A recent editorial in the Wall Street Journal (Andrew Haldane: The Banker Who Cried ‘Simplicity’) bears reading – and re-reading, and re-reading. It goes directly to the point of my recent rant post titled ‘The Volcker Rule: How Complexity Kills Good Ideas’. Mr. Haldane is the Bank of England’s executive director for financial stability, and a master of the metaphor. As the title of the article implies and the text confirms, Mr. Haldane believes that when it comes to the hopelessly complex rules designed to prevent bank failure and ultimately taxpayer bailouts, such as Basel III[1] and the Volcker Rule[2], less is more.
Herewith are two of Mr. Haldane’s metaphorical gems:
- While speaking at the Federal Reserve Bank of Kansas City’s policy symposium in Jackson Hole he made his famous Dog and Frisbee analogy:
He pointed out that catching a Frisbee requires the catcher to process, in real time, a brain-fryingly complicated set of physical and atmospheric factors: wind, gravity, the Frisbee’s rotation and flight path. And yet “catching a Frisbee is remarkably common.”
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The reason, he said, is that in complex decision-making problems, simple rules sometimes do just as well as complex solutions, if not better. You don’t have to understand the science of Frisbee-catching to master the practice. If you tried to keep all the physics in your head, you’d probably be distracted or overwhelmed and miss the Frisbee. Dogs, like most humans who catch Frisbees, keep it simple. Less is more.
- On overzealous financial regulation, he describes it thusly:
…(it endeavored) to capture every raindrop rather than to look out for thunderstorms.
So what does Mr. Haldane see as the biggest risk confronting us today? Too Big to Fail? The Housing Crisis? The Credit Crisis? No! Nada! Nyet! Rather, he sees the greatest risks coming from the central banks themselves – e.g. the billions and billions of bond buying engaged in by Britain, the U.S. and others.
“…the potential for an abrupt increase in long-term [interest] rates remains a key risk to financial stability,” the report said. Like central banks in the U.S., Japan and the euro zone, the BOE is keeping its foot on the monetary accelerator to boost growth. (Or at least juice up prices of certain assets.) It is a perilous time for central banks when the biggest threat to financial stability comes from their own monetary policies.
“Let’s be clear,” Mr. Haldane told a House of Commons committee in June, “we have intentionally blown the biggest government bond bubble in history. That is where we are, so we need to be vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted.”
In short, it appears that Mr. Haldane is suggesting that the medicine may be as dangerous as the malady. ~PCQ
[1] A complex international framework intended to limit bank failures by setting capital ratios and other risk management rules. For more, see link here.
[2] The recently passed rule mandated under the Dodd-Frank Act requiring that federally regulated banks be prohibited from engaging in risky bets on their own (rather than their clients’) behalf – known as “proprietary trading. “
