A world obsessed with Best Practices may calcify its structure and break with any small wind

In reference to Mr. Flash Crash’s supposedly malevolent disruption of the market in 2010, John Plender writes interestingly about globalization, regulations and fragility “Global financial regulation meets a cul-de-sac” April 23.

In this respect I would like to recall a written statement that I delivered as an Executive Director of the World Bank on April 2, 2003, while discussing its Stategic Framework 04-06. In it I wrote:

“Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.

A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind. Who could really defend the value of diversity, if not The World Bank?"

http://subprimeregulations.blogspot.com/2003/03/my-comments-on-world-banks-strategic.html

@PerKurowski

Too well tuned?

Sir, John Plender in “It’s time to rewrite fashionable finance ideas”, May 4, refers to the need for some redundancy in the system so as to be able to respond better to unforeseen events. Below is how I addressed that issue in my Voice and Noise of 2006.

Too well tuned?: Martial arts legend Bruce Lee, whom many people regarded as immortal, died at the age of only 32 of a cerebral edema, or brain swelling, after taking some sort of aspirin. I have not the faintest idea whether that pill actually had anything to do with his death but I have frequently used (or misused) this sad death as an example of how an organism could be in such a highly tuned and perfect condition that it could not resist a small external shock. And I used this metaphor to explain why companies nowadays, pressured by the stock market’s expectations for the next quarterly results; the latest theories in corporate finance as to how squeeze out the last drop in results; and, perhaps, even some bit of creative accounting, might be so well-tuned (no little reserve fat left) that they would not be able to withstand any minor recession. (Whenever I expose this theory, I can see in my wife’s eyes that she believes this is just my preparing an excuse for my growing—ok, grown—midline.)

Europe needs and merits someone better than Mario Draghi

Sir, when Guy Dinmore, Quentin Peel and Peggy Hollinger report” Mario Draghi poised for ECB job”, April 27, they refer to "his prominence as head of the Financial Stability Board”. Let me remind you that the most adequate name for that board would be the “Financial Fragility Board”. With their artificial and global regulatory construes they are introducing a fragility that has made and will make the financial system more prone to breaking. When you for instance build resistance against earthquakes, more than the basic strength of material you need to consider their flexibility.

Since Mr. Mario Draghi is one of those who so many years into this crisis has not yet understood the immense damage the regulators of the Basel Committee produced, when they considered the credit ratings for the capital requirements of banks, even though these had already been considered when the market and banks set their risk premiums, he does not seem qualified for such an appointment. A Europe that is so messed up because of the excessive build up of sovereigns and “triple-A rated debt, very much induced by the Mario Draghis of this world, needs someone better.

What about accountability? Giving him a promotion? Would you have made a Chamberlain with his “Peace in our time” the War Minister? I don’t think so! But, that indeed seems to unfortunately be the name of the game, in a world where the too big to fail banks are allowed to grow bigger still.