For the perfect market theory to have been discredited, free markets needed to exist, and they did not.

Sir, Gillian Tett references a paper in Central Banking Journal December 2012, by Paul Wooley and Dimitry Vayanos, which I have not read, but that is quoted stating “Like regulators funds have been following procedures based on the discredited theory of perfect markets”, “Momentum trading part of a wider structural flow” December 21. 

I do not know about the procedures of funds, but, let me assure you, regulators did not believe in any theory of perfect markets; on the contrary, what they did, and still do, was to destroy it. 

When they imposed on the banks capital requirements based on perceived risks which were already cleared for by the banks and the markets, they completely distorted the financial system. 

In doing so they allowed banks to earn a much higher expected risk-adjusted return lending to “The Infallible” than when lending to “The Risky”. And, as anyone should be able to understand, at least if allowed to understand it or no other agenda stands in their way, that has absolutely nothing to do with free and perfect markets, and so, therefore, no theory about perfect markets could have been discredited by the recent crisis.

Taxing the speed of capitals with a Tobin tax is a thousand time better than directing the capitals with capital requirements

Sir Tony Jackson in “Putting a rational spin on inefficient markets and irrational investors” August 31 writes “just because markets are inefficient, it need not mean investors are rational.” Right on. What happens if driving the car your GPS or radio, suddenly announces a roadblock ahead and recommends taking an alternative route? Rationally you do so though that could prove to be highly irrational if all others do the same at exactly the same moment.

That is why I sustain that taxing the speed of capitals with a Tobin tax is a thousand time better than directing capitals with Basel type capital requirements for banks based on credit ratings that could be wrong or that could change whether one second too early, one second too late or exactly in the right second.

Jackson refers to a paper by Paul Woolley and Professor Dimitri Vayanos titled “An Institutional Theory of Momentum and Reversal” which draws special conclusions about “assets with high idiosyncratic risk. And I wonder Sir, have you ever come around something with a higher idiosyncratic risk than an AAA-rated asset?