I try to take Rand with a grain of salt, but do find myself associating to her work more and more these days.
This LIBOR scandal feels like a rather typical case. We set up stupid crooked rules, incentivize people to break them and appoint regulators to prevent the same. And when this mess blows up we blame it on "capitalism" and say we need more regulation.
I think the limits of financial and regulatory "architecture" are similar to those of software architecture; there's a tradeoff between the desired properties of a system and its complexity - and your complexity budget is not infinite. You cannot have every combination of desirable properties you can dream up. There will be combinations that are too expensive. The example here is that we want a reference rate called "LIBOR" that is set by the market, but that is defined for every point in time. That's just not possible, because markets can freeze up. When there are no transactions there is no market rate. Either we accept that or we go down the road of increasing complexity, "panels of banks" emulating a market, the inevitable failures, more regulations and complexity in a never ending downward spiral... At least that's my feeling. :)
This LIBOR scandal feels like a rather typical case. We set up stupid crooked rules, incentivize people to break them and appoint regulators to prevent the same. And when this mess blows up we blame it on "capitalism" and say we need more regulation.
I think the limits of financial and regulatory "architecture" are similar to those of software architecture; there's a tradeoff between the desired properties of a system and its complexity - and your complexity budget is not infinite. You cannot have every combination of desirable properties you can dream up. There will be combinations that are too expensive. The example here is that we want a reference rate called "LIBOR" that is set by the market, but that is defined for every point in time. That's just not possible, because markets can freeze up. When there are no transactions there is no market rate. Either we accept that or we go down the road of increasing complexity, "panels of banks" emulating a market, the inevitable failures, more regulations and complexity in a never ending downward spiral... At least that's my feeling. :)