Banks regulators, please, more humility… and also read more Hayek

Friedrich Hayek in his essay of 1945 “The use of knowledge in society” wrote the following: 

“The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. 

The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality. 

This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics.” 

And this truth was completely ignored by our current generation of bank regulators, who arrogantly thought themselves capable to act as the risk managers for the whole world, and so haphazardly set their risk-weights which determined the effective capital requirements for banks, based on perceived risks.

Of course that distorted it all and the banking system blew up… but these regulators still think they are up to the task of managing risks… As I see it the only possibility we have to make them humbler, at least for a while, seems to be, unfortunately, humiliating them.

I am truly concerned about the future of the Western world

Regulators, on their own initiative, instructed banks, by means of capital requirements based on perceived risk, to stay away, more than usual, from what was perceived as “risky” like the small business and the entrepreneurs, and embrace, more than usual, what was perceived as “not-risky”, like the triple A-rated or the “infallible” sovereigns. The fact, that this does not raise any eyebrows, bodes badly for a Western world, which became what it is thanks to risk-taking. 

If we do not rid ourselves of these dumb overly nanny regulators, the Western world is doomed to perish in some dangerously overpopulated absolutely safe-haven.

The Western world is being brought to its knees by mad bank regulators

The Western world is the result of risk-taking in all shapes and forms… “God make us daring!” ends one of the psalms sung in its churches… and we honor the successful and feel for the unsuccessful. 

But regulators, concerned only with bank failures, decided on capital requirements for banks based on perceived risk. And with these they gave the banks additional incentives to embrace lending to those perceived as “not-risky”, like the triple-A rated and “infallible” sovereigns, and to further avoid the “risky”, like the small business and entrepreneurs. And with this they stuck a dagger in the very soul of the Western world. 

And the dagger proved also to be more than useless for its initial purpose. Since it is precisely when banks embrace too much something that is perceived as absolutely not risky, that they fail en masse, the regulators doomed the world to this the mother of all systemic bank crises. 

The survival of the Western world now needs to begin by rescuing the possibilities of its risky risk-takers to take the risks we depend upon as a society, and that requires to allow the “risky” to compete for bank credit without regulators discriminating against them. 

And that begins by firing the nannies in the Basel Committee and in the Financial Stability Board, and renaming the latter immediately the Financial Functionability Board so that the regulators do not forget what they are there for.