Resilient fragility

Alexandre Lamfalussy's keynote speech to the ICMA conference ("Resilience or fragility") raised a few eyebrows today - Banks, said Lamfalussy, were "succumbing to the temptation of herd behaviour."

We've had warnings from people like Anthony Bolton and Warren Buffett, but for Lamfalussy to speak out perhaps throws things into starker light, not least when it comes a few days after Ben Bernanke's warning to US hedge funds.

"You can be sure that this golden era, will come to an end," Lamfalussy told the conference. He accused banks of being "irresponsible" and walking blind into an "opaque, uncharted and dangerous market." While risk may have been spread around, markets have become increasingly correlated, he said. And the risk of a systemic crisis had not changed. Lamfalussy is, I think right.

What's happened is that the threshold for individual crises to significantly affect the market has been raised. Credit derivatives have enabled risk to be more broadly spread, and thus made markets more resilient. But should a crisis big enough come along, then the markets will be affected in a way far worse than ever before. Such crisis always come along, says Lamfalussy - but we still think we can predict them. Bernanke voiced a similar concern when he warned of hedge funds behaving just like LTCM did.