Is there no cost in avoiding bubbles?

Sir though I agree with much of Martin Wolf’s “How mistaken ideas helped to bring the economy down” October 28, I have serious difficulties on understanding how one should be implementing the bubble-busting. Are the regulators now going to appoint bubble-measurers? Are we going to have these assets bubble-meters being showed off in Times Square?

Much the same way it sounded so utterly reasonable to have the credit rating agencies influence how much equity banks should have, and look where it led us, this reasoning assumes that a bubble is a bubble and that there are no risks derived from pre-announcing that a bubble will not happen. And what if the prime motor of development is the belief in the possibilities of the next bubble? If we eliminate ex-ante the possibility of a bubble will some then just stay in bed while other countries with no qualms about crisis go forward?

If there is something truly lacking in the current discussion on regulatory reform is the appreciation of the good things that come with risk-taking and now, the good things that come from bubbles.

Me, I would love the world to keep on taking risks- and blowing bubbles even at the cost of suffering huge setbacks as long as that takes us forward. Because of this, more than worrying about where the next precipice might be, I would try to make much more certain we are heading in the right direction. Others, on the contrary, seem to be satisfied with what they have achieved and settle for keeping it.

Not safer, better!

Sir once again in “The legacy of Lehman Brothers” you talk about the need of “a strategy for making finance safer” September 14 and you are wrong. What we need is a strategy for making finance serve our needs better. An absolutely failsafe bank can be an absolutely useless bank.

FT don’t be such a wimp. How can we get better regulations of the financial sector without, like the whole Basel regulations, speaking a word about the mission of the banks?

There is a cultural war looming on the financial front

Sir Gillian Tett writes that the “Era of leverage is over” September 23 but sort of mulls over the fact that leverage is not an absolute financial value but only another dimension of risk, since a zero leveraged investment in something risky could be more risky than a 100:1 leveraged investment in something less risky. The problem, as always, is who is to determine the risk.

When Gillian Tett mentions that “Basel Two capital rules will now force banks to hold more capital against esoteric assets” it is a great moment to remind ourselves how extraordinary little esoteric those lousily awarded mortgages to the subprime sector really were.

In the US there is a lot of talk about a cultural war breaking out on the political front but the stage is also set for a cultural war on the financial front; between those who believe that markets should be allowed to freely determine risks and those who believe in soviet-styled-central-planning and feel that, even having to face the current disaster, this is best left in the hands of official risk-kommissars, which is what the outsourced credit rating agencies really are.