The possibilities of a “rapid resolution plan” to be of any use depends also much on what disaster hit you. For instance what is the “rapid resolution plan” for a bank if all the credit rating agencies turn out to be wrong (again? Suing the regulators for forcing the banks to heed so much the opinions of these risk surveyors?
As a former Executive Director of the World Bank I know that the columnists of the Financial Times have more voice than what I ever had, and therefore they might need some checks-and-balances. For more see "A Blog is Born" at the very bottom.
Would a child shouting out “the Emperor is naked” have his observation published in FT? Would he now need a PhD for that to happen?
June 30, 2009
For a good obituary you need a good life
The possibilities of a “rapid resolution plan” to be of any use depends also much on what disaster hit you. For instance what is the “rapid resolution plan” for a bank if all the credit rating agencies turn out to be wrong (again? Suing the regulators for forcing the banks to heed so much the opinions of these risk surveyors?
June 27, 2009
It was not the faith based financial institutions who caused it but the “too few to follow”
And blaming derivatives when the originals, the mortgages to the subprime sector in the US were so badly awarded is just like the robber pointing with his finger down the street and loudly shouting “there he runs that s.o.b!
June 25, 2009
This particular efficient market hypotheses was murdered and I am not buying any efficient regulator hypotheses
Montier could be suffering a state of shock like when he writes “new research shows that career risk and business risk are the prime drivers of most professional investors” as if that was something new, as if we really wanted or expected that to be different; or when he writes “there isn’t a scrap of evidence to suggest that we can actually see the future at all” like even if it were true we should not try to do our best to look into the future. Then again anyone capable of describing the current regulatory approach as “the markets know best” has either no idea of what he is talking about (I am always suspicious of anyone that uses many quotations) or is pursuing a completely different agenda. Just in case I rather go searching after any other efficient market hypotheses or even use the current carcass to clone a new one than to buy myself an efficient regulator hypothesis.
June 24, 2009
Don’t just pick on the fallen bankers.
The incentives I most worry about are those arbitrary incentives created by the regulators in Basel and that state among others that if a bank lends to a corporation without a credit rating it can leverage its capital 12 to 1 but if lending to a corporation that has managed to obtain a credit rating of AAA to AA- then it is allowed to go for an incredible leverage of 62.5 to 1… and as if the good risks needed additional subsidies.
Talk about incentives to pursue the AAAs! With incentives like these no wonder many of the AAAs weren’t for real. Like many, Wolf also expresses concern about the “too big to fail banks”. Had he participated in the few debates prior to the approval of Basel II in June 2004, he would have known that this was exactly one of the major concerns and that unfortunately was finally brushed aside.
We know that the bankers are down for counting so it is understandably tempting to pick on them but please let us first and foremost go after on the truly horrendous regulatory incentives which perhaps are also easier to correct.
Wolfgang Kuhn… you are absolutely right
We need warning signs placed on academics
But the real fundamental problem is not necessarily with the academics per se but more with those of them who venture into public life selling or allowing themselves to be sold as experts. Academician should be the first to know that at least in social sciences there are no real experts, just as there are no credit rating agencies that can guarantee a consistently good result. Therefore academics should at least come with a warning sign that reads “Believing an academic to be an expert could be extremely dangerous for the health of your portfolio.”
Private schools compete quite well with public schools
June 23, 2009
The Fed has a conflict of interest if overseeing systemic risk.
The current crisis occurred, primarily, because of those so poorly crafted minimum capital requirements for banks that originated in the Basel Committee and that created immense incentives for anything that could get hold of an AAA rating, such as AIG and the securities collateralized with subprime mortgages. The sole fact that most still speak of “excessive risk taking” while the truth is that the problems derived from risk adverse investors taking refuge in instruments that had been faultily classified as risk-free, is just an example of that peer solidarity among regulators that creates opacity and puts the world on a wild-goose chase it cannot really afford.
I would prefer to outsource any systemic risk vigilance to a totally independent entity, perhaps, given its global implications, even one paid and supervised by the United Nations, than having that function placed in the hands of regulators and that as far as this type of risk I trust even less than I would trust a Wall Street firm.
June 22, 2009
A minimalistic comment
Let us avoid subtle muddle
There might be other real problems with these “government sponsored entities” but the subprime avalanche was created by mortgage originators that managed to channel unbelievably lousy awarded mortgages into Wall Street created securities which had managed to hustle up AAA credit ratings, so much that even Fannie Mae and Freddie Mac fell into the trap of buying up some of this securities, as investors.
There might be other real problems with these “government sponsored entities” and there is a lot of pent up criticism of these by conservatives, and much of it might be valid, but creating regulatory reform in hard times like this is not made easier by subtle muddle being thrown into the debate.
In his article Clive Crook also asks “what would better regulation of the [credit rating] agencies look like? To this I would have to reply by asking? Why would we need better regulation that could make the credit rating agencies even more dangerous? Why do we not just take away the official powers they have had since only June 2004?
June 20, 2009
We must learn to celebrate pruning.
And you are also absolutely right also mentioning that “it is even more important to make it possible for even the largest ones to fail. Indeed we must learn to celebrate pruning. In May 2003 while being an Executive Director at the World Bank I told a workshop of some hundred regulators from all over the world that “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation.”
June 18, 2009
We need at least one urgent change in the financial rule book.
How would you arbitrate a game of hockey if depending on how some external consultants perceived the strength of the players to be each player had to carry different protective gears? The strong AAA players would have less protection, exposing them to additional risks, while the poor BB- weaklings would have to carry more protection weighing them down even further. And, if a hockey reporter how would describe the team? The protective-gear weighted strength of it?
June 17, 2009
The taxman must do better than create a cartel
Does Soros want to eliminate private banks?
The world needs to reach a sustainable bottom.
Martin Wolf sums it up very well when he ends “How today’s global recession tracks the great depression” with “The race to full recovery is likely to be long hard and uncertain” June 17. To this I would just add that the length of that recovery will depend a lot on those who by panicking impede the world economy from regaining a strong foothold from where it can work itself up.
June 15, 2009
The remedy for the creative industries is already in their name.
But there is a minimum minimorum reform that the US health sector needs for a starter.
If beer companies compete that is good for beer drinkers and does not affect those who do not drink beer. But in the case of health services it is obvious that many of the cost reductions negotiated by the competing insurance companies, end up expected to be recovered from those uninsured.
If it was in my hand (perhaps it's good that’s not the case) I would put up a prohibition to charge anyone more than 5% to max 20% over the minimum price offered to any insurance company… and then take health reforms from there. Not doing so forces millions of uninsured who could pay reasonable fees to either swamp free service emergency rooms, or being financially abused.
Is not cost-discrimination against the uninsured a much worse discrimination than many of those other discriminations being protested so loudly?
Who could have thought the Financial Times would come to this?
The above set in motion forces that over only some 3 years helped to channel around two trillion dollars, some 100 years worth of World Bank lending, to finance badly awarded mortgages to the subprime housing sector in the US just because these managed to dress up as AAA and which detonated the current crisis.
Sir given that among the seven recommendations for better financial regulations you make in “Last chance saloon”, June 15 , you do not mention that the regulators should stop interfering arbitrarily in the risk allocation mechanism of the market I guess you are alright with it. Who could have thought the Financial Times would come to this?
June 11, 2009
Please, regulators, more humility.
The truth is that regulating for systemic risk could be the most dangerous way of creating systemic risk. To understand the above suffices to look at the minimum capital requirements for banks concocted by the Basel Committee and that amount to a direct arbitrary intervention in the markets risk allocation mechanism and that can be shown having been the number one driver of the current crisis.
In “Against the Gods Peter L. Bernstein (1996) writes that the boundary between the modern times and the past is the mastery of risk, since for those who believe that was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant. Today, when seeing so much risk managing, I cannot but speculate on whether we are not leaving out God’s hand, just a little bit too much.
June 10, 2009
Martin Wolf’s savings are not much different from China’s or Germany’s
In fact had it not been for the misguidance produced by the credit rating agencies or the regulators intervening in the risk allocation process of the market by way of the minimum capital requirements for banks, the system could have kept on working for a very long time until other factors would have become important on the margin.
For instance, just a couple of years ago many were analyzing what would happen to China when they ran out of their labour surplus and salaries were not any longer so competitive. Sadly now we won’t know this for quite some time.
Wolf considers “China’s decision to accumulate roughly $2.000bn in foreign currency reserves... a blunder” What did he himself do? Spent it all? Kept it in pounds? Did he also blunder?
June 05, 2009
You, oil dictators, give us our (f……) oil revenues.
There are many places where citizens are finally waking up to the fact that the principle of that very well intentioned Extractive Industries Transparency Initiative and that states “We affirm that management of natural resource wealth for the benefit of a country’s citizens is in the domain of sovereign governments to be exercised in the interests of their national development”, is just plain wrong.
And if there is truly one single thing the US should regret in the US is not having taken the opportunity to promote oil revenue sharing of the citizens in Iraq. Trying to sow democracy in a land where oil resources are centralized would be laughable but for its tragic implications.
In Venezuela I have over the last two years published at least 40 articles on the subject of why we need to wrestle away the oil check-book from the Hugo Chavezes of this world, and I am currently trying to form a global coalition of oil cursed citizens, to see if we can help each other since, at the end of the day, there is no such thing as an oil-cursed politicians, oil-cursed governments or oil cursed policymakers, on the contrary they are all most often shining examples of oil blessings... there are only oil-cursed citizens.
Unfortunately, since we citizens do not have the oil revenues yet, few want to help us, they prefer helping the dictators to become more saloon respectful dictators, but I guess that’s life on the oil curse lane.
June 03, 2009
Hurrah! We managed to get out of the garage!
Does Wolf need an example of one of the trolls awaiting him round the bend? If a bank lends to a car company then the government requires it to have 8 percent of bank equity but if it lends to the government so that the government can lend to the car company then it is not required to have any equity at all.
Does Martin Wolf really have any idea of where the 10 year US bond rate would be without the quantitative easing of the Fed or the subsidies implied in the zero capital requirement for the banks when they hold such paper? I don’t think so, and so even for a fierce anti-deflationist like him it is much too early to shout out any type of Hurrah!
“Sharp tightening, but not yet”… that is indeed the battle cry of the baby-boomers “Après nous le deluge”