Do they really trust credit rating agencies less?

Sir, Claire Jones and Robin Harding quote Frederic Mishkin of the Fed saying on August 7, 2007 “The point of the subprime market is just that we now trust the credit rating agencies less,” said Frederic Mishkin. “Fed red-faced as notes reveal officials failed to grasp dangers of 2007” January 19. 

Is Mishkin really sure about that? Last time I looked the Basel Committee for Banking Supervision, on top of the capital requirements for banks based on perceived risks, and as perceived fundamentally by credit rating agencies, and which remain firmly entrenched, are now adding a layer of liquidity requirements also based on perceived risks, and also as fundamentally perceived by credit rating agencies.

When are our utterly naïve regulators going to wake up to the fact that in banking it is what is perceived as safe which can cause most risk since what is perceived as risky takes perfectly care of itself?

I dare you to think about the horrors of a world with no bubbles.

Sir Frederic Mishkin wrote “Not all bubbles present a risk to the economy” November 11. I go one step further and hold that it is the absence of bubbles that would drive the economy into the ground, in just a few decades, and that what most drives the economy forward is precisely the probability of finding yourself a nice little bubble to float up on.

I dare you at FT to think about the horrors which a world with no bubbles would imply. Ah you want controlled bubbles? Are you going to use bubble rating agencies for that? Good luck! What I want are financial regulations that do not discriminate against risk and that are willing to risk the bubbles instead of embracing the certainty of staying on ground or even underground.

I do not want the regulators worry so much about the crisis, but instead worry about how to increase our possibilities that the bubbles takes us somewhere we want to go.

The Fed has a conflict of interest if overseeing systemic risk.

Sir Frederic Mishkin in “Why all regulatory roads lead to the Fed” June 23 fails to mention the most important reason why the Fed should not be the systemic regulator, namely that as a regulator it is also a producer of systemic risks and has therefore a clear conflict of interest.

The current crisis occurred, primarily, because of those so poorly crafted minimum capital requirements for banks that originated in the Basel Committee and that created immense incentives for anything that could get hold of an AAA rating, such as AIG and the securities collateralized with subprime mortgages. The sole fact that most still speak of “excessive risk taking” while the truth is that the problems derived from risk adverse investors taking refuge in instruments that had been faultily classified as risk-free, is just an example of that peer solidarity among regulators that creates opacity and puts the world on a wild-goose chase it cannot really afford.

I would prefer to outsource any systemic risk vigilance to a totally independent entity, perhaps, given its global implications, even one paid and supervised by the United Nations, than having that function placed in the hands of regulators and that as far as this type of risk I trust even less than I would trust a Wall Street firm.