Comments on: Federal Office for Oversight of Leverage [FOOL] http://alephblog.com/2008/04/01/federal-office-for-oversight-of-leverage-fool/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Sun, 12 Feb 2012 22:02:53 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Estragonhttp://alephblog.com/2008/04/01/federal-office-for-oversight-of-leverage-fool/comment-page-1/#comment-17355 Estragon Tue, 01 Apr 2008 16:25:10 +0000 http://alephblog.com/?p=624#comment-17355 Initially I thought the proposed control of systemic risk objective was a good one. On reflection though, and in addition to your list of problems to overcome, I see a potential for it to produce the very thing it seeks to avoid. A prudent investor has to consider the possibility, however remote, of various sorts of systemic failure, and position accordingly. We diversify, we control leverage, we inquire and inform ourselves of how we might be affected, etc. If we ever became confident that systemic risks had been credibly eliminated, we could and would change our behavior to effectively price out those risks. It's something like a moral hazard problem on steroids. Initially I thought the proposed control of systemic risk objective was a good one. On reflection though, and in addition to your list of problems to overcome, I see a potential for it to produce the very thing it seeks to avoid.

A prudent investor has to consider the possibility, however remote, of various sorts of systemic failure, and position accordingly. We diversify, we control leverage, we inquire and inform ourselves of how we might be affected, etc. If we ever became confident that systemic risks had been credibly eliminated, we could and would change our behavior to effectively price out those risks.

It’s something like a moral hazard problem on steroids.

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