October 15, 2012

To get out of a vicious cycle you first need to understand what vice holds it there

Sir, Lawrence Summers writes “The world is still stuck in a vicious cycle”, October 15, five years after the crisis started, and is seemingly still incapable of understanding what happened. 

The vicious cycle that was created and in which we are still stuck is the direct result of absolutely loony bank regulations that, with its risk-weights, discriminate in favor of The Infallible, those already favored, and against The Risky, those already disfavored. 

That is not only morally repugnant, but it also distorts completely the efficient economic resource allocation process that banks are supposed to perform. 

What must be done is to urgently fire all those bank regulators who are now trapped in their own regulatory labyrinth, spending more time thinking about how to find their own way out, than thinking about the banks they are supposed to regulate. Their frantic movements are becoming truly embarrassing. Put them out of their misery, for the good of all of us.