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September 2008 when the crisis bomb exploded is not as important as the dates when the bomb was planted

Friday, August 31, 2018 11:45

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Sir, Philip Stephens writes: “The process set in train by the September 2008 collapse of Lehman Brothers has produced two big losers — liberal democracy and open international borders. Historians will look back on the crisis of 2008 as the moment the world’s most powerful nations surrendered international leadership, and globalisation went into reverse”. “Populism is the true legacy of the crisis”, August 31.

I agree with most of what Stephens writes, especially on how “central bankers and regulators, politicians and economists, have shrugged off responsibility” for the crisis. What I do take exception of is for the date of the collapse since much more important than when a bomb detonates, is when the bomb is planted. In this respect three dates come to mind.

1988 when regulators announced: “With our risk weighted capital requirements for banks we will make our bank system much safer” and a hopeful world, who wanted to believe such things possible, naively fell for the Basel Committee’s populism.

April 28, 2004, when the SEC partially delegated their authority over US investment banks, like Lehman Brothers, to the Basel Committee.

June 2004, when with Basel II, the regulators put their initially mostly in favor of the sovereign distortions on steroids, like for instance allowing banks to leverage a mind-blowing 62.5 times with assets that managed to acquire from human fallible credit rating agencies an AAA to AA rating. And EU authorities decided that all EU nations, like Greece should, in an expression of solidarity be awarded a 0% risk weight.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”?

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Source: http://teawithft.blogspot.com/2018/08/september-2008-when-crisis-bomb.html

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