When experts on different aspects collaborate they should be able to disagree, not just join a mutual admiration club.

Sir, Tim Harford writes about “a flawed statistical study by Winston Churchill’s scientific adviser Frederick Lindemann that no one had both the technical skill and the political clout to challenge. [It caused] the allied bombing of dense urban areas in Germany during the war, which not only took a terrible toll on civilians but failed in military terms by sparing industrial targets.” “Real change requires experts to collaborate” May 4.

There is a document prepared by the Basel Committee on Banking Supervision dated July 2005 and titled “An Explanatory Note on the Basel II IRB Risk Weight Functions". It can be found on the web site of the Bank for International Settlements.

It is supposed to explain the standardized risk weighted capital requirements for banks decided upon in the Basel II agreements. It does nothing of that sort, mostly because those risk weights are impossible to justify.

For instance assets rated AAA to AA rated, which ex ante perceived safety could cause banks to build up excessive exposures that could be dangerous to the bank system if these turned out ex post risky are assigned a 20% risk weight while; for assets rated a below BB- and that because of their perceived riskiness banks will not voluntarily build up excessive exposures to, and therefore represent no risk to the bank system, even if they turn out even riskier than expected, have been assigned a whopping 150% risk weight.

But that explanation was never challenged. The fact that AAA to AA rated assets could be leveraged 62.5 times by the banks, when compared to the 12.5 times allowed leverage with unsecured loans to unrated entrepreneurs, created the incentive structure for the 2008 crisis, caused by the excessive exposures to the AAA rated securities backed with mortgages to the subprime sector in the US, which turned out very risky; or by the excessive exposures to assets covered by default guarantee sold by AAA rated AIG.

Even after that crisis, the silence on it has persisted. As is our bank systems are doomed to especially large crisis, caused by especially large exposures to assets perceived ex ante as especially safe, but against which when these turn out ex post to be especially risky banks hold especially little capital.

How did the weavers in Basel manage to convince the world that with their regulations the bank systems were fully dressed, and that anyone not seeing that were unfit for their positions, stupid, or incompetent? I have, like the child in Hans Christian Andersen’s “The Emperor’s New Clothes”, shouted out innumerable times that our bank systems are now even worse of than if naked, but this has obviously not sufficed.

Harford opines “good policymaking is now a team effort. It requires different perspectives and a range of specialist expertise. We all must learn to work with people who see the world very differently”

Indeed, and there is of course more than enough “technical skill and the political clout to challenge” these regulations, but yet nothing happens. Could there perhaps be too many disincentives to do so? For instance like then not being invited to Davos? 

Sir, one day historians will scratch their heads trying to figure out the reasons for the world’s now more that thirty years silence, on the outright loony (and statist) risk weighted bank capital requirements. Do you not wonder what they in that respect could say about FT’s?

@PerKurowski

A Neo-Inquisition is at work protecting mutual admiration clubs, like the Basel Committee for Banking Supervision

Sir, Ian Goldin writes “Today, the increasing depth of knowledge in any field means that greater specialisation is needed to master ideas. Yet this stifles creativity and the ability to grapple with real-world problems, whose messy complexity has less and less in common with the increasingly fragmented disciplines and professional specialisation” “Da Vinci code: what the tech age can learn from Leonardo” April 29.

Indeed, and that is most clearly evidenced by expert specialized regulators coming up, within the walls of a mutual admiration club, with risk weighted capital requirements for banks, which are based, not on the dangers bank assets could pose to the banking system, but simply on their ex ante perceived credit risk… as if bankers did not perceive these… as if bankers loved taking risks… as if not all major bank crisis had resulted from something ex ante perceived as safe turning up ex post as something very risky. 

Goldin rightly opines: “For progress to prevail, evidence-based, innovative and reasoned thinking must triumph. Genius thrived in the Renaissance because of the supportive ecosystem that aided the creation and dissemination of knowledge — which then was crushed by the fearful inquisitions. Today, tolerance and evidence-based argument are again under threat.”

Indeed those bank regulations, which blatantly failed in 1988, when AAA rating turned out wrong, and which are building up dangerous exposures to 0% risk weighted sovereigns and to 15%-35% residential mortgages, are still not discussed.

In response to a public request of comments on SMS financing, I sent a letter to the Financial Stability Board. It began this way:

“I have not found sufficient strength to sit down and formally write up my comments, because I feel I would just be like a heliocentric Galileo writing to a geocentric Inquisition.

The Basel Committee’s standardized risk weights are based on the presumption that what is ex ante perceived as risky is more dangerous to our bank system.

And I hold a totally contrarian opinion. I believe that what is perceived a safe when placed on banks balance sheets to be much more dangerous to our bank system ex post than what is perceived ex ante as risky; and this especially so if those “safe” assets go hand in hand with lower capital requirements, meaning higher leverages, meaning higher risk adjusted returns on equity for what is perceived safe than for what is perceived as risky.”

Sir, that letter managed to get nailed on FSB’s web-doors and I’m waiting to see what will be its destiny.

PS. In these days when the filthy rich are so much abhorred, there’s room to ask whether Leonardo da Vinci’s Salvator Mundi and Mona Lisa would ever have been painted if not commissioned by some filthy rich.

PS. In FT November 2004: “Basel is just mutual admiration club of firefighters seeking to avoid crisis”

@PerKurowski

A designated group of Wise People, often self-designated from a mutual admiration club, does not guarantee any wisdom

Sir, Howard Davies the chairman of the Royal Bank of Scotland, when discussing financial regulations after Brexit writes. “The choice is presented as being between continued market access, as a rule taker from Europe, or taking back control of our own regulation and losing market access. The dilemma is nothing like so stark —EU bank capital regulations derive from the Basel Accords, and the UK remains a full member of the Basel Committee.” "Post-Brexit financial regulation cannot be left to negotiators" November 1

And to Work “out a new arrangement which responds to these realities” he suggests designating a group of Wise People.

Indeed, but Britain, Europe, we all need is bank regulators acting like wise men, and not like self-interested not accountable to anyone bankers.

Let me for the umpteenth time ask some questions.

What creates those excessive exposures that can endanger a bank system?

That which is perceived as very safe, or that which is perceived as very risky?

The regulators obviously believe the second, the very risky, as they in Basel II assigned a risk weight of 20% to what is AAA rated and one of 150% to what is below BB-rated.

What do you think is a more important purpose for our banks?

Lending to sovereigns and the AAA rated those with already ample access to credit, or lending to SMEs and entrepreneurs those that could help the economy to keep moving forward?

The regulators obviously believe the first, as they in Basel II allowed banks to leverage 62.5 times to 1 or more when lending to sovereigns and AAA rated, but only 12.5 times to 1 when lending to the unrated.

But have not Basel III changed it all? No, the risk weighted capital requirements remain in place and, on the margin, are just as distorting as ever.

How has this happened? The regulators acted like bankers and looked at the risks of bank assets, instead of wisely concerning themselves with if bankers perceived or managed the risks correctly.

Any risk, even if perfectly perceived, causes the wrong action if excessively considered.

And so for Britain and for the long-term prospects of the English banks that we have learned to admire, assure yourself of getting rid of all that pernicious Basel influence and so that your bankers can again be savvy loan officers, and not just the small equity minimizers they have so willingly become… in order to maximize their bonuses.

@PerKurowski

Let us not allow group-thinking unaccountable technocrats operating in mutual admiration clubs decide for us voters

Sir, Tim Harford explains many reasons why a normal voter cannot be duly informed about all matters. Though that weakens democracy, it is a fact of life, and so he opines: “The workaround for voter ignorance is to delegate the details to expert technocrats.” “The man in Whitehall sometimes does know best” March 18.

I agree, except that I would have to add the caveat: As long as those technocrats operate transparently and can be openly questioned by any normal voter who happens to be interested in the subject.

And I say that out of experience. I consider the risk weighted capital requirements for banks that have come out of the Basel Committee to be about the most damaging and useless regulations ever; and I have a long list of questions that I have never been able to get a response to. Like for instance:

Why did the regulators not look at all empirical evidence that exists on what has caused all major bank crises? In that case they would not have assigned a risk weight of only 20% to what is so dangerous for the banking system as what is AAA rated, and one of 150% to the totally innocuous below BB- rated.

Why did the regulators not define the purpose of the banks before regulating these? In that case they would not have ignored the distortions in the allocation of bank credit this regulation causes?

Of course journalists, like those in the Financial Times, could play a vital role going between technocrats and voters… but what when they don’t want to do that for their own particular reasons?

PS. Harford writes “Better a flawed expert than a flawed amateur” Yes, but let us keep a watchful eye on the experts; let us never forget George Orwell’s comment, in “Notes on Nationalism”, “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool” or references to Patrick Moynihan opining “There are some mistakes it takes a Ph.D. to make”.

@PerKurowski

Risk weighted capital requirements for banks, is a false solution that is destroying the western world

Sir, Martin Wolf writes: “By succumbing to the lure of false solutions, born of disillusion and rage, the west might even destroy the intellectual and institutional pillars on which the postwar global economic and political order has rested.”, “The march to world disorder” January 6.

Again Wolf prefers to ignore the perhaps most destructive false solution that has affected us.

Before 1988, bank credit, except for when criminal activity was involved, was allocated to what produced banks the highest expected risk adjusted return on equity.

But then, in order to make our banks safer, the regulators, with Basel I 1988 and Basel II 2004, imposed portfolio invariant risk weighted capital requirements for banks. Bank credit was thereafter allocated to what produced banks the highest expected risk and capital-requirement adjusted return on equity.

As a result banking changed dramatically, and the allocation of bank credit to the real economy became hugely distorted.

For a starter with risk weights of 0% for the Sovereign, and 100% for We the People, it introduced runaway regulatory statism, just while communism was disintegrating,

It also caused a dangerous risk aversion, which has bankers no longer financing the riskier future but only refinancing the safer past and present, something which of course is a driver of inequality.

How could it have happened? Six major factors stand out.

First, although hard to believe, bank regulators never defined what the purpose of banks is before regulating these. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

Second, equally hard to believe, the regulators never researched what had caused bank crisis in the past; namely unexpected events, criminal doings and what were ex ante perceived as very safe but that ex post turned out very risky. What is perceived as very risky is, precisely because of that perception, what is least dangerous to the system. “May God defend me from my friends, I can defend myself from my enemies” Voltaire

Third, regulators completely missed out on that any risk, even if perfectly perceived, causes the wrong actions, if excessively considered, and doubled down on the ex ante perceived risks.

Fourth, an overreliance on data and models.

Fifth, not understanding that, as regulators, they could be introducing serious systemic risks.

Sixth, a general Groupthink, that which results from allowing experts to isolate themselves in a mutual admiration club.

The saddest part of the history though is how after so much evident failure, and evident waste of stimulus like QEs, the risk weighted capital requirements for banks is still discussed as part of a solution. To that we have many silencers, like you Sir and like Martin Wolf to thank for.

Sir, where would the western world have been if since Medici banks had used risk weighted capital requirements for banks

@PerKurowski

Tim Harford, lack of the limited diversity is bad, but much worse is groupthink within mutual admiration clubs.

Sir, Tim Hartford argues that one argument in favor of diversity is “to engage with people who may see the world differently because of their race, nationality, sexuality, disability or gender.” “Economics: a discipline in need of diversity” November 12.

That is a way too restricted view on the importance of diversity. As an Executive Director of the World Bank, back in 2002-04, I often argued with my colleagues that if by lottery we would get rid of two us with so much alike backgrounds, substituting the eliminated with a nurse and a plumber, we would not only have a more knowledgeable Board but, more importantly, a much wiser one. Not surprisingly there was a general lack of enthusiasm in the response to this line of argument.

Likewise, if bank regulators had beside those with banking experience included some with borrowing experience within their ranks, those who could attest to the difficulties they already faced accessing bank credit when perceived as risky (even if all these were white men) we would never have had to suffer the sheer idiocy of the current risk weighted capital requirements for banks.

Sir, so to stuff mutual admiration clubs that can easily fall trap to groupthink with those who meet the current limited meanings of diversity, will result in much less than what is really needed.

@PerKurowski

Free Greece from regulatory shackles that make banks finance more the safer past & present than the riskier tomorrow

Sir, when commenting on the tensions between a “eurogroup” of ministers and the IMF about how to solve the problem called Greece you, as you should, clearly argue in favor of some additional relief of that debt “overhang that can only depress confidence”, “The IMF should stay in the Greek rescue squad”. October 12.

The problem though is that even if all Greece’s debt was condoned, but bank regulations stayed the same, that nation would just repeat its and most other countries’ recent mistakes.

Sir, nothing expresses a more depressed confidence in tomorrow as Basel’s risk-weighted capital requirements for banks. If Greece, and all the rest, is not freed from it, its banks have no chance of allocating credit so as to achieve a sturdy and sustainable growth. And besides if such growth does not happen, the banks’ own stability is also endangered.

That Europe, IMF, and the rest of regulators, do still seem to be unaware of what nasty effects their current bank regulations produce, is just amazing. Or perhaps they are all aware of it, but, with a little help from their friends, like FT, are just circling their wagons in order to defend their little mutual admiration club of technocrats.

There should be claw-back clauses for failed regulators and blind journalists (and editors) too!

@PerKurowski ©

Governments best take big decisions, when there’s no conflict of interest, no stupid groupthink, and contestability.

Sir, I come from an country, Venezuela, where privatizations of public owned utilities were based not on who would provide us citizens the best services, but on who would provide the state with the highest upfront payment… an anticipated tax revenue for the government, to be paid later by us citizens by means of higher than needed tariffs, for decades to come. And, to top it up, that was accused of being odious neo-liberalism product of the Washington Consensus. 

That’s why when I read Martin Wolf’s “Big energy decisions are best taken by government, not the market” of September 16… I immediately reacted… “Hold it there, take it very easy!”

If government is going to take big decisions, as it should, we must make sure all its possible conflicts of interest are removed, and that the decision process is transparent and guarantees contestability, and not just the result of a small mutual admiration club of technocrats/bureaucrats.

For instance, allowing bank regulators to impose their statism of a 0% risk weight for the Sovereign and a 100% risk weight for “We the People”, was wrong.

And allowing bank regulators to impose risk weighted capital requirements for banks based on the ex ante perceived risks of bank assets, and not on the ex post risks conditioned on the ex ante perceived risks, was utterly stupid. What’s the chance of something really bad happening from something perceived as “safe”, and what is it for something “risky”?

Wolf lectures us: “Rational risk-taking by individual financial businesses will create substantial threats for others. This, too, is a spillover, or “externality”. Financial regulation has to internalise such externalities, thereby reducing the likelihood of crises and making them more manageable when they arrive. One way to do so is to raise capital requirements far above what profit-seekers would wish”

I argue that much more important than that, is to get rid of the credit-risk weighting of the capital requirements that only distorts the allocation of bank credit to the real economy while serving no bank safeness purpose, much the contrary. Wolf, in spite of hundreds of letters I have sent him over a decade on this issue, has yet to understand that.

And Wolf ends “The government must have the courage to make… difficult decisions and the wisdom to make them well.” Yeah, yeah, yeah, but what if the decision makers are dumb and we are not allowed to correct them… because so many want to suck up to them nevertheless (like in Davos)… or because some are interested in exploiting that dumbness? 

@PerKurowski ©

Globalizing the conclusions of members of mutual admiration clubs, like the Basel Committee’s, is a huge systemic risk.

Sir, I refer to Gillian Tett’s interesting discussion of Paula Jarzabkowski’s “Making a Market for Acts of God” “The doublethink insurance club”, September 26.

Tett writes: “insurance executives …love to talk about how they are now using diversified strategies that bundle different risks together, and price this according to a global pattern of supply and demand – or a “market”… But there is a rub. As consolidation has taken hold, this has cut sharply the number of players who handle reinsurance products – And [so] while the insurance companies say they want to “diversify” their risks, they are all doing this in exactly the same way –which produces less, not more, diversity.”

Indeed that of diversifying more and more in ever fewer and fewer diversified ways is a clear and present danger in days of increased globalization. The following is what I had to say on that subject in April 2003 at the World Bank, as an Executive Director:

“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 is 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.”

Tett writes “this project touches on a point that matters beyond the insurance world: namely we all have an amazing tendency to fool ourselves… insurance brokers…they are so clubby that they are susceptible to both groupthink and doublethink – and an inability to see the contradictions that underpin their world.”

And if that goes for insurance brokers, then think of what a mutual admiration club of regulators could come up with, when trying to impose the same one and only set of regulations on the banks of the world. Holy moly! Just for a starter, when setting the capital requirements needed to partly cover unexpected Acts of God losses, without blinking, they decided to use the human perceptions of the expected losses… and no member of the Basel Committee club objected... naturally... members are not supposed to do that.

@PerKurowski

The IMF, like a member in good standing of a mutual admiration club, keeps total mum about the mistakes of colleagues.

Sir, Takatoshi Ito writes: “perhaps the IMF cannot be frank with Europe… — its management, after all, is dominated by Europeans” “Someone should have spoken truth to Europe” July 8.

Of course that might influence, but IMF’s silence is more based on the reluctance to criticize other members in their small mutual admiration club of technocrats.

In September 2006 in a letter published in FT I wrote:

“The Fund's problem is that it has now turned into the clubhouse of the "independent" central bankers… Though I agree…that the top job should not be reserved for a European… may I also advance the idea that it should not be reserved for a central banker either?”

And even more directly related to the subsequent events in Greece, in November 2004, in a letter that was also published by FT, I wrote:

“Our bank supervisors in Basel are unwittingly controlling the capital flows in the world….

How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.

Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters trying to avoid bank crisis at any cost - even at the cost of growth”

The IMF, as to this moment, has yet not warned in clear and unequivocal terms about the dangerous distortions that credit-risk-weighted capital requirements for banks cause. And that though the evidence is there for all to see. A Greece brought to its knees because of excessive borrowings by its government, and unable to stand up, because of the lack of access to bank finance for its SMEs and entrepreneurs.

@PerKurowski

Creativity needs a chair in any mutual admiration club to somewhat dent any ongoing groupthink

Sir I agree with Gillian Tett in that “A degree of creativity should be on the college curriculum” March 21. But that must also include making sure that creativity has a chair wherever important decisions are taken.

I say it again… had there for instance been some genuine representation in the Basel Committee of historians, and why not of anthropologists, these would have questioned the wisdom of the risk-weighted equity requirements for banks that have so completely distorted the allocation of bank credit to the real economy.

At least the chance of having someone able to quote Mark Twain in that “bankers are those who lend you the umbrella when the sun shines and want to take it away as soon as it looks like it is going to rain” could have given those central-banker-regulators some second thoughts, while they were doing their groupthink, in their cozy mutual admiration club.

@PerKurowski

No! We can’t accept markets know more than we the experts do, can we?

Sir, I refer to John Kay’s “Crowd-pleasing theories are no substitute for wise regulations” December 17.

In it he writes “The wisdom of crowds becomes a pathology when the estimates of the crowd cease to be independent of each other, and this is likely when the crowd is large, ill-informed or both. It is in the nature of a crowd to turn on anyone who dissents from what is already an average opinion”.

I fully agree with that but, when the crowd is too small, then the groupthink risks really sets in, and it is in the rules of a mutual admiration group not to dissent in such a way that it could reflect badly on a member of it.

And so that is why “wise” regulators are certainly no perfect substitute for crowds either.

Just look at what our current bank regulators did:

They automatically decided that risky is risky, safe is safe, and therefore banks should be required to hold more capital against risky assets based on perceived risks.

And they ignored any deliberations on that 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.

Why? Because that would mean that there in their club of great experts regulators they would have to admit that they really do not know much about risks, and that the market could be better at determining it, and of course “We can’t have that… can we?

Is the financial transmission mechanism muddled? Yes, that is to say the least.

Sir, Gillian Tett writes that the “bigger worry is that the benefits of QE3 are so unclear, because the transmission mechanism is so muddled”, “Beware the high costs and psychology of America’s QE3.” September 21. 

And Tett reports on Richard Fisher, head of the Dallas Fed saying: “Nobody on the [Fed] committee… really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. The very people we wish to stoke consumption and final demand by creating jobs and expanding business investments are not responding to our [Fed] policy initiatives as well as theory suggests”. 

Muddled transmission mechanism indeed! How could it not be so when capital requirements for banks favor so much the lending to those perceived as “not-risky” and thereby discriminates so much against those perceived as “risky”. 

But I know for sure what is at least an absolute sine qua non to get the economy back on track, and that is getting rid of those discrimination based on perceived risks, and which almost amount to a class war waged by the “not-risky” against the “risky. 

It is the action of the “risky” which normally builds the muscles of an economy. Those “not risky” slowly, or fast, over time, most often turn into flabby fat. 

And Gillian Tett should know this after all the letters I have sent to FT, and to her, explaining the above. But, then again, as she recently wrote in “An internet free for all read by none” September 15, “People are clustering into tribes… only reading information that reaffirms their pre-existing social and political world view”, and, since I do not really belong to her mutual adoration tribe, she might not even have read my letters. 

PS. As I am putting together a Stupid Bank Regulations 101, for the benefit of those who like Martin Wolf do not get it, perhaps Gillian Tett would also like to take advantage of it.

Don´t point fingers at the economists

Sir, I refer to Robert Skidelky´s “How to rebuild a shamed subject” August 6. There should not be any finger pointing of the economists specifically. Many are to blame, including the financial press. 

This crisis has nothing to do with economics and all with the lack of ordinary good common sense. Given the strong incentives of the minimum capital requirements for banks concocted by the Basel Committee for to follow the opinions of some few credit rating agencies, everyone should have known that, sooner or later, something was doomed to go wrong.

I, as an Executive Director at the World Bank (2002-2004) said so over and over again; and FT even published a letter where I, in January 2003 said that “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.” 

Now why could we not react and stop what was being done? Because the whole regulatory debate was captured by some regulatory gnomes in Basel, who let no outsider question anything in their cozy little mutual admiration club. 

By the way, in the context of this crisis, please stop talking about a black swan or, at least, as a bare minimum, clarify that it was a black swan fabricated by the regulators.

The Central Banks’ independency has to be balanced with more criticism.

Sir in your sermon “The value of bank independence” August 3, you mention that “the era of economic theocracy, in which unelected experts ran the global economy is over”. Over? Where, how and when? The fact the central banks have taken a less prominent role while the fiscal spenders are doing their juggling act do not make them less independent. In fact, if anyone at this moment would have to take a bet on the central banks losing their independence or continuing to be the mutual admiration club their independence have turned them into I would advice to bet on the latter.

Also though you quite correctly opine that “risks are greater when a regulator plays God, deciding which banks should live in a crisis” why did you never say a word when the regulators also played God and with their minimum capital requirements for the banks arbitrarily decided to sort of call it quits by subsidizing risk adverseness and taxing risk-taking?

Finally you keep being stubborn and wrong insisting on the role of “too low interests” in the credit bubble. Have you any idea at what rates these subprime mortgages that defaulted were contracted at? Is it so hard to see that the problem was how these lousily awarded mortgages morphed into no-risk AAA instrument to be discounted at so much lower interest rates?

Of course the world needs independent central bankers but more than that it needs independent minds and, of course, a more critical financial press much less prone to suck up to the independent authorities.

We might need an international regulator, but we humans do not have the people for that.

Sir Carmen Reinhart and Kenneth Rogoff declare that “We need an international regulator”, November 19. Their fundamental reason for it is that “finding ways to insulate financial regulators from political meddling is critical to creating a more robust global financial system in the future.” I vehemently disagree.

The current crisis is a direct result of the financial regulators having insulating themselves in the Basel Committee, the Financial Stability Forum and the Central Banker’s club house, the International Monetary Fund, where they in splendid isolation among friends concocted ideas like the minimum capital requirements for banks based on vaguely defined risks, and empowered the credit rating agencies to serve as the guiding stars for the capitals of the world. What more political independency could they have wished for? When were the financial regulators stopped by the politicians from stopping this crisis?

Someone recently reminded me that F.A. Hayek wrote that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design", and which tells us that even if we could have much need for an international regulator, we humans simply do not possess the people capable of being international regulators; and ignoring this would only set us up to much worse systemic risks.

Contrary to what Carmen Reinhart and Kenneth Rogoff say I would welcome some more political meddling in our current bank regulations so as to ascertain that our financial system, or at least our commercial banks, have a worthier purpose than not falling into default, which is the only thing that our regulators worry about. What about banks risking it more to provide us with decent jobs… instead of playing it safe using the AAA ratings the regulators instructed them to use?

Tear down the walls of that club of mutual admiration... even if it takes a civil war!

Sir Alan Beattie in “Good question, Ma’am. But some people did see it coming” November 15, does not explain why those people were not listened to. The truth of it all was that the whole issue of bank regulations, the numero uno of financial regulations, was captured by a club of likewise thinkers coming from likewise life experiences with likewise PhDs from likewise universities and that all teamed up in a cosy small club of mutual admiration where no questions were asked out of politeness or just because they were none.

When Beattie now asks us “Let’s just try and get through this one without a civil war, shall we?” I totally disagree. It behoves us all to break down the walls of that club and let other mind-frames into the world of financial regulations, even if it takes a civil war. And with this I mean real other minds and not some same other-minds just because they come from different geographical areas.

Ma’am. Please be careful with Alan Beattie says. He might be one of the silencers. Who knows? They are all around us!

IMF cannot be the independent central bankers' clubhouse

Sir, In your editorial "What is the IMF for?" (September 1), you qualify the original formulas used to assign the quotas determining responsibilities of nations to deposit cash and the rights to borrow it as "arcane". Yet you seem to favour a recalculation that will just produce a reshuffling of the local interests. In a world where we see multinationals getting rid of their "home country", it might instead be time to introduce some representation in the International Monetary Fund that is not bound by pure arcane geographical considerations.

You mention a lack of credibility and legitimacy but seem to believe this could be solved by giving the professional staff a free rein. It is much more difficult than that. One of the reasons the IMF has lost credibility is in fact the mistakes of its staff and these go much further than the handling of the Argentine debt crisis. If you take a closer look, you will find them backtracking on so many of their "cast-in-iron" policies. The world needs not less accountability in the IMF, but much more.

In my view the Fund's problem is that it has now turned into the clubhouse of the "independent" central bankers. What instead we need the IMF to do is to open up its executive board and diversify the recruitment of its staff so there is a better chance for the board to have a healthier perspective of what the IMF's role should be.

Though I agree completely with you that the top job should not be reserved for a European, since "he must now defend interests wider than those that put him in place", may I also advance the idea that it should not be reserved for a central banker either?

Published in FT, September 5, 2006