August 10, 2017

Amazing how an anthropologist, like Gillian Tett, can believe that our financial markets are driven by lust for risks

Sir, Gillian Tett writes: “if we want to avoid a replay of 2007, we must keep questioning our assumptions — and peering at the parts of the system that seem “boring”, “geeky” and “dull”. Our mental bins can sometimes hold time-bombs” “The next crash risk is hiding in plain sight” August 10.

Indeed! And one of the greatest drivers of such time-bombs is confusing ex ante perceived risks with ex post risks.

But Ms. Tett also writes “Sometimes, market shocks occur because investors have taken obviously risky bets — just look at the tech bubble in 2001”. What? Does FT’s in house anthropologist really believe investors were taking “obviously risky bets”? Was it not much more the illusion of very high-risk adjusted returns that caught the investors’ attention?

But Ms. Tett also writes: “Most investors assume that Treasuries are the risk-free pillar of modern finance”. What? If there is anyone who has really assumed that, it is the bank regulators when they, in 1988, with Basel I, began to assign 0% risk-weights to sovereigns.

Ms. Tett also writes “precisely because the system has become so flush with cash — and seemingly calm — there is complacency; and not just about the dangers of clearly risky bets (say, Argentine bonds), but about the perils of “safe” assets too”.

Not really, the complacency about clearly risky bets is almost non-existent when compared to that related to safe assets.

As an example of riskiness Tett points out “an obscure “Inverse Vix” ETF that benefits from low volatility… the world’s 34th most actively traded equity security…[and] that has returned almost 100 per cent this year. What? Is she really arguing that something which offered the expectations of large returns and that has actually provided almost 100 per cent return this year, is riskier than holding 10 year German bunds yielding certain negative rates?

Sir, it is so hard to understand how Ms. Tett, and most of you, even when acknowledging that “The next crash risk is hiding in plain sight”, seem unable to wrap your minds around the fact that what is really dangerous, for instance to our banking system, is what is perceived as safe… and that therefore the current risk weighted capital requirements, besides dangerously distorting the allocation of bank credit to the real economy, are incredibly dumb.

Sir, were you a part of the inquisition, you would most certainly be prosecuting Galileo.