Basel is a mess

rkawai

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The more I learn about Basel and this history of Basel, the more I realize they are a big part of the problem. They don't have any appreciation for root causes. Elegance and parsimony are not words in their dictionary.

It's all overly taxonomical, and obsessed with lists.

The solutions are piecemeal. One solution creates new goal displacement opportunities.

They don't get the root of the problem-- incentive alignment, and lack of ultimate market discipline. The entire premise of creating this monster of a regulatory framework is based on a flawed one, that there cannot be an efficient market-oriented wind-down of very large market institutions which were too myopic, or were too aggressive in their risk-taking. The assumption of TBTF and the convoluted, overfit regulatory framework is a significant contributor to past crises, and will be for the next, and the next, and the next. It's very obvious to me.

The people doing cutting edge work in fintech and blockchain technology are fighting against this bureaucratic inefficiency-- moving rapidly to try to make it all irrelevant and obsolete. They've finally begun moving toward injecting themselves. Inadvertent petit corruption.

If they had to build the regulatory framework from scratch, they should've started with market discipline (pillar 3) first. They've shown an under-appreciation time and time again for goal displacement, game theoretical dynamics, and elegance (they tend to overfit modifications, make things more taxonomically dense, complicated/non-robust, convoluted).

Rather than looking for elegant/parsimonious market-first solutions, they chase after exploitative private actions in piecemeal fashion, creating new unforeseen problems and loopholes (exactly as with American tax laws-- which have contributed to a non-value-added cottage industry of professionals who help the more wealthy entities game the convoluted, every-growing system: tax avoidance schemes like the double Irish, transfer pricing schemes, million dollar back-door Roth accounts, etc.) If the Basel regulators understood the private profit entities will generally always outspend them and win this unproductive cat-and-mouse game, they would've not started on this absurd mess.

In the end I can only believe that the bureaucrats don't really want to solve these issues at their core, because that would mean sizing down. Parsimony and efficiency means a smaller bureaucracy. It's petit corruption on steroids. They wouldn't be gratified with an end conclusion that they ARE the problem. They could never admit their activities are detrimental. They have to believe their activities are useful for investor protection, market stability, and helping to maintain a fair playing field. So the delusion must persist.
 
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