Wednesday, August 5, 2015

Why has not a proper independent autopsy of the financial crisis 2007-08 been done? The answer: What would be found!

When we see with how much care and dedication investigators perform the autopsy of the causes of an accident whenever a plane crashes, one can truly be surprised about how little autopsy has been performed on the 2007-08 financial crash.

But of course those performing the autopsy of a plane crash are not the designers of the plane, nor those responsible for its maintenance, nor air-traffic controllers nor, of course, those who were flying it… and so there are no conflicts of interests present in the investigation (I presume).

In the case of the Financial Crisis 2007-08 crisis any outside completely independent investigator would have determined its principal cause to be:

The very low capital requirements for banks when holding assets perceived as “safe”, and which created unmanageable perverse incentives for banks to lend or invest excessively in what was ex ante perceived as safe.

Evidences?: Just look at the debris: a) AAA rated securities and credit default swaps issued by AAA rated AIG that, at least US investment banks and European banks were allowed to leverage 62.5 times with; b) loans to sovereigns like Greece to which EU authorities had assigned a 0% risk weight, meaning no capital requirements at all; and c) loans to real estate like in Spain. Nowhere is something ex ante perceived as "risky" found to have caused any problem. What more can you need for a prosecutor to rest his case?

But since those investigating the Financial Crash 2007-08 were, by commission or omission, directly responsible for those risk weighted capital requirements, they all found it in their best interest to classify these as truths that shall not be named.

Until now their strategy has worked splendidly for them... even deregulation is denounced a thousand times more as the source of the problem than their misregulation... and some of the regulators have even been promoted, like to BIS and ECB... and other have found job working on Basel III.