Why we need to regulate the regulators sooner, not later

Sir Kenneth Rogoff belongs to those “influential” economist who had their expertise on financial matters been closer to their fame should have been able to timely warn the world about what was going on. The concerns he expressed in his “No grand plans, but the financial system needs fixing” in the Financial Times, February 2007, about “global hedge funds proliferate and increasingly influence key markets ... Capital flows are once again rushing into emerging markets” would have been almost laughable now had they not helped to divert the attention from the real regulatory failings. Like old soldiers they should perhaps fade away.

Now in “Why we need to regulate the banks sooner, not later” August 19, Rogoff mentions bank leverages of “three dozen” to one, and the dangers of it, but he does not admit the simple fact that had more known about the existence of 36:1 leverages, and higher, all kind of alarm bells would have sounded much earlier. As is, this did not happened because the financial regulators fooled the whole world, and of course first and foremost themselves, with that crazy concept of risk weighted asset and that, for instance, reduced the exposure to an AAA rated security to only 20%. In other words, a one trillion dollar exposure to AAA rated securities collateralized with subprime mortgages and only 16 billion dollars in equity, instead of a 62.5 to 1 leverage, would (and is still) reported as a 12.5 to leverage.

Any common sense dictates now that what we need to regulate the most, the sooner the better, are the regulators themselves.