It’s not just abiut the targets but also about how you throw the darts

Sir, Paul de Grauwe opines that “Central banks should prick asset bubbles”, November 2, and though that might be right in terms of monetary policies, whether the central banks throw their darts at inflation targets or assets bubbles, does not excuse them from acting with wisdom when regulating the banks.

When the regulators imposed their minimum capital requirements on the banks based exclusively on risk assessments performed by their commissars or Blackstone type subcontractors, the credit rating agencies, they should have known a reaction would follow. First that many assets deemed more risky by the banks than what the appraisers thought them to be, would probably stay in their balance sheets while all those assets deemed less risky than appraised, would find new balance sheets where to hide out .

Second that the credit rating agencies would turn into the mother of all the systemic risk builders and contagion agents allowing profitable arbitration in risks, mostly through securitization mechanisms. Let us remember that all this subprime mortgages mess would have had no chance of going global, had it not been for the banks being able to sell the mortgages because the credit rating agencies provide these with AAA travelling documents.