Belmont Club

"World Leaders" strike again

Tigerhawk calls it “the most terrifying paragraph you are likely to read all year”.

World leaders holding an emergency meeting to combat the economic crisis agreed yesterday to a far-reaching action plan that, over the next 4 1/2 months, would begin to reshape international financial institutions and reform worldwide regulatory and accounting rules. … The Europeans got “virtually everything” they sought at the summit, French President Nicholas Sarkozy crowed afterward at a news conference. …

The leaders agreed to set up a new regulatory body, “a college of supervisors,” to examine the books of major financial institutions that operate across national borders, so regulators could begin to have a more complete picture of banks’ operations. They demanded greater scrutiny of hedge funds and the completion of a clearinghouse system to help standardize and limit risk on some of the opaque and exotic financial derivatives that helped bring down Wall Street’s investment banks.

Tigerhawk writes:

I can smell it now, a global “Sarbanes-Oxley” law that neither replaces nor is consistent with American securities regulation or generally accepted accounting principles.

Sure as God made little green apples, new global regulation will not prevent the next bubble and the crash that follows it. As I have written before to the point of tedium, the best and only insurance against that is human memory. There will be no insane bubble and no crash that follows it as long as the generation scarred by this one is running the show, but once it has passed its memories will only be history, and people will again be free to argue that “it is different this time” without being mocked.

In a previous post, I recalled the incident of how tying down all the circuit breakers of the USS South Dakota during the Naval Battle of Guadalcanal put the entire ship’s electrical at risk to a single point of failure, which nearly caused its loss to the IJN Kirishima. It was saved because the USS Washington was uninvolved its self-inflicted fiasco and won the battle. The analogous question is whether this regulatory “college of supervisors” might not create yet another point of failure for the entire system.