Sheer regulatory stupidity and statism caused the financial crisis. But that shall not be admitted!

Sir, Lord Adair Turner writes: “The financial crisis began because of dangerous features within the financial system itself. Massively leveraged investment banks engaged in socially useless trading of huge volumes of complex credit securities and derivatives… The excessive risk-taking was allowed by bad regulation justified by flawed economic theory.” “Banks are safer but debt remains a danger” September 12.

Turner, like all other involved, does just not tell it like it is! 

The “massively leveraged investments of banks” were caused, 100%, by the simple fact that regulators allowed for these.

The “socially useless” in complex securities were mortgages awarded to poorer house buyers in the US, the subprime sector. 

The “excessive risk-taking” was in fact an excessive risk aversion that led to the excessive build up of bank exposures to what was considered, decreed, or concocted as safe. 

Yes Turner mentions “bad regulation justified by flawed economic theory”, but there was none of that, there was only sheer stupidity. Like when regulators allow banks to leverage 62.5 times only because a human fallible credit rating agency has assigned it an AAA to AA rating.

And Sir, assigning a 0% risk weights to the sovereign, like to Greece is not based one iota on economic theory but all on flawed statist ideology.

Turner is right though when he writes that the “economic growth has been anaemic despite massive policy stimulus… “That poor performance reflects… inadequate capital regulation.”

Indeed, the distortions that the risk weighted capital requirements produced in the allocation of bank credit to the real economy that have not even been admitted much less were eliminated. “Debt burdens shifting around the world economy from private to public sectors” are just one symptom of those distortions. 

In fact by having raised the floor of bank capital requirements with leverage ratios, on the margins, the roof, the distortions of credit risk weighted capital requirements could be worse than ever.

Turner consoles us with “A deep economic recession, made worse by a large debt overhang, could occur even if not a single big bank went bankrupt or needed to be rescued with public money.”

Not true a deep economic recession, a dysfunctional economy is as dangerous as can be for the banks and for us. That is why the most important question that regulators need to answer before regulating banks is: what is the purpose of banks. Except for being safe mattresses to stack away cash there is not on word on this in the whole immense Basel Committee compendium on rules.

“The increasing role of real estate in modern economies is also crucial.” That is because, by means of giving house purchase access to credit on preferential conditions, a house is no longer just a home it has also become an investment asset. The day houses return to being home only it is going to hurt, a lot. 

“Rising inequality”… with capital requirements that favor the “safer” present over the riskier future, how could that be avoided?

PS. And Sir, you know it, FT has in many ways been complicit in the cover up of our mistakes stories peddled by regulators and their colleagues.

@PerKurowski