And the lesson number one is....
Sir, Martin Wolf in “The lessons to be learnt from today’s financial crisis” July 2, 2008 quotes the Bank of International Settlements annual report stating “loans of increasingly poor quality have been made and then sold to the gullible and greedy”. Although I find it hard to think of a market that does not use greed as one of its main motors it is really the “gullible” part of it all that really blows my mind.
Who on earth is BIS to talk about gullibility. Was it not the Basel Committee on Banking Supervision that BIS hosts that set up a system based on credit risk assessments and that appointed the credit rating agencies as the supreme risk measurers? If we normal citizens and investors are gullible of anything it has been of believing that the Basel bank regulations had taken care of the problem once and for all, and that the credit rating agencies knew what they were doing.
BIS also mentions “the inherent procyclicality of the financial system” to argue for tighter monetary conditions when credit soars…but not a word about how the risk rating and the consequent “massive re-rating of risk” can send cyclicality soaring to the moon.
No, if there is a first lesson to be learnt it is that central bankers and bank regulators are, no matter how knowledgeable and pompous they act, only humans prone to err, and so it behoves us not give them too much powers, which is what makes them truly scary and dangerous.
PS. A letter on this theme to FT back in 2004.
PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is dangerous nonsense.
Who on earth is BIS to talk about gullibility. Was it not the Basel Committee on Banking Supervision that BIS hosts that set up a system based on credit risk assessments and that appointed the credit rating agencies as the supreme risk measurers? If we normal citizens and investors are gullible of anything it has been of believing that the Basel bank regulations had taken care of the problem once and for all, and that the credit rating agencies knew what they were doing.
BIS also mentions “the inherent procyclicality of the financial system” to argue for tighter monetary conditions when credit soars…but not a word about how the risk rating and the consequent “massive re-rating of risk” can send cyclicality soaring to the moon.
No, if there is a first lesson to be learnt it is that central bankers and bank regulators are, no matter how knowledgeable and pompous they act, only humans prone to err, and so it behoves us not give them too much powers, which is what makes them truly scary and dangerous.
PS. A letter on this theme to FT back in 2004.
PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is dangerous nonsense.
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