http://groups.google.com/group/emperu/browse_frm/thread/47b3921601557128/138ce40473fbb163?hl=en&lnk=st&q=#138ce40473fbb163
> We will never have a perfect model of risk
> By Alan Greenspan
> Published: Financial Times, March 16 2008 18:25 | Last updated: March 16
2008 18:25
> If we could adequately model each phase of the cycle separately and
> divine the signals that tell us when the ****ft in regimes is about to
> occur, risk management systems would be improved significantly. One
> difficult problem is that much of the dubious financial-market
> behaviour that chronically emerges during the expansion phase is the
> result not of ignorance of badly underpriced risk, but of the concern
> that unless firms participate in a current euphoria, they will
> irretrievably lose market share.
>
> Risk management seeks to maximise risk-adjusted rates of return on
> equity; often, in the process, underused capital is considered
> "waste". Gone are the days when banks prided themselves on triple-A
> ratings and sometimes hinted at hidden balance-sheet reserves (often
> true) that conveyed an aura of invulnerability. Today, or at least
> prior to August 9 2007, the assets and capital that define triple-A
> status, or seemed to, entailed too high a competitive cost.
So what about having regulators audit financiers and enforce a
distribution of rates of return for each institution? A given lending
institution would be required to have a certain pro****tion of low-risk
investments per unit of high-risk investment, similar to the way
automakers are required to sell a number of fuel-efficient vehicles for
each unit of gas-hogging vehicles. The level of risk of a given
investment would be measured by its rate of return.
This would recognize the danger of catastrophe that unregulated lending
brings to the economy and to the economic lives of all people. So the
justification of this regulation would resemble those of antitrust
regulations and the limits on demand-deposit/reserve ratios of banks.
IANAE
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