November 25, 2013

If fighting groupthink, start with the worst, with bank regulators, Basel Committee and Financial Stability Board

Sir John Authers asks and answers “Can globalized capital markets coexist with democracy and the nation state? It is reasonable now to fear the answer is “no”, and that means reforming the investment industry should be a far higher priority”, “Fund management reform will help avert groupthink” November 25.

I have no idea why Authers goes after the fund management’s groupthink first and not after bank regulators’ groupthink which has been so much more perverse.

Let me just ask:

What kind of smartass idea is it to require banks to hold capital based on the same ex ante perceived risks which have already been cleared for by markets and banks by means of interest rates, size of exposure and other terms? Could the group of regulators not figure out this dooms the banks to overdose on perceived risks and the risk-price equation to go haywire?

And what democracy approved that for instance a bank in Spain needed to hold 8 percent in capital when lending to a Spanish medium or small business, entrepreneur or startup but could lend, for instance to the government of France, holding zero capital?

No! Globalized market cannot coexist with the dumb groupthink produced by that small mutual admiration club comprised by the Basel Committee and the Financial Stability Board.