November 19, 2012

Pray for some shadows sufficiently dark for some banks to escape the regulators... Caveat emptor, regulators regulating!

Sir when reading Brooke Masters report on “Regulators to tackle shadow banking”, November 19, and given the regulators doing that are the same old failed regulators, I can only fret for the future of whatever they identify as “shadow banking”.

If the regulators keep acting according to their so mistaken paradigm of weighting anything for perceived risks, even if those risks have already been weighted for, then they are dooming the shadow banks, like the surface banks, to create dangerously excessive exposures to what becomes officially considered as “The Infallible”… just like those exposures created in AAA rated securities back with lousily awarded mortgages to the subprime sector, loans sovereigns like Greece, or real estate financing in Spain.

And in that case, let us pray there will still be some banks hidden away in sufficiently dark shadows so that “The Risky”, like our small businesses and entrepreneurs, can at least have some access to bank credit… even if on the unnecessary expensive terms that the regulators’ dumb and useless risk-aversion has created. 

Lord Turner magnanimously admits that “Shadow banking is like cholesterol. There is good and there is bad”, but says “now we’ve got the really difficult job of getting national authorities to dive in and determine [which part of shadow banking] really worries us.” And that should worry us… because that sounds just like when the regulators discovered the too-big-to-fail banks they helped create, they just proceeded to make it worse by naming these Systemic Important Financial Institutions, SIFIs, and thereby relegating the rest into being systemic unimportant financial institutions. 

When will the regulators understand how much they distort all, when just distorting some? Why do they not just loudly proclaim that caveat emptor rules the shadows? Or perhaps we must: “Caveat emptor, regulators regulating!