Monday, September 13, 2010

Basel III: Pesto in the making

It's terribly ironic, the grand reveal of the new international banking rules. They have within them the seeds of their own destruction.

Business writing, which I normally despise, has an apt phrase--picking up nickles in front of steamrollers. You can do it for quite a long time, and pick up a good deal of money, but that one time you don't get out of the way in time, it's all over.

Basel III will give us (to make a prediction no one will ever bother calling me on) a good 40 years before the next major meltdown. What will happen is that it will guard against the most catastrophic confluence of events, and people will grow accustomed to "risk free" banking. Since banking is risk free, they will take on more risks in other areas. When it finally breaks, it will be devastating.

Tinkering with reserve levels, the definition of cash, cash-equivalency, liquid assets, etc., will never eliminate this category of banking risk entirely. Nothing short of 100% reserve banking would eliminate the risk, but no one is willing to take such a radical step (and surrender their control of monetary policy).

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