March 03, 2014

Unfortunately, the fact that something is correctly stated does not suffice for it to be correctly understood

Sir, John Authers writes “Risk is greatest when there is no perception of risk” March 3. Indeed that is what I have written to you and to Authers innumerable letters over the years. Those perceived as “absolutely safe” are those who pose the largest possibility of dangerous unexpected losses.

And yet, nailing the truth, and even holding that “regulation can easily be counterproductive”, Authers’ still seems incapable, or not wanting, to extract the most important lesson from it.

That lesson is of course that current risk based capital requirements for banks, those based on the perceptions about the risks of expected losses make absolutely no sense at all.

The strange inability to infer the right conclusions from the right facts is also made very clear by how Authers’ ends his article. There he holds that the cure for “the greatest risks come from those things that have no history of problems, and which are not perceived as high risk” is additional “research [in this case] into fund manager’s systemic risks”… and that, Sir, is proposing to dig us even deeper in the hole he now knows we’re in.