Is Basel II to blame?

Robert Waldmann has advice for libertarians:

I’d look into the Lucas critique — when policy makers assume that an
empirical relationship is a natural law and attempt to exploit it, it
disappears. In particular the usefulness to private agents of the
ratings caused regulators to decide to use them too (and destroy them)
via Basel II.

Along related (but contradictory) lines, in The Economist Alan Greenspan calls for higher capital requirements.  The arguments of both Waldmann and Greenspan make perfect sense.  The problem of course is defining "capital" in such a way that is not counterproductive.  You know the old joke:?  "Capital requirements: can’t live with ’em, can’t live without ’em."


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