Regulators are quite busy fooling themselves.

Sir in “A smaller role for Wall Street” December 29 you write “Above all, regulators do not want to be fooled again”. Let me assure you that no one fooled the regulators more than they fooled themselves, and, from the looks of Basel III, they still keep on doing that.

June 2010, in Washington D.C. I commented to Lord Adair Turner, the Chairman of the FSA, that he as a regulator was acting like a confused handicap officer on a horse-racetrack, taking away the weights of the good runners (triple-As) and placing these on the bad runners or debutants (small businesses and entrepreneurs), without even informing the bettors and the bookies, and believing this would lead to a fair and good race. This layer of discrimination, slapped on top of the market´s natural adverseness to risk, pushed the banks excessively into AAA land and is affecting quite seriously the real economy.

I also reminded Lord Turner that even from a pure limited regulatory perspective it made no sense, as the only thing capable of posing a systemic threat to the banking system was precisely what was perceived as not risky, by banks and regulators alike. Lord Turner, in an email answered that “Our ability to know ex ante what is low and high risk is clearly limited” and that my “argument certainly poses a challenge which I need to think about”. It would seem he is still thinking about it… or trying to forget the inconvenience.