The pulmonary capacity of banks went from unlimited, through 62.5, 35.7 to 12.5 times of allowed leverage. Where do you think bubbles were blown?

Sir, I refer to John Authers review of “Ray Dalio’s” “A Template for Understanding Big Debt Crises” September 22, 2018.

I have not read the book, and something in it could apply to other bubbles but, if Dalio left out mentioning the distortions produced by the risk weighted capital requirements for banks, those that caused the 2008 crises, he would surely have failed any class of mine on the subject.

Sir, let me be as clear as I can be. 100%, not 99%, 100% of the bank assets that caused the 2008 crisis were assets that, because they were perceived as especially safe, dumb regulators therefore allowed banks to hold these against especially little capital. 

The allowed leverages, after Basel II, that applied to European banks and American investment banks like Lehman Brothers were:

AAA rated sovereigns, including those the EU authorities authorized, like Greece, had a 0% risk weight, which translated into unlimited leverage.

AAA rated corporate assets, were assigned a risk weight of 20%, signifying a permissible 62.5 times leverage.

Residential mortgages were assigned a risk weight of 35%, translating into a 35.7 allowed leverage.

Of course, after the crisis broke out, any few “risky” assets banks held, like loans to entrepreneurs, those that banks could only leverage 12.5 times with went through, (and still do), a serious crisis of their own, when banks began to dump anything that could help them improve that absolutely meaningless Tier 1 capital ratio.

http://subprimeregulations.blogspot.com/2016/12/here-is-succinct-but-complete.html

@PerKurowski

Populism is not the exclusive domain of politicians and autocrats. Even technocrats practice it and experts fall for it

Sir, Ray Dalio, Bridgewater’s founder, told Gillian Tett “that the proportion of the western world voting for populist candidates had risen to 35 per cent. The figure, from a report by his firm, was starkly higher than at the start of the decade, when it was 7 per cent.” She finds that “unnerving on several levels” “Economics alone does not explain the surge of populism” August 4.

It is now ten years since a crisis caused exclusively by assets that because these had been perceived, decreed or concocted as safe banks could hold against very little capital turned out to be risky. And still so few question the wisdom of basing regulations on the belief that what is perceived as risky is more dangerous to our bank system than what is perceived as safe.

So Sir, I find it even more unnerving that seemingly 99.9% of regulatory experts, economists and financial journalists do still seem to believe, and ever refuse to question, those populist regulators who tell us they know all about bank risks, so as to make our banks safer with their risk weighted capital requirements.

Yes, many voters might fall for nice sounding populist promises, but others too, perhaps even you Sir, can sometimes not be able to resist these. Imagine, safe banks at no cost, does that not just sound too sweet not to believe?

@PerKurowski