What a pity Martin Weitzman did not chair the Basel Committee for Banking Supervision. If he had we would surely not have suffered the 2008 crisis.
Sir, Tim Harford when referring to an economic paper by Martin Weitzman on climate change classifies it as a “this changes everything” paper, leading him to conclude “extreme scenarios matter. What we don’t know about climate change is more important, and more dangerous, than what we do”, “How this economist rocked my world” September 14.
So I must ask why is it possible to understand that and yet so hard to understand the mistakes of bank regulations based on that what’s perceived as risky being much more dangerous to our bank systems, than what might be lurking behind that which is perceived as safe?
“The truly eye-opening contribution” — for Tim Harford — “was Weitzman’s explanation that the worst-case scenarios should rightly loom large in rational calculations.”
In January 2003 you published a letter in which I said, “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is”.
Sir was it not clear I was warning about big crises resulting from some human fallible credit rating agencies assigning a very safe rating to something very risky? Like that in 2008 caused by the AAA to AA rated securities backed with mortgages to the subprime sector? European banks and US investment banks, loaded up with because with those credit ratings they were allowed according to Basel II, to leverage their capital a mind-blowing 62.5 times.
Ten years later, when it comes to bank regulations, Martin Weitzman’s wisdom about “worst case scenarios”, is still blithely ignored.
PS. In April 2003, as an Executive Director of the World Bank, in a formal statement I wrote "Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"
@PerKurowski
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