Undercover Economist Harford, instead of "the volatility express" the rest of us we have, thanks to regulators, the volatility ball and chain.

Sir, in October 2004, in a written formal statement at the World Bank, as an Executive Director, I warned: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

And so I believe that, whether you like it or not, few have such credentials to talk about volatility.

And today I refer to Tim Harford’s “The volatility express” July 5. In it, Harford correctly describes the dangers for the financial sector of low volatility, in that it can foster a false sense of security; and the benefits for the economy of low volatility, as it can provide for the stable environment investors need in order to take risks.

But what the Undercover Economist, and you yourself, fail to understand, is that regulators, with their risk-weighted capital requirements for banks create not only an artificial false low volatility which becomes extra dangerous for banks, while at the same time, with the same risk-weights, they block the access to bank credit to those most willing to take risks when volatility is low.

And so, instead of the volatility express the “rest of us” would all like to see, we now have, thanks to regulators, the volatility ball and chain.