We better not leave bank regulation in sophisticatedly skilled unscrupulous hands.

Sir Martin Wolf in his marvellous “Why today’s hedge fund industry may not survive” March 19, describes how the hedge fund industry by acting as bookies arranging the betting on low probability events manage to profit handsomely while these events do not become the certainty that they indeed must become, at some point; and that this clearly attracts the unscrupulous and the unskilled. Wolf also frets that the hedge fund managers by copying each other could produce a real disastrous stampede of non-events and says “the more one believes this is how an unregulated financial system operates, the more worried one has to become”

What Wolf fails though is in connecting the dots with between the way the hedge funds operate and how our banks are currently regulated. The regulators, exactly like hedge fund managers, have been able to collect their praises upfront for a system that by favouring size tends to unload failures into an even greater accumulation of risks; that by using minimum capital requirements exclusively based on short term default risk leaves us not considering sufficiently all the other risks; and that by imposing upon the market the credit rating agencies as their official risk measuring bureaucrats, will just guarantee that we all will, sooner or later, follow them and fall off the deepest of the cliffs.

We should not fret the unscrupulous unskilled as much as the unscrupulous skilled and sophisticated… the last conform the really dangerous wild bunch. And please, do not tell me that some of our current bank regulators do not have it in them to know this is all true. I sincerely believe that Greenspan knew it all along but he did nothing about it!