October 09, 2009

Slow the dance but do not impose the tune

Sir Chrystia Freeland ends “Investors had little choice but to keep dancing” October 9 asking for “a more powerful regulator to be established with the authority and courage to slow down the music for everyone” and this absolutely correct. But in doing so we need to avoid by all means that the regulator chooses the tune to which the markets should dance.

I say so because the current crisis resulted from the Basel bank regulator wanting the market to dance slower and, using capital requirements based on risk, induced it to take up some slow low risk waltzes instead of fast polkas or emotionally laden tangos and which led the markets into the arms of the dangerous AAAs.

By the way there are still two dance halls open and that many feel should be closed but which proves something impossible to do while the music plays. One is the dollar, where investors all know that one morning they will wake up find the safe-haven unsafely overcrowded, and a murderous panic for the exit will ensue, and the other is the public debt here and there and almost everywhere. Who is making the preparations for when these other two dance halls close down?