July 08, 2012

And again, Big Blunder was kept under the table

Except for when fraud was present, bank crises have always resulted from excessive lending to what was perceived as absolutely not risky. There were never too large bank exposures to what was originally perceived as risky. 

Even so bank regulators decided to favor what was perceived as not-risky, and which was therefore already so much favored by banks, by means of allowing banks to hold extraordinarily little capital against these safe assets, and which allowed them to leverage more their equity. 

And as a natural consequence of favoring the not-risky, they imposed a de-facto regulatory tax on the risky, those already being taxed by banks precisely on account of being perceived as risky. 

And this extraordinary regulatory mistake, the greatest intellectual blunder I know of, plus the various responses to the current crisis, among others ignoring Big Blunder, has caused the most monstrously obese bank exposures to what is officially perceived as not risky and, in relative terms, truly anorexic exposures to what is perceived as risky, like to small businesses and entrepreneurs. 

And from the looks of it, unless there are immediate regulatory changes, all our banks seem doomed to end up gasping for profits and capital on the last officially perceived safe beaches, probably US Treasury and Bundesbank. 

I had bad feelings about it all quite early. In November 1999 in an Op-Ed in the Daily Journal of Caracas I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse, of the only remaining bank in the world” And little did I know that the regulators were creating the AAA-bomb that detonated in mid-2007. 

And over the years I have written more than a hundred letters about this regulatory mistake to Martin Wolf, the influential Financial Times’ chief economics commentator; so many that he has accused me, quite rightly perhaps, of being a monothematic bore. 

And this is why I feel sad, for all of us, when, five years into the crisis, I read about Mr. Wolf enjoying lunch in Paris (a “perfectly pink” foie de veau), in the company of Jean-Claude Trichet, recently the chair of the oversight body of the Basel Committee on Banking Supervision, and still blithely ignoring Big Blunder. 

Or, in a mutual admiration club context, perhaps it is not comme il faut to speak about mistakes. If so, how sad silly club rules trump truths. Talk about a not- so-brilliant “unités brillantes.”