September 12, 2012

Let us welcome John Kay’s awakening. Better late than never! Let us now hope he wakes up completely

Sir, John Kay, refers to “Goodhart’s law”, from the 1970s, which states that “any measure adopted as a target loses the information content that appeared to make it relevant. People [bankers] change their behavior to meet the target”, “The law that explains the folly of bank regulation”, September 12. 

Well, if that law was known, one could have presumed someone would have alerted the bank regulators about that, when they in the Basel Committee were concocting their capital requirements for banks targeted based on perceived risks. Where was Charles Goodhart, and those who knew of his law, when we needed him? 

The fact though is that in this case it was even worse, forget about “changed behavior” because when regulators set their capital requirements, they even ignored the initial behavior of bankers when reacting to the perceived risk, and which of course ignored the fact that bankers already had a propensity to go for the “absolutely not risky”. And, in doing so, they doomed our banks to a crisis larger than ordinary bank crisis. 

But now at least John Kay writes about the Basel Committee’s “irrelevant” “conclaves”, held “to give politicians and the public a sense that something is being done while enabling banks and regulators to go on doing what they have always done”. But, honestly, that Kay can do so without the slightest word of “sorry”, after he in the midst of this monstrous crisis has himself, for years, blithely ignored both Goodhart’s law and my hundreds of more humble letters, is sort of sad. 

That said, let us welcome John Kay’s awakening, better late than never, and let us hope he now wakes up completely. 

PS. In you will find the letters I have written in response to John Kay’s articles.