October 28, 2009

The regulators did indeed cause this crisis, with their faulty regulations

When in 2002 I arrived from Venezuela, where I had never been assaulted, to Washington DC, in less than 48 hours I was thrown to the floor at handgun point and robbed of my wallet. When I asked the police officer who had helped me to my feet “is this not supposed to be a safe area? he answered “yes, you are right, and that is why these bad figures need to come here to steal”.

If the police had told some neighbourhoods in London that just because they were safer they could lower the guard and leave the doors open and some disaster had ensued, it would surely have been blamed. But this is exactly what the bank regulators did when they authorized the banks to a 62.5 to 1 leverage as long as they were lending or investing in AAA safe areas.

So therefore when John Kay in “Too big to fail’ is too dumb to keep” argues that “the claim that regulators caused the crisis is a ludicrous as the crime due to the indolence of the police” he just shows he has no idea of what happened. 99 percent or more of those losses that detonated this crisis can be traced to this regulatory naïveté. Just for a starter the AAAs of AIG would not have the same value.

The problem we have is that so many are trying to use this crisis to push their particular agenda, which often requires a blatant disrespect for what really happened. Mr John Kay, a true baby-boomer, in the “Après mois le deluge” sense, wants us now to have narrow banks which refuse to underwrite risk-taking, as if society can prosper with non-risk taking banks.

And, by the way, since I am one of the very few who has spoken out loud and publicly against the “too big to fail” before the “too big” started to seem as failures, this is by no means a defence of them.