Sunday, December 27, 2009

A letter in the Washington Post

Another 'worst': Faulty bank regulation

The Dec. 20 Outlook compilation of the decade’s worst ideas did not 
include the one most to blame for the loss of most of the past decade’s 
growth: regulations that allowed banks to hold absolute minimums of 
capital as long as they lent to clients or invested in instruments rated 
AAA, for having no risk. This launched a frantic race to find AAA-rated 
investments wherever and finally took the markets over the cliff of the 
subprime mortgages.

The most horrific part is that it seems likely to endure because 
regulators can’t seem to let go of this utterly faulty regulatory 
paradigm. Let me remind you that banks are allowed to hold zero capital 
when lending to sovereign countries rated AAA and that there are already 
many reasons to think that the credit quality of many sovereign states has 
been more than a bit overrated.