Excerpt:
Pushing Back
The risk weights on assets are always wrong. You only need to think back to mortgage-backed securities and euro-area sovereign debt, or look ahead to the approaching train wreck for some emerging markets. Letting banks calculate their own risk weights or develop their own methodologies makes no sense — conflicts of interest predominate when you are too big to fail. But asking rating companies or government officials to come up with meaningful risk weights also is doomed to fail. They lack the information, motivation and compensation incentives to do this right.
By contrast with earlier eras, ours is a technocratic age: Our debate concerns bank capital and the extent to which financial-sector executives who run megabanks should be allowed to gamble, even when they get the upside and the downside is someone else’s problem, with this asymmetry exacerbated by leverage.
The right historical analogy is the U.S. debate over antitrust laws at the beginning of the 20th century. Many people deserve credit for pushing this issue to the fore, notably President Theodore Roosevelt, who brought a case against J.P. Morgan’s Northern Securities Co. The matter was ultimately decided in the government’s favor by the U.S. Supreme Court, in a 5-to-4 decision in 1904. That ruling spawned further cases, legislation and, eventually, a big shift in public opinion.
via Bank Leverage Is the Defining Debate of Our Time – Bloomberg.
