April 15, 2009

What bedevilled the world was the belief in certainty.

Sir Edmund Phelps writes that “Uncertainty bedevils the best system” April 15 and though I agree of course with that uncertainty is part of any system, what has really bedevilled us lately has been the belief in certainty. In this respect Mr. Phelps would do well reading the basic first pillar of the bank regulatory system that emanated from the Basel Committee and in the minimum capital requirements for the banks he would find that the regulators formally authorized an astonishing 62.5 to 1 leverage if banks lent to corporations rated AAA to AA- by some human fallible credit rating agencies.

If there ever was a dysfunctional, naive and gullible regulatory system that arrogantly believed it had the risks under control, this was it. Our current problem is that the same regulators that came up with this are still in charge of regulating.