If governments insist in central clearing for illiquid contracts, they must accept the consequences.
In his recent book Thinking, Fast and Slow, Nobel-prize
winning economist Daniel Kahneman outlines what he terms theory
induced blindness. This is the phenomenon whereby once you
accept a theory, it is very difficult to identify its flaws.
Are we suffering theory induced blindness over the safety of
The logic behind the move to central clearing is well
understood: by passing trades through a clearing house, you
reduce counterparty risk that banks and other financial
institutions are exposed to in the traditional bilateral OTC
But in reducing counterparty risk, we should not infer that
we are reducing risk as a whole.
Risk is akin to energy and, as the first law of
thermodynamics tells us, in a closed system energy cannot be
reduced or created, only transformed. After the CDO craze of
the last decade, in which the fallacy that risk could be
reduced by being spread took hold, we are now embarking on a
fallacy that risk can be reduced by being centralised.
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