July 26, 2016
Sir, Mohamed El-Erian refers to issues (such as Brexit) that “could change longstanding economic and financial relationships, affect the way economic agents interact with each other, fuel political anomalies and, in the case of unusual asset class correlations and valuations, undermine some of the institutions and basic tenets of the capitalist system.” “Period of artificial calm distracts from potential for storms” July 26.
And El-Erian writes: “These issues share a potential for fuelling so-called jump conditions in which there is a leap to a different set of circumstances, rather than a smooth and incremental evolution.”
Well let me remind El-Erian, and you Sir too, that one of the most impacting “jump-conditions”, was the introduction of the risk-weighted capital requirements for banks. These allowed banks to earn higher risk-adjusted returns on equity on assets perceived, decreed or concocted as safe, than on assets perceived as risky. And, of course, much of what was ex ante safe, became ex post dangerous, when too many went there.
Much contrary to Mother Abbess’ inspirational “Climb ev’ry mountain”, which in Sound of Music encourages people to take every step towards attaining their dreams, the Basel Committee for Banking Supervision, has de facto instructed banks to “Climb only safe mountains”.