Wednesday, October 21, 2009

The man who would be Mervyn King

Merv had a bunch of very insightful things to say recently, reported here in the Torygraph.  Especially eye-catching was this view:

"It is in our collective interest to reduce the dependence of so many households and businesses on so few institutions that engage in so many risky activities. The case for a serious review of how the banking industry is structured and regulated is strong."

He added: "The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion," adding: "It is hard to see how the existence of institutions that are 'too important to fail' is consistent with their being in the private sector."

Harping back to an old but related theme, if the risk free rate of return is 5% or thereabouts (before tax) and the banks are chasing 20% returns (after tax), presumably the differential between them represents a gigantic risk premium which doesn’t quite add up to their “too important to fail” tag.

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