Dangerous global coordination was the real cause of the crisis
Capital is intrinsically coward and loves anything triple-A rated. Therefore, when on top of this natural love, the global regulators in the Basel Committee awarded the triple-A rated additional benefits in terms of these generating much smaller capital requirements for banks... the demand for triple-A rated instruments soared. As should have been expected the supply mechanism of the market started to fabricate triple-A rated instruments in enormous volumes... something that by definition should be anathema to low risk.
There were of course many other economic imbalances that aggravated the final result but this, the excessive belief in that risk should and could be avoided, is why the current financial crisis came to happen.
In February 2000 in an article titled “Kafka and global banking” published in the Daily Journal of Caracas I wrote: “The risk of regulation: In the past there were many countries and many forms of regulation. Today, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.”
In January 2003 the Financial Times published a letter in which I wrote: “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.”
But now when the above has unfortunately been proved to be too true, Dominique Strauss-Kahn of the IMF, in “Nations must think globally on finance reform” February 18, keeps on going as if nothing has happened writing that “the work of [the Basel Committee and the Financial Stability Board] must be accelerated to harmonise rules that limit excessive risk taking”.
IMF, before going forward, needs to reflect more on the dangers that the very real possibility of a bad global coordination might signify.
There were of course many other economic imbalances that aggravated the final result but this, the excessive belief in that risk should and could be avoided, is why the current financial crisis came to happen.
In February 2000 in an article titled “Kafka and global banking” published in the Daily Journal of Caracas I wrote: “The risk of regulation: In the past there were many countries and many forms of regulation. Today, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.”
In January 2003 the Financial Times published a letter in which I wrote: “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.”
But now when the above has unfortunately been proved to be too true, Dominique Strauss-Kahn of the IMF, in “Nations must think globally on finance reform” February 18, keeps on going as if nothing has happened writing that “the work of [the Basel Committee and the Financial Stability Board] must be accelerated to harmonise rules that limit excessive risk taking”.
IMF, before going forward, needs to reflect more on the dangers that the very real possibility of a bad global coordination might signify.
Posts
