The history I’ll tell my grandchildren has little to do with Philip Stephens’ history.

Sir, Philip Stephens writes: “Twenty-five years ago… the world belonged to liberalism. Soviet communism had collapsed. Historians will record the 2008 global financial crash as… the moment western democracies suffered a potentially lethal blow. The failure of laissez-faire economics was visible before the collapse of Lehman Brothers.” “The west is the author of its own weakness” Financial Times, October 1, 2021.

The history I will be telling my grandchildren is quite different.

Thirty-three years ago, the world belonged to liberalism and Soviet communism was collapsing. Historians will record how in 1988, one year before the Berlin Wall fell, the western world’s bank regulators introduced risk weighted bank capital requirements that distorted the allocation of credit. That put an end to any laissez-faire economics. With risk weights of 0% the government and 100% citizens, as if bureaucrats know better what to do with credit than e.g., entrepreneurs, communism took over. 

The 2008 global financial crash resulted from banks being allowed to leverage their capital/equity/skin-in-the game a mind-boggling 62.5 times, with assets that human fallible credit rating agencies had assigned a AAA to AA rating.

Yes, the west is the author of its own weakness… it much renounced to the willingness to take risks that had made it great. 

Sadly though, there are way too many interested in not disclosing what really happened… and therefore our banks are still in hand of insane risk aversion. “Insane”? Yes, because those excessive exposures that could become dangerous to our bank systems, are always built-up with assets perceived as safe, never ever with assets perceived as risky.

PS. My 2019 letter to the Financial Stability Board

There is a cultural war looming on the financial front

Sir Gillian Tett writes that the “Era of leverage is over” September 23 but sort of mulls over the fact that leverage is not an absolute financial value but only another dimension of risk, since a zero leveraged investment in something risky could be more risky than a 100:1 leveraged investment in something less risky. The problem, as always, is who is to determine the risk.

When Gillian Tett mentions that “Basel Two capital rules will now force banks to hold more capital against esoteric assets” it is a great moment to remind ourselves how extraordinary little esoteric those lousily awarded mortgages to the subprime sector really were.

In the US there is a lot of talk about a cultural war breaking out on the political front but the stage is also set for a cultural war on the financial front; between those who believe that markets should be allowed to freely determine risks and those who believe in soviet-styled-central-planning and feel that, even having to face the current disaster, this is best left in the hands of official risk-kommissars, which is what the outsourced credit rating agencies really are.