Why are we ruled by the illogical?


I've long been saying that recent events might mean we should have more regulation of the financial sector. It might also mean less and I'm certain it should mean different regulation. But could we please have an absolute moratorium on illogical, just plain counter-productive, regulation like this?

Today, as part of that effort to make markets safer, lawmakers in the European parliament are expected to back new rules that will force banks to retain 5 per cent of the securitised products they originate and sell.

Now a reasonable thumbnail sketch of what happened is that the banks went overboard in a wave of euphoria about the joys of securitisation. in fact, they thought that these whizzy CDOs were such fun that they weren't going to flog them on to the pension funds and the insurance companies as originally planned. Nope, these things were so super that they were going to keep them. And so they did keep them until everyone woke up with a hangover one day and realised that they weren't so whizzy or super duper and immediately started calling them "toxic assets". And then the banks went bust.

So the legislators suggestion to stop this happening again is that the banks should be forced to do what made them bust rather than just left to make a stupid decision like that on their own? Everyone's got to do it not just a few?

Now some will say that having to keep a portion of a securitisation will make the banks look a little harder at them and their risks. Perhaps, but this is the point. Up until 18 months ago the banks were indeed looking at these securitisations and they thought they were just peachy. Best thing since sliced bread in fact right up to the point that they thought that they weren't any more. So such a law would not have changed their behaviour at all. Except, of course,  for those people who didn't get swept away in the euphoria and so didn't keep the toxic assets on their books.

Yes, of course we need laws, of course some form of regulatory system has to be in place. But does it have to be so blitheringly stupid a one? One that forces every bank to do what has just sent half of the banks into bankruptcy?