Bank regulators fixed the game, bribed the players, and got us the crisis they paid for.

Before the current set of bank regulations, all borrowers could be treated equally good or bad by the bankers, though Mark Twain held there was a natural risk-adverseness among bankers that played out in a strong bias against those perceived as “risky”. 

But the Basel Committee for Banking Supervision, thinking it was doing its duty as a nanny, paid the bankers to treat those perceived as “safe” borrowers so much better than those perceived as “risky”. And this they did by allowing the bank to hold much less capital against the first, and thereby obtaining a much higher risk adjusted return on equity when lending to “The Infallible” than when lending to “The Risky”. 

And of course, the banks accumulated excessive exposures to what was ex-ante perceived as safe but that ex-post turned out to be very risky, against very little capital, and the crisis exploded. 

And of course, since these dumb regulations remain in place, banks do not finance those borrowers that find themselves on the margin of the real economy, like small businesses and entrepreneurs, and who are extremely important if we want to get out of the crisis. 

Poor us! How do we get rid of these crazy nannies?