Sunday, May 8, 2016

Don’t put the blame on politics, when clearly technocratic stupidity is at fault

Below the abstract from a recent paper by Jihad C. Dagher from the International Monetary Fund titled "Regulatory Cycles: Revisiting the Political Economy of Financial Crises"

“Financial crises are usually perceived and analyzed as purely economic phenomena. The political economy of financial booms and busts, while far from ignored, remains under-emphasized and has often been analyzed in isolated episodes. 

The recent wave of financial crises has brought unprecedented attention to financial regulatory policy; yet the policy discussions and economic literature, which are usually cast in technical terms, tend to overlook political forces that shape regulations and impact their effectiveness over time. 

This paper examines the political economy of financial policy during some of the most infamous financial booms and busts and finds consistent evidence of pro-cyclical policies. 

Financial booms, and risk-taking during these episodes, were often amplified, if not ignited, by a political regulatory stimulus and interventions. The bust has always resulted in an overhaul of the regulatory and supervisory framework and a political turnover. The interplay between politics and financial policy over these cycles, and their institutional underpinnings, deserve further attention. 

Politics can be the undoing of macro-prudential policy”

Basel II, of June 2004, for the purpose of determining the capital requirements for banks, set the risk weights for corporates rated AAA at 20% and that of those rated below BB- at 150%.

Sorry, frankly, those who believe that those below BB- rated pose a greater risk for the banking system, have no idea about what they are talking about, and have probably never ever left their desks to walk down on Main Street.

That has nothing to do with politics, that is sheer technocratic stupidity