Mar

27

One must say that there is no reason to believe that banks are subject to always doing the wrong thing, putting on excessive risk. They've made mistakes in the past. That doesn't mean they will make them in the future. To assume that they don't learn, that they're more prey to error than others, is wrong. There are probabilities associated with their activities and expectations and distributions of the expectation. They make decisions. To assume that they should prepare now for a repeat of 2008 would be irrational. Perhaps there could be check points, where as they get closer to various pitfalls, they adjust their positions. That's what everyone in the world does,—- banks would do it also. Why should they prepare now for an event that occurs 3 times each hundred years. Anyone in the options business for example adjusts their position. They are not subject to wide spreads. I believe I've made my gist clear. They are flexible, and should be. The analogy with the bridge which usually can't be changed in its structure is not relevant for human being with access to many different alternatives to structure their balance sheet and access to many liquid markets.

Stefan Jovanovich writes: 

As some DailySpec readers already know from my private grumblings, I am still pissed off about having had to settle for an architectural degree from Harvard when what I wanted was one in naval architecture from M.I.T. The R-Man's bridge analogy may not be ideal; but he is right to look to the rivers and the oceans for a comparison. When you design a ship, one of the first calculations to be made is how strong will the bow steel be. To answer the question, you have to decide how large a wave will break over the bow - i.e. what the weight of water will be. Before satellite observation and remote telemetry buoys, the nautical world had to rely on the observations of mariners and the examinations of the damaged ships that survived rogue waves to determine what was an appropriate "stress test". What modern researchers have discovered is that the size, weight and length of freak waves is far, far greater than all previous estimates. The otherwise unexplained disappearance of super tankers and large freighters is now attributed to their having had the misfortune to run into a wave that literally tore open the ship's skin and flooded it beyond its buoyancy.

There is no lesson in any of this. Shipbuilders and ship owners still have to make the calculation of how much more money is to be spent on further strengthening bows and decks. Whatever budget is decided on will not be enough to assure absolute safety; the Breton Fisherman's Prayer will still be true.

What bewilders us aging cranks is why our central banking world persists in the belief that the fluid dynamics of credit can somehow be engineered so that nothing ever sinks. The common sense of the old world was that money should be something that could survive wrecks, storms and frauds. Credit needed no protections; it was in the very nature of people to believe in the future and to bet on it and to take the risk of sailing small boats on a large ocean. What was folly was to think that lashing all the ships together into mighty armadas would somehow persuade God to permanently moderate the waves. 


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