And stopping “crime”, if the area has not been correctly identified, stops paying too

Sir, Tim Harford writing about crimes and incentives after the London riots mentions how “a mugger or a burglar in an area… entirely unaffected by the riots might still feel conscious that the mood of the judiciary had changed”, “When crime stops paying” August 2.

In 2002, just 48 hours after arriving to Washington, I was robbed at knife point, about four blocks away from the Whitehouse. I asked the policeman who helped me out whether it was not safe there, and he replied that since visitors don´t go so often to where these muggers reside, they have to come to where the market is. And as an economist I understood it… but it also comes to show that in terms of law enforcement it is not that easy to pinpoint down which are the really relevant areas.

For instance bank regulators have clearly difficulties with that. As they become obsessed with banks lending too much to where it was risky, they told the bankers that, if they insisted in doing so, they would have to put up a lot more capital, which meant less return on their equity and, consequentially, of course, smaller bonuses.

But unfortunately, when doing so, regulators confused the ex ante and the ex post risks areas, and so this only exasperated what bankers have always done which gets them into trouble… namely to lend too much to something perceived as absolutely safe.

And so regulators, in retrospect, only aggravated the crisis by having the banks being caught by bad news in the ex post area with their pants really down… I mean with especially little capital. And besides, since banks stopped visiting the areas considered ex ante as “risky”, the whole economic region started to suffer and crumble.

PS. I explained to the kind policeman who even instructed a close by liquor-store to “give him something strong”, that unfortunately I was not used to this type of events, since I came from Caracas Venezuela. I immediately felt better… and not just because of the “something strong”.