Martin Wolf (even when told) does not discern the gorilla in the room
Sir Martin Wolf writes about “a shift in the psychology of supervision away from the presumption that institutions know what they are doing”, “The end of lightly regulated finance has come far closer”, September 17. It is further proof on how many can’t see the gorilla in the room, even when told.
If a father tells his son “you can go anywhere you want as long as you take your governess with you” is he being a trusting father? No! Just like the current regulatory system that obliges the financial sector to take the credit rating agencies with them wherever they go cannot be regarded as a liberal letting the sector free to roam.
The credit rating agencies were the governess and the gorilla in the financial sector. The investors who were all very strongly signalled by the regulators to heed their opinions, let down their guard and went where the credit agencies told them there was no risk to go, for instance into the land of the securities collateralized with lousily issued subprime mortgages.
Martin Wolf refers to John Kay opining “regulators cannot successfully second guess the decisions of huge institutions staffed by better paid and more highly motivated people than themselves”. That is exactly what the regulators were doing when they outsourced risk assessments to credit rating agencies and imposed them on the markets.
In a letter to the Editor of the Financial Times published May 11, 2003 I said “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds". To me my comment illustrated what should be a natural concern for financial regulators expected foremost to be wise… but they did not seem to care. To me my comment illustrated what should be a natural concern for all influential economists and financial experts… but no one of them said a word. How come?
In being able to answer that question, forthrightly, lies the way out of our current financial predicaments and our only chance for not ending up someplace even worse... which is always a possibility.
All financial literature is crowded with the concept of a “risk-free rate”, google it, and though it is accepted as only a theoretical construction, think about what just those two words, “risk-free”, could be doing to inflate our regulatory egos and instincts.
If a father tells his son “you can go anywhere you want as long as you take your governess with you” is he being a trusting father? No! Just like the current regulatory system that obliges the financial sector to take the credit rating agencies with them wherever they go cannot be regarded as a liberal letting the sector free to roam.
The credit rating agencies were the governess and the gorilla in the financial sector. The investors who were all very strongly signalled by the regulators to heed their opinions, let down their guard and went where the credit agencies told them there was no risk to go, for instance into the land of the securities collateralized with lousily issued subprime mortgages.
Martin Wolf refers to John Kay opining “regulators cannot successfully second guess the decisions of huge institutions staffed by better paid and more highly motivated people than themselves”. That is exactly what the regulators were doing when they outsourced risk assessments to credit rating agencies and imposed them on the markets.
In a letter to the Editor of the Financial Times published May 11, 2003 I said “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds". To me my comment illustrated what should be a natural concern for financial regulators expected foremost to be wise… but they did not seem to care. To me my comment illustrated what should be a natural concern for all influential economists and financial experts… but no one of them said a word. How come?
In being able to answer that question, forthrightly, lies the way out of our current financial predicaments and our only chance for not ending up someplace even worse... which is always a possibility.
All financial literature is crowded with the concept of a “risk-free rate”, google it, and though it is accepted as only a theoretical construction, think about what just those two words, “risk-free”, could be doing to inflate our regulatory egos and instincts.
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