April 15, 2017
Sir, Rana Foroohar, when reviewing the former Securities and Exchange Commission regulator and Treasury department adviser Richard Bookstaber’s book “The End of Theory”, begins it with “Economists are forever running forensics on past financial crises to discover clues as to how the next one might occur.” “Uncertainty principles” April 15.
I don’t know about all my economist colleagues, but our current bank regulators, those you most should thought would do that in order to regulate, they definitely did not do that.
If they had done so, they would clearly have noted that all major bank crises result from a. unexpected events (like devaluations) b. criminal behavior (like lending to affiliates) and c. excessive exposures to something ex ante perceived safe, but that ex post turns out to be very risky.
As a consequence they would never ever have come up with something as dumb as risk weighted capital requirements for banks that were lower for what was dangerously perceived as safe, and higher for what was made innocuous, precisely because it was perceived as risky.
Indeed bank capital should be there for the unexpected, to take care of the ex post uncertainties. That is why current regulators, when basing their capital requirements for banks on the ex ante perceived risks, evidence they haven’t a clue about what they are doing.
Sir, as you have silenced some 2.500 letters of mine on this, I know you don’t want to raise this issue but do you really believe it is in your best interest to keep quite on it?