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With capitalists like this... / Comment / Opinion - The two-stage de-risking of banks.

I am not arguing with Mr El-Erian's thesis here, but I am rather alarmed by his language. Apart from the horrible and unnecessary word "de-risking" (eugh), consider the way he describes the sequence of events in the late economic unpleasantness (my emphases).

The first stage of de-risking of the banking sector was led by the markets. Fueled by massive concern about the banks’ lax risk management practices and related over-exposure to toxic assets, the process was vicious and indiscriminate. With the market-induced contraction of the banking sector over-shooting, the highly disruptive implications for employment and economic activity forced policymakers into a ”WIT” mindset – doing ”whatever it takes” to stabilise the sector.

Got that? The market over-shot. It got it wrong. It was all the foolishness of crowds. People making decisions about their own money succumbed to some kind of mass hysteria, thus destroying the value of their assets. Then he describes the actions of policy-makers. Despite their "WIT" or perhaps even "HC" (headless chicken) mindset, they proceeded sagely;

The massive policy reaction succeeded in stabilising the banking system. And while the banks are still not lending in any meaningful manner to the real economy – an issue that will become politically even more problematic as unemployment continues to rise in the industrial countries (particularly, in the US and UK) – most have used the extraordinary policy support to strengthen their balance sheets and, also, take on risk.

Thank goodness for these wise, all-knowing policy-makers, who know so much better than the market itself what it will, or rather should, do. Using other peoples money they splurged trillions wisely to save the markets from themselves. Of course. Is this the end of their wisdom? No indeed not.

There is another stage of de-risking in banks’ future. This second stage will be driven by the regulatory authorities, rather than the markets.

God help us. He then goes on to make a number of suggestions, which I leave my readers to evaluate. My questions, however, are these; if Mr El-Erian is so much wiser than the market, why does he need to make money writing books? Did the funds he manages do better in this chaos than others? Or worse? If those in government are so much wiser even than him, why are they badly-paid bureaucrats, rather than retired to their personal islands? If they are collectively so wise, why did they not advocate these new regulations before the silly old markets fouled up? Finally, if banking could really be "de-risked" (which, if it means anything, must mean removing all risk) wouldn't everyone be a banker? How would that work?


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