Comments on: Can you stop banks acting like lemmings? A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: AmericanFool Wed, 15 Apr 2009 04:46:34 +0000 Ian, man, chill. If you don’t like it, don’t read it. I like physics too, but I’m not going to dump on Felix for using a famous but widely misunderstood principle to communicate with the majority of his audience a bit better. I thought it was clever. Felix, I don’t mind seeing this point made again and again (and I’ve seen similar discussions before.) It’s valid and pertinent to the Global Crisis.

By: Gaute Tue, 14 Apr 2009 22:06:58 +0000 Isaac Asimov was clever enough when he wrote “Foundation”, (where the great mathematician Hari Seldon develop the mathematics of “psycho history”), to include the detail that the predictions produced by the model would be invalid if the group who was the object for the prediction was familiar with psycho history. It is interesting that a sci-fi writer fifty years ago had a hunch about the role of feedback that it took us a severe crisis to realize in full.

By: Tim Connor Tue, 14 Apr 2009 22:00:05 +0000 You realize, of course, that lots of things are OK if a few people do them, but undermine society if a large group adopts them.

For a classic example, take innoculations against disease. They’re a great idea, preventing the pandemics that have caused the fall of many civilizations. But, since there is –say –a 1 in 10,000 chance of an adverse reaction –what is even better for a single individual is not to take the innoulation, while evrybody else does.

Naturally, if very many people do it, pandemics return.

Many of the practices of our fearless financial leadership class fall into exactly this category.


By: S. Hellinger Tue, 14 Apr 2009 19:11:25 +0000 You will remember that there was a massive failure by the banking regulators in this regard. I am a former senior bank regulator and I spent many years in the investment banking world involved in risk management, risk reporting and risk technology. There appears to be a failure to recognize that the regulatory process can only work if there are good regulatory people looking at the matters every day. If I may let me offer the following comments:

1. The bank regulators had the authority to examine any aspect of a bank’s activities. They had the authority to figure out what was going on at the banks and to limit it. The regulators did nothing. So all the new regulations on paper will mean nothing if the regulators cannot or will not do their jobs.

2. Consolidating regulators or setting up an international cooperative coalition will not likely achieve the desired goals. Creating new risk models will not likely do the job. Sending a regulator who makes $50,000 dollars a year to examine the activities of sophisticated financial traders who make millions of dollars a year is not a fair battle. And if you have ever worked in a government agency, as I did, you will be intimately familiar with the viciousness of the turf battles among the senior officials. There is a lot of deadwood at the top of the agencies and it needs to be cleaned out. A Herculean task if there ever was one.

By: Mikey10011 Tue, 14 Apr 2009 18:42:05 +0000 Oops, broken link. Trying again: ng_Principles_Caused_the_Financial_Crisi s#chapter_01

By: Mikey10011 Tue, 14 Apr 2009 18:36:34 +0000 The following is an incredibly insightful lecture by Avinash Persaud (November 24, 2008):

“How Well-Meaning Principles Caused the Financial Crisis” ng_Principles_Caused_the_Financial_Crisi s#chapter_01

The regulators’ mantra of risk-sensitivity has meant in effect that regulatory capital was more sensitive to the market price of risks, which inevitably led to systemic crisis. Mark-to-market accounting was one, but not the only source of increased sensitivity to market risks. The legal principle that we must preserve equality of treatment of financial institutions also contributed to the systemic fragility of the banking system. There is natural diversity in a financial system and it is a key source of liquidity that should not be destroyed.

Journal of International Banking and Finance Law, January 2009 3

By: KenG Tue, 14 Apr 2009 17:22:11 +0000 We shouldn’t have to place any caps on banks’ balance sheets, we just need to limit how much money they are allowed to borrow from the Federal Reserve and how much coverage they get from the FDIC. We should also make sure that anyone selling insurance on debt has enough reserves to cover their bets, so the government doesn’t have to do that again.

By: The Epicurean Dealmaker Tue, 14 Apr 2009 17:18:56 +0000 Felix — Face it, human beings feel safer moving in herds: 007/04/talking-of-michelangelo.html

I made this point way back in the dark ages of April 2007, before Larry Lessig was a glimmer in his parents’ eyes. Oh, for a wider and more alert audience.

Finally, I am not sure your idea to limit every bank to less than $300 billion in assets will necessarily fix the problem. You could just end up with a larger herd of smaller lemmings plunging over the same damn cliff as before (or, what is more likely, a different cliff). Human nature is a bitch.

By: F Belz Tue, 14 Apr 2009 16:49:21 +0000 First, not all the banks fell down. So look at the banks that did not.

The problem with the fallen banks can only be fixed when their goals are changed from maximizing profits, and pointed toward doing a good ong term job for the share holders and the banks customers. Also, the idea of measuring success by Wall Street expectations also has to be scrapped.

The problem is also present in other businesses, and always has been there. Take the auto manufacturers: They are all geared up for high production and maximizing profits. Wrong focus. They have been building throw away cars for a long time, rather than building cars to last at least 30 years and travel 500,00 miles with just routine maintenance. No focus on saving the resources.

Same as peoples lives. When our personal focus is based on getting as high as one can, and earning as much as one can with no regard as to how much good one is doing for other people the crash will most certainly come.

Need to refocus the country.

By: Chris Tue, 14 Apr 2009 16:25:32 +0000 Felix-

One can generalize from your idea that similarity/congruency in practice (i.e. the gaussian copula model) leads to convergence of correlations across firms. One, somewhat ignored, facet of this is the impact that identical regulatory structures (Basel II) have upon financial firms. If there is a shock to the system, then (in order to maintain capital requirements) all firms must liquidate similar assets at similar times, leading to the proverbial “rush to the exit”. Given that we want to regulate financial firms similarly (if not identically), and that we want to keep the information produced by “mark-to-market” accounting, the only solution is the one that you propose, limiting the size of financial firms. This will not eliminate the problems, merely dampen their impact. I would go one step further and prohibit the public listing of all financial institutions. This would help to keep the size of the balance sheet down, as well as shield management from quarterly earnings goals.