Absolutely

The way I put it is that lessons learned at th cost of hundreds of billions of dollars tend to stay learned. But Jamie Whyte, as usual, says it better:

And now that everybody knows about the risk, regulation is redundant. The same goes for liquidity risk in mortgage- backed bonds. When no one knew about it, regulating it was impossible. Now that everyone knows about it, regulating it is pointless; the market will now price it in.

In fact, once risks are known, regulating them is worse than useless. It can only move the price of risk away from, and usually above, the market price. That is a recipe not only for inefficiency but for future calamities. It encourages financiers and investors to seek profit in areas where the regulators are not imposing their burdens – namely, those where the risks are poorly understood.

4 thoughts on “Absolutely”

  1. Ah yes, but whether you have overt regulation or more demanding shareholders, these buggers will always find new games to play. Plus people have short memories. We have these house price/credit bubbles every 18 years, it’s the same basic sub-plot every time.

  2. I’m not one for over-regulation but Jamie misses the fact that a similar event happened 10 years ago when Russia defaulted, the liquidity crunch then caused similar problems for ‘sub-prime’ lenders in the US.

    For example, Firstplus Financial went bust when it could no longer securitise it’s mortgages. So, the market know about the risks….then forgot them and continued to mis-price.

    Could this have been solved by regulatio…perhaps, perhaps not but Jamie misses the fact that the market has a short memory and so doesn’t always learn the lesson.

  3. The way I put it is that lessons learned at th cost of hundreds of billions of dollars tend to stay learned.

    Not if the people who made the mistakes are not the ones paying the costs.

  4. Markets have short memories, but politicians have shorter ones.

    (Just think of all the Labour politicians who have already forgotten how they cheered last year’s budget)

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