December 15, 2010

We have a poor illusion of a committee working on an illusion and us believing their illusions.

Sir, John Kay writes “The notion that a committee can finely calibrate the risk associated with a variety of asset classes, many instruments, and a wide range of institutions on a basis which is at once objective and economic meaningful, is an illusion.”, “Even Middle England should spare a thought for Modigliani-Miller.” December 15. Hear, hear! …that is the sole truth about the Basel Committee for Banking Supervision.

But when on top of that, the Basel Committee also decides that the only risk for which it will calibrate is the truly innocuous risk of default (probably just trying to save itself from the job it should be doing, that of making the defaults run as smooth as possible); and on top of that does it without considering the risk-premiums charged in the market precisely to clear such default risks, then what we end up with is a poor illusion of a committee working on an illusion… and unfortunately a world of politicians, academicians, financial experts, and financial journalists believing in their illusions. Isn´t that a sad state of affairs?