January 26, 2010

First reform the regulators!

Sir I agree fully with Martin Wolf when in “Volcker’s axe is not enough to cut banks to size” January 26m while referring to the latest reforms of banks proposed by Obama presumably upon suggestions of Paul Volcker deems these to be “in important respects, unworkable, undesirable and irrelevant to the task at hand.”

As Wolf implies, what seems to have been ignored is that huge financial losses can cause huge economic damage independently of whether the government has guaranteed them or not… and so having some small capable of failing banks surviving when a huge shadow sector, formal or informal, goes bankrupt, can also provide for calamitous economic effects and in fact even create similar fiscal problems if tax bases are eroded.

The number one golden rule financial regulators should apply is that of “doing no harm” and that was exactly the golden rule regulators violated when, with their silly capital requirements for banks based on risk, they empowered too much some few human fallible credit rating agencies to presumptuously serve as the global experts on risks… which caused the world to go over the lousily awarded mortgages to the subprime sector cliff.

The proposed reforms do nothing to solve the problem above; which evidences that the first and most urgent reform that is still required is the reform of the regulators. Throw out the current bunch of them! We cannot afford having the needed reform of the financial regulations hijacked by those wishing to hide their blame in causing the crisis.