Sunday, 15 March 2009

Heisenberg and FDR

The pyre on which the public has been throwing previously respected bankers is beginning to dim a touch and with it so is the fury of bears.

The populist reaction is to blame the bankers almost exclusively for not forseeing the penalties of overleverage but the politicians well know that this became SOP. OVER leverage was NORMAL leverage and the ever-rising markets dictated its common usage. This became the paradigm of the system taught to the new generations of bankers over two decades. Furthermore the bankers were not the ones to put in place the system but the regulators and the governments themselves. Not only did they allow and encourage the levels of leverage practised but whilst these leverage ratios reached historically high levels they decided it was a good time to change the accounting practice of scrutinising it. It was a little like adding a giant magnifying glass over a dry hot forest. Yes you might briefly see better the details of the forest and the possible risks of fire and but beware the hot sun you were inadvertently concentrating onto its floor.

The mere act of closer observation caused that observation to become less benign. Even if it was a stretch to interpret Heisenberg in an effort to avoid this crisis, we should have learnt from our mistakes in the 30s (see link below).



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