de Jasay's Sad Commentary on (Economic) Intelligence

Anthony de Jasay was born at Aba, Hungary in 1925. (The original spelling is Jaszay). He studied Agriculture in Szekesfehervar. After the war he worked as free-lance journalist, fleeing Hungary in 1948. After two years in Austria, he emigrated to Australia in 1950 and took a part-time course in Economics at the University of Western Australia. Then he went to Oxford in 1955 and was a research fellow of Nuffield College where he stayed till 1962. Then he moved to Paris and worked there as a banker, first as employee then on his own account. In 1979, he retired to Normandy with wife and three children. He ended like all Hungarian Jews becoming something of a philosophy writer. On the new European financial regulation:

Other than "pruning" investment banking, Franco-German inspired regulation is likely to focus on solvency and on the whole modern generation of innovative financial products. Banks are already under pressure to increase their solvency ratios, and it would not be surprising if the present standards of about 8 per cent of a bank's "risk-weighted" liabilities being their own capital, were gradually raised to 10 or even 12 per cent. Skeptics would remark that in case there is a "meltdown" in the market for one major asset class, such as mortgages, a few per cent more or less of their own capital will not make the difference between solvency and insolvency, while a more massive increase in solvency ratios would suck the rest of the economy dry of capital, for far too much would be needed to fill up bank balance sheets. The only way out for the banks is to de-leverage, shrink their balance sheets to make their existing capital amount to a higher percentage of it. This result, which some authorities seem to want, is achieved by restricting credit—the "credit crunch" the authorities untiringly condemn.

The other main target area of regulation is bound to be all the recent innovative financial products. They include the transformation of non-marketable into marketable assets by securitisation, as well as such derivatives as credit default swaps, put and call options, currency and commodity futures and interest rate "swaps". Their common function is to help distribute risk by creating instruments for insuring against it and for underwriting the insurance. They also serve as more efficient vehicles for the speculation that everybody bitterly hates and wants to eradicate, failing to understand that its function is to smooth out price fluctuations by buying low and selling high. Thus pulling the price up in the trough and pushing it down at the peak. If it does the opposite, it bankrupts itself.