As the flood of articles on the tenth anniversary of the collapse of Lehman Brothers continues, a common question has emerged:  are we prepared for the next financial crisis?

Much to my surprise the consensus answer is NO!

In an interview, the now-disgraced former chief of the IMF, Dominique Strauss-Kahn, was asked:

Q: Ten years on, are we better equipped to deal with a crisis of such a magnitude?

A:  We have made some progress, particularly in the area of banks’ capital adequacy ratios. But that is not nearly enough. Imagine Deutsche Bank suddenly finding itself in difficulty. The eight percent of capital it has at its disposal are not going to be enough to solve the problem.

 

The truth is that we are less well prepared now.

Regulations are insufficient.

Considering how much ink has been spilled on bank capital regulations, he could not be more dismissive of them.  But he doesn’t stop with just debunking the myth of bank capital.  He goes on to say “regulations are insufficient”.

This has been known since the 1930s, but the only person who has been mentioning this fact for the last decade has been me.  It is nice to hear another voice effectively saying the reason our financial system is not dependent on regulators is they are not up to the task of preventing a financial crisis.