March 12, 2017

When facts do not make those who should be the most curious curious, like FT journalists, what are we to do?

Sir, Tim Harford discusses “agnotology”, a term coined by Robert Proctor, a historian at Stanford University, which refers to the study of how ignorance is deliberately produced. “The problem with FACTS”, March 10.

Harford writes: “Facts rarely stand up for themselves – they need someone to make us care about them, to make us curious… Mainstream journalists, too, are starting to embrace the idea that lies or errors should be prominently identified… [but] We journalists and policy wonks can’t force anyone to pay attention to the facts... Curiosity is the seed from which sensible democratic decisions can grow.”

Indeed but here follows two facts about which I have written to the Financial Times more than 2.500 letters over the last decade but that has not been able to raise its curiosity or perhaps belong to the group of the facts that shall not be checked.

First fact: Regulators, with their Basel II of 2004, for the purpose of setting capital requirements for banks, assigned a risk weight of 20% to what was rated AAA to AA and one of 150% to what carried a below BB-rating.

A below BB-rating ex ante indicates a very high risk, something which precisely make clients so rated to signify no risk at all for the banking system.

What is rated AAA to AA ex ante indicates a very low risk, something that precisely induces banks to generate those excessive exposures capable of causing a major crisis, if ex post it turns out to really be very risky.

Second fact: By allowing for different capital requirements, the regulators allow banks to leverage differently their capital with different assets. That produces expected risk adjusted returns on equity that are quite different from what would have been the case in the absence of such regulations; something which clearly must distort the allocation of bank credit to the real economy.

Harford mentions the presence of “motivated reasoning” distraction, and lies can help to cloud or even make impossible the understanding of truths. In the case of bank regulations and the 2007-08 crisis, two that stand out.

Motivated reasoning: we do not want banks to fail. Just the phrase “risk weighted capital requirements for banks”, if compared to “not risk weighted capital requirements for banks”, indicates something so much more prudent… and therefore likable. It is hard for most to understand that risk weighing can in essence mean nothing if the risk weights are wrong, as they sometimes are; and also that since the clearing for risks already occurs by means of sizes of exposures and risk premiums, the doubling down on the same perceptions, now in the capital, makes it impossible to adjust for risks… even if the risks are ex ante perfectly perceived.

Distraction: derivatives. Does it not sound so delightfully sophisticated when we speak of the dangers of derivatives? How can anyone dare questioning the expertise of someone capable of that?

A qualified lie: deregulation of banks. Banks were effectively somewhat deregulated with the repeal of the Glass-Steagall Act in 1998. But that “deregulation” was really insignificant when compared to the imposition of such intrusive and distortive regulation as the risk weighted capital requirements for banks. Never ever have banks been so miss-regulated as now.

Harford writes: “Agnotology has never been more important” “We live in a golden age of ignorance,” says Proctor today. “And Trump and Brexit are part of that.”. To this I would have to add, Bank Regulations!

So Mr Undercover Economist, and you too Sir, why not begin by some fact checking on your own fact avoidance.

PS: Harford quotes Molière “A learned fool is more foolish than an ignorant one.” George Orwell also wrote in “Notes on Nationalism”: “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

And according to Edward Dolnick, Francis Fukuyama has heard Daniel Moynihan opining: “There are some mistakes it takes a Ph.D. to make”