LRB · Donald MacKenzie · The Magic Lever
“The idea of risk weighting seemed sensible, even necessary, as a guard against banks’ being tempted simply to accumulate the riskiest and thus highest-yielding assets. However, banks’ aversion to equity created a huge incentive for them to reduce the risk weights of their assets even in ways that did not in fact reduce actual economic risks. As my colleagues at the Centre for Research on Socio-Cultural Change at the University of Manchester show in their book After the Great Complacence, much of what has counted over the past 25 years as ‘financial innovation’ has been a response to incentives of that sort.”
A relatively short text that explains a lot about our present economic situation.
See on www.lrb.co.uk