Be careful in not promoting the dark ages

Sir John Eatwell and Robert Reoch in “‘Greater transparency’” will not reduce systemic market risk”, October 7, conclude that “Those who argue that greater transparency is the answer don’t understand the question”. Since, to get there, they argue that “Greater transparency means more firms share the same information” in which obviously they are right, but follow up with, “and have access to the same procedural knowledge and even the same modelling” and which obviously has absolutely nothing to do with transparency, it is clearly they who don’t understand what has happened.

The information on how badly the subprime mortgages were being awarded was out there for anyone to see, had they taken their time. The problem arose in that no one felt there was a need to do so, after the regulators non-transparently favoured few information digesters, the credit rating agencies, to do the modelling and number crunching on behalf of everyone.

What we need to make sure is that any financial crisis results at least from something worthwhile.

Sir John Eatwell and Avinash Persaud, in “Fannie and Freddie, damned by a Faustian bargain” July 18, write the following: “The main cheerleaders for the marketisation of banking were the gnomes of Basel – the centre of international bank regulation. Many regulators thought the “marketization” of banking represented a brave new world, where grizzled, idiosyncratic lending officers were replaced with best-of-breed credit models, policed by third party rating agencies and, where risk was digitised, spread across a large number of investor and traded. But it was a Faustian bargain…. We need to redraw the lines of financial regulation. A critical objective should be to preserve diversity, not create artificial homogeneity in the blind pursuit of common practice.”

Of course as I have been writing and fighting along those lines for over a decade I totally agree with them on this. But when they suggest that regulators need to focus more on the risk capacity of the institutions, primarily their funding structure, there I lose them. The first think we need to focus on is what the real purpose of our financial system should be since currently it seems limited to avoid any type of crisis and that, besides being unrealistic, sounds like a truly pitiful objective.

Since a financial crisis is natural and will happen no matter what, we need to make sure that any financial crisis at least results from something worthwhile.