Basel III isn’t perfect, but it’s as good as we’re going to get, and is actually significantly better than most people dared hope when it first started being negotiated. And the technocrats who put Basel III together are not some group of knaves, deluding themselves that they’ve magically fixed all the problems with the banking system. They’re smart and well-intentioned regulators, who know full well what the problems are, and who are implementing the best set of patches and solutions that can be implemented in reality. Or if not the very best, then something damn close. They too would love to tear everything up and start from scratch with a much simpler system featuring much smaller banks. But, unfortunately, they can’t.
The independent panel that investigated the Teton Dam failure recognized that causality is complicated in dynamic systems where the outcomes are the result of the interaction of numerous systems and variables. Despite a financial/economic system that was more complex and dynamic than any dam, the financial authorities promoted two ideas;
1. That weaknesses in the regulatory system coupled with financial institutions that evaded and avoided existing regulations was a complete explanation for the crisis; and
2. The recession of 2007 was an unforecastable inexplicable “black swan” event.
It is clear that many financial institutions had engaged in unethical and criminal behavior. It is also clear that they had exposed the financial system to unjustifiable risks. No one can argue that regulation has been satisfactory. However, unlike the parties to the design and building of the Teton dam, the financial institutions were not in a position to mount a defense of any kind. Who would believe that a defense was anything but self-serving? In addition, the financial institutions were not in a position to point a finger or shift any of the blame to policymakers or regulators, as they were dependent on the same policymakers and regulators for their continued existence.
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