December 15, 2008

Knowing the purpose of our banks is never redundant.

Sir Tony Jackson begins his “Banks’ crisis of identity leaves depositor in trauma”, December 15, asking “What are banks for?” and adding the comment “In normal times the question would seem redundant”.

The question is indeed valid, but not at all redundant, since even in the most normal of normal times, one would have hoped that our bank regulators should have had to answer it, to all of us, before they regulate. They did not!

One of the worst things with the current crisis is the total absence of a “was it at least worth it?” and this is a direct consequence from not having discussed, in any way shape or form, for many decades, the exact question Tony Jackson poses, namely “What are banks for?”

When we allow regulators to regulate according to their whims we deserve what we get. In this case the regulators were allowed to play out their bedroom fantasies of a world with no bank-failures and for which they implanted a sort of ridiculous set of minimum capital requirements based on some vaguely defined risks of default, and then empowered the credit rating agencies to measure those vaguely defined risk.

For starters that for a society some default risks are worth taking while others are not, was a consideration that did not even cross the regulators minds.