The Australian economist, Joshua Gans, recently described a problem central to the current financial turmoil. How could he persuade his young son not to wet his pants?
Believing in the power of incentives, Mr Gans offered a reward if his son could keep his pants dry for seven nights. The boy simply removed his pants. The prohibition was on wetting pants, not on wetting the bed. Young Gans was learning a skill that would equip him well to be a British MP, or a senior executive in a global bank.
Many MPs need second homes to perform their duties. Such rules were not intended to allow less honourable members to build a property portfolio by charging the taxpayer to refurbish a succession of second homes. These members argued that what they did was consistent with the rules.
The Basel banking principles attached varying capital requirements to different types of assets. But it was easy to rearrange how assets were categorised, even as the underlying risks remained the same.