May 27, 2015

Martin Wolf, absent conflicts of interest, and with perfect information, would there even be financial markets?

Sir, Martin Wolf writes: “It is very costly to police markets riddled with conflicts of interest and asymmetric information. We do not, by and large, police doctors in this way because we trust them. We need to be able to trust financiers in much the same way.” “Why finance is too much of a good thing” May 27.

And of course it is hard, and absolutely politically incorrect to disagree with that… but still there is a question that should nag us:

Would there be financial markets in the absence of conflicts of interest and presence of perfect information? Is it not precisely conflicts of interest and asymmetric information, all dosed with a hefty amount of blissful ignorance, which gets markets out of their bed every morning?

Martin Wolf, the purpose of doctors is very clear and it would be foolhardy for doctor regulators to stand over their shoulders and intervene. But let me ask you, what for you is the real purpose of financial markets, and banks. I ask that because if you just want to go ahead and control for control’s sake, then you are a just a freaking dangerous vigilante.

Here we are, in May 2015… with our banks still being regulated by some nuts, who have not yet clearly told us what they think the purpose of banks is; and then made sure we the society agree… freaking dangerous vigilantes they are!

PS. Now the Basel Committee regulators imposes purposeless credit-risk weights for determining the capital (equity) banks need to have against assets. Why do we not ask them for some purpose weights... to see what they can come up with?