Thursday, December 22, 2011

Regulators Don't Help

One of the reasons why I'm a libertarian comes from my experience with financial regulators. They are totally out of their depth, not understanding where risk really lies because the essential information simply can't be grasped by flying in and looking and talking to people for 2 weeks. I have never worked in a financial firm where I felt I understood what was really going on for at least a couple years. They fill out reports conceived by someone ten years ago that would have caught last decade's big error, and come back next year. The good ones, and there are many, realize the futility, but it's a paycheck.

Anyway, now here's the European regulators repeating the mortgage fiasco. Remember pre 2007 regulators encouraged mortgage lending without qualification. Now, the issue is Greek debt. John Cochrane nail it:
Indebted governments have been pressuring banks to buy more debt, not less. As banks have been increasing capital, they have loaded up even more on “risk-free” sovereign debt, which they can use as collateral for ECB loans. The big ECB “liquidity operation” that took place yesterday will give banks hundreds of billions of euros to increase their sovereign bets...So much for the faith that regulation will keep banks safe....They keep looking for the Big Announcement that will soothe markets into rolling over another few hundred billion euros of debt. Alas, the problem is reality, not psychology


Anonymous said...

Bankers don't help

CiG said...

All this is presuming that the ECB is tasked with making banks safe. Their primary mandate is price/currency stability, not bank solvency. In the crisis as it stands, it can be argued that they are either solvency-neutral, or are actually engineering insolvency on purpose to clean up the banking sector later on at a reduced cost (solvent banks are more expensive than insolvent ones).