Universities, especially tenured professors, sometimes neglect their vital social role as intellectual vigilantes.

Sir, I refer to Tim Harford's discussion of "Are universities worth it?" August 27.

I totally agree with Harford that universities generally produce a lot of local and global good vital for the welfare of society, though it behooves us never to ignore the possibility they could also generate some awful local and global bad.

But something Harford leaves out in his discussions, is that universities, most specially tenured professors, as intellectual vigilantes, have an important societal role to fulfill of alerting to stupid and dangerous ideas, like that of the credit risk weighted capital requirements for banks.

What are the causes of major bank crises?

1. Unexpected events, like major devaluations and natural disasters.

2. What was ex ante perceived as very safe turned out ex post to be very risky.

3. Shenanigans like unauthorized speculative trading or banks lending to their own directors or shareholders.

What did the regulators do?

They introduced credit-risk-weighted capital requirements: more ex ante perceived risk more capital - less risk less capital... re-clearing for basically the only risk that was already being cleared for, by means of size of exposure and interest rates.

For instance, they gave prime AAA to AA rated assets a 20% risk weight, while highly speculative almost broke below BB- rated, assets got a 150% risk weight...

As if banks would ever build up dangerous excessive exposures to what is below BB- rated.

And that has seriously distorted the allocation of bank credit to the real economy with disastrous consequences.

But have we heard sufficient finance professors protesting sufficiently against this the pillar of current bank regulations? Absolutely not! In fact their deafening silence on it, is one of the principal reasons why this issue is not even discussed.

Sir, it would be great if the undercover economist Harford would dare to do some research on the why of that silence. He could do that in his beloved Oxford or, if he feels more comfortable doing so, in some university of some other faraway town. (Cambridge?)

PS. Here is a more detailed aide memoire on the Basel Committee for Banking Supervision’s regulatory monstrosity.

PS. There are some academics who have protested these regulations but mostly in terms of the capital requirements being too low or in terms of the distortions these might cause of the balance sheets of banks. They are correct but my point is that the distortions produced in the allocation of bank credit by using different capital requirements, is even more important than these being too high or too low.

@PerKurowski ©

When restructuring the World Bank you might want to start even higher than its presidency.

Sir, I refer to your editorial “Restructuring hell at the World Bank”, April 10.

You end it stating “If there is a silver lining to the bank’s turmoil, it is this: the Bretton Woods Institutions belong to the world. From now on, they must be headed by the best people available”

Not so fast! When presenting my book Voice and Noise, May 2006, in which I reflected on my experiences as an Executive Director of the World Bank, 2002-2004 this is what I said:

“Although we proudly name ourselves the World Bank, the fact is that we are more of a “Pieces of the World Bank”, with 24 Executive Director representing parochial interests. As a consequence I sadly had to conclude in that the World itself, call it Mother earth if you want, in these times of globalization, is in fact the Bank’s most underrepresented constituency.

This needs to be fixed, urgently, as we need to be able to stimulate a profoundly shared ownership for the long-term needs of our planet; that is if we want to survive as a truly civilized society worthy of the term civilization. As I see it, adding a couple of truly independent seven-year-term Executive Directors, whose role would be to think about the world of our grandchildren, way beyond the 2015 of the Millennium Development Goals—could be what the World Bank most needs now.”

And Sir, I still stand by that. 

The way the World Bank’s Executive Directors are nominated by ministries, does not guarantee the existence of sufficient intellectual and independent diversity at the Board. And that is the number one condition that needs to be satisfied in order for any international finance institution, to become something more than a well intended mutual admiration club, run by an also well intended management in natural pursuit of their own and perhaps even more parochial objectives.

PS. I have been asked by a representative of the civil society, whatever that now means, to add some additional straight to the point explanations of what I mean, and so here it is:

1. I guarantee that if one Joe the Plumber or one Nancy the Nurse, selected through lottery from 25 plumbers or 25 nurses, substituted for one of the 25 current executive directors, chosen also by lottery, we would have a 75% chance of ending up with a more commonsense and wise Board of Executive Directors at the World Bank, and less than a 1% chance to end up with something meaningfully worse.

2. If the Basel Committee for Banking Supervision (or perhaps the IMF) had counted with one biologist or an expert in the contagion of diseases, they would never ever have introduced something as dumb as the risk-weighted capital requirements for banks which, besides distorting the allocation of bank credit, amplify dramatically the consequences of any insufficient or any excessive ex ante perception of risk. And the world would have been saved from the current crisis. The ongoing intellectual incest is so bad that even 7 years after the outburst of the crisis they still do not realize what they have done.”

3. With reference to William Easterly’s 'The tyranny of experts', the real nightmare is to be in the hands of a group of similar experts on the same subject.

4. One of the best ways to control for the dangers of group-think, is to subject the group to the authority of some who is guaranteed not to belong to the group, and has no reason for wanting to belong to the group.

PS. Whenever you click on to social media, say this little prayer: “Please God, save me from becoming a victim of intellectual incest”