August 21, 2011
My daughter Alexandra, an art fanatic, on hearing my explanation about the mistake of the Basel Committee pointed me to “The forger’s spell”, a book by Edward Dolnick about the falsification of Vermeer paintings. Boy was she right!
In that book Dolnick makes a reference to having heard Francis Fukuyama in a TV program saying that Daniel Moynihan opined “There are some mistakes it takes a Ph.D. to make”. And he also speculates, in the footnotes, that perhaps Fukuyama had in mind George Orwell’s comment, in “Notes on Nationalism”, that “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.”
And that comprises about the most appropriate explanation I have yet seen so as to understand why our bank regulators were able to commit their huge mistake that got us into this financial and economic crisis that threatens the Western World. No “ordinary man” would have told his children to beware about what he knew his children were afraid of, and stimulated them to go more where they wanted to go as it seemed safe… which is precisely what the current capital requirements for banks do when they are quite sizable whenever the perceived risk of default is high and small or even inexistent whenever the perceived risk of default is low.
And then, just like to force down our throats, Dolnick writes “Experts have little choice but to put enormous faith in their own opinions. Inevitably, that opens the way to error, sometimes to spectacular error.” All of which now leaves me with the problem that also “no ordinary” FT reporter can come to grips with believing that experts could be such fools.
August 13, 2011
Sir, Gillian Tett in “The unmasking of our inner reptiles in times of crisis” August 13, writes about Professor Andrew Lo, of MIT segmenting our brains in the reflexive “reptilian”, the emotional “mammalian”, and the rational “hominid”. Tett also quotes Peter Atwater with respect to that a present “sense of insecurity is fostering a wider, longer term shift towards ‘narrow’ horizons.
Our bank regulators, by focusing too much on bank borrowers’ current credit ratings, without caring a iota about what such excessive focusing could imply for the banks’ medium and long term exposures, clearly regulated using a very ‘narrow’ horizon. There is no doubt that such an expensive error must have sprung out from a deep sense of insecurity but, what is not entirely clear is, what brain of the regulators was responsible for it, the “reptilian” or the “mammalian”, as the “hominid” was clearly not.
Sir in your “Financial markets at their wit’s end” August 13 you hold that in the midst of all turmoil “credit market stayed relatively robust. Much sovereign debt in fact rallied”.
Currently banks facing scarcity of regulatory capital are forced to go where the capital requirements are the smallest. If you want to call that something related to a robustness of the credit markets I guess you have not asked the opinion of those bank borrowers whose access to bank credit is being severely curtailed because lending to them requires a lot of that capital.
It is vital for the economy that the natural risk-takers, the “risky” small businesses and entrepreneurs, have access to bank credit in competitive terms, and that it is not monopolized by those belonging to the regulatory “safe” franchise, the sovereigns and triple-A rated. Any levelheaded regulator would, in an emergency like this, long ago have reduced substantially the capital requirements for banks when lending to the “risky”, instead of sometimes even allowing a very risky zero capital when lending to some of the “safe”.
August 12, 2011
Sir, Gillian Tett wonders why “Faced with a choice between betting on the safety of US government, or its banks, cash rich large companies and asset managers are choosing the former”, “Cash-rich investors are choosing crazy Treasury” August 12.
What kind of silly question is this? Since the banks in these days of scarce bank capital would just turn around and also choose “crazy Treasury”, because that does not require any capital of them, why would cash-rich investors need intermediation?
When are you going to wake up that via bank regulations which favor public borrowing over any other kind of borrowing we are being embraced by communism? And, by the way, FT’s silence on all this is very suspicious to me.
August 05, 2011
Sir, would you design an economic package that included a tax on small businesses and entrepreneurs to be used to subsidize a job creation program run by the government or the interest cost of triple-A rated companies? Of course not, but this is precisely what the bank regulators have done, by discriminating the capital requirements of banks based on the ex-ante perceived risks of default and which have already been cleared for by the markets.
That stupidity messed up the whole interest rate signaling system, creating excesses in public and triple-A rated debt and bank credit scarcity for the “risky” but most dynamic participants. The result is a crisis that we cannot get out of, without scrapping completely those bank regulations.
And so to read Jonathan Faull the Director General of the Internal Market and Services of the European Commission defending Basel III, with arguments like that any criticism of it amounts basically to sabotage against Europe´s single market, makes me angry, to say the least. “Brussels strikes right balance on bank rules” August 5.
I have always supported Europe´s single market but if that requires having to live under obstinate and dumb bureaucrats who can topple the whole Western World, then the price for it is much too high.
August 04, 2011
Sir, Roger Altman in “Why America deserves to stay a triple A” August 4, argues as if a triple-A rating has something to do with a pure absolute and objective risk-free reality. Of course it hasn´t, and it can never thought have been meant so... except perhaps by some truly in the “In God we trust” minds.
The reason why America, though quite undeserving, should remain a triple A is that if America is downgraded, all other countries would then also have to be downgraded, and the credit rating agencies would have to start adding letters to classify the bottom.