July 12, 2015

Wishful thinking should follow the do-no-harm principle, and the Basel Committee clearly violated it.

Sir, Tim Harford writes about wishful thinking plans having secondary unexpected unwished consequences “Why wishful thinking doesn’t work” July 12.

Yes any wishful thinker should make a declaration before he puts his wishes in action that he has seriously adhered to the principle of do-no-harm.

For instance, the perceived credit risk weighted capital requirements for banks; more-risk-more-capital / less-risk-less-capital, must represent one of the greatest wishful thinking gone wrong.

Bank regulators wishfully thought they could with these bring stability to the banking system, though it is not too clear why did thought they would do that more by saving banks than by hurrying the demise of bad banks. It would have saved us a lot of tears (and jobs) had they, by following the do-no-harm principle, asked themselves the simple following two questions:

Might we dangerously distort the allocation of bank credit the real economy?

Might we send off banks into accumulating excessively some assets that ex ante might have been erroneously perceived as safe, and then when ex post these turn out to be very risky, banks stand there naked with too little capital?

How sad they did not do it… how tragic they still do not do it.