How can we get rid of really bad ideas, e.g., risk weighted bank capital/equity requirements?
Sir, reading “African Union-backed initiative aims to challenge ‘big three’ rating agencies” by Simon Mundy I was reminded of when in an Op-Ed in Venezuela, concerned with that when markets expressed too much trust it doomed my nation to have too large capital/debt inflows setting it up to later be judged as too much distrustful.
I ended that Op-Ed with: The day our governments pay more attention to the opinions of us, their humble subjects, than to those of the glamorous international credit rating agencies, we will finally stand a chance of making it out of our standard “poor and moody” situation.
When reading “Why bad ideas are always with us” by Janan Ganesh I cannot help to remind you of awful ideas that still remain with us, most certainly because it is in the interest of some few.
January 2003, over two decades ago, you published a letter in which I wrote:
“Except for regulations relative to money-laundering, the developing countries have been told to keep their capital markets open and to give free access to all investors, no matter what their intentions are and no matter for how long they intend to stay. Simultaneously, the developed countries have, through the use of credit-rating agencies, imposed restrictions as to which developing countries are allowed to be visited.
This Janus syndrome – ‘you must trust the market while we must distrust it’ – has created serious problems, not the least by leveraging the rate differentials between those liked and those rejected by our modern-day financial censors. Today, whenever a country loses its investment grade rating, many investors are prohibited from investing in its debt, effectively curtailing the demand for it just when that country might need it the most.
Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”
Today, Basel’s risk weighted bank capital requirements’ procyclicality is still fully alive and well. Precisely as Mark Twain (supposedly) said: “A banker is a fellow who wants to lend you the umbrella when the sun shines and wants it back when it rains”.
Should we not expect the wider society to get some help eliminating truly bad ideas by e.g., the Academia… and the Financial Times?
Posts
