June 19, 2017

Much current radical uncertainty is the result of radical statism and of radical bank regulatory idiocy

Sir, I refer to Wolfgang Münchau’s “Welcome to the age of radical uncertainty” June 19.

He writes: “The victory of capitalism over communism was the single most formative event for many of today’s commentators and analysts like myself.”

Really? With the Basel Accord of 1988’s risk weights of 0% the Sovereign and 100% citizens, is that not more compatible with communism than with capitalism?

He writes: “The financial crisis turned what outwardly seemed a stable political and financial environment into what mathematicians and physicists would call a “dynamical” system. The main characteristic of such systems is radical uncertainty.”

Really? Did all that start with the financial crisis? What about Basel II of 2004 that with its risk weights and resulting capital requirements distorted the allocation of bank credit to the real economy even more?

He writes “To succeed we need to understand the difference between risks we can calculate, and deep uncertainty that we cannot.”

Indeed, as in the risk of the assets of a bank and the risks of what assets can bring banks and a bank system down. These are not la meme chose. Regulators allowed banks to hold only 1.6 percent of capital against what is rated AAA-AA, that which precisely because of that rating could lead to the build-up of dangerous excessive bank exposures; while requiring banks to hold 12% against below BB- rated assets, that which bankers do not willingly touch even with a ten feet pole?

He writes: “Once we accept that our globalised world has characteristics of a dynamical system, many of our assumptions will fall like dominoes”

Sir, the assumption we most need to fall, urgently, is that regulators know what they are doing. They don’t, they are radically dumb.

Sir, there is a growing problem with the apparent weakening of egos that makes it harder by the day for most to say (including You), “I was wrong!”