Regulators wrongly believe that to increase the stability of banks, they must stimulate risk-aversion.

Sir, I refer to Martin Wolf’s “Make policy for real, not ideal, humans” December 17.

In it and with references to the World Bank’s latest World Development Report (WDR2015); and Daniel Kahneman’s “Thinking fast and slow” he writes, “most of our thinking is not deliberative but automatic; it is socially conditioned; and it is shaped by inaccurate mental models”.

Clearly, the socially conditioning of believing experts to be unable to totally get things wrong, have stopped most, Martin Wolf included, from accepting the fact that current bank regulators decided automatically with no deliberation and based on inaccurate mental models. Let me for the umpteenth time repeat the evidence:

Automatic thinking would be: Risky is risky, safe is safe, and therefore banks should be required to hold more capital against risky assets based on perceived risks.

Deliberative thinking would be: What is risky might not be risky if it is perceived as risky, while what is perceived as safe might be really dangerous if it turns out to be risky, and therefore perhaps banks should be required to hold more capital against what is perceived as safe, than against what is perceived as risky.

And an inaccurate mental model is one that is based on that the only purpose of banking is to serve as a safe mattress where to stash away our savings, while ignoring its fundamental social purpose of allocating bank credit as efficiently as possible. And because of that bank regulators did not care on iota about how with their credit risk weighted capital requirements for banks, they have caused huge distortions by allowing “safe” assets to produce much higher risk-adjusted returns on equity than “risky” assets.

WDR2015 mentions “the tendency of poor women to believe that the right treatment for diarrhea is to cut fluid intake, to stop their child ‘leaking’”.

Frankly, those in the Basel Committee, and in the Financial Stability Board, and most “experts” on regulations are just as wrong. They believe that the right thing to do for the stability of our banks (and our economies) is to stop the leakages… by increasing the risk-aversion.

Unfortunately, the power of “automatic” thinking is enormous. In July 2012 Martin Wolf wrote that I regularly reminded him of that “crises occur when what was thought to be low risk turns out to be very high risk” but, as we could see in his latest book “The Shifts and the Shocks”, he has yet not been able to internalize the meaning of it.

On bank regulations why can’t we get to the heart of its problems? Why can’t we keep political agendas out of it?

Sir, I refer to Edward Luce’s “Too big to resist: Wall Street’s come back” December 14.

Anyone who with an open mind reads Daniel Kahneman’s “Thinking, Fast and Slow” 2011, or this years “World Development Report 2015: Mind, Society, and Behavior” issued by the World Bank, should be able to understand the following with respect to current bank regulations:

Regulators (and ours) automatic decision-making makes us believe that safe is safe and risky is risky; while a more deliberative decision-making would have made us understand that in reality very safe could be very risky, and very risky very safe.

And so when so many now scream bloody murder about the influence of big banks in the US congress, because these managed to convince legislators to allow “banks to resume derivative-trading from their taxpayer insured arm”, they posses very little real evidence of what that really means… except, automatically, for the fact that it all sounds so dangerously sophisticated.

No, if there is something we citizens must ask our congressmen to resist, that is the besserwisser bank regulators who, with such incredible hubris, thought themselves capable of being risk-managers for the world, and decided to impose portfolio invariant credit risk weighted capital requirements for banks.

These regulations distorted all common sense out of credit allocation, and cause the banks to expose themselves dangerously much to what is perceived as “absolutely safe”, while exposing themselves dangerously little for the needs of our economy to what is supposedly “risky”, like lending to small businesses and entrepreneurs.

If we, based on what caused the current crisis should prohibit banks to do, it would have very little to do with derivatives, and all to do with investing in AAA rated securities, lending to real estate sector (like in Spain) or lending to “infallible sovereigns” like Greece.

Does this mean for instance that I do not agree with FDIC’s Thomas Hoenig’s objection to US Congress suspending Section 716 of Dodd-Frank? Of course not! But, before starting to scratch the regulatory surface, something which could create false illusions of safety, or even make it all much riskier… we need to get to the heart of what is truly wrong with the current regulations… Sir, enough of distractions!

And also enough of so many trying to make a political agenda and election issue out of bank regulations… as usual it would be our poor and unemployed or under employed youth who most would pay for that.