Archive for July, 2009

‘Is banking a profession?’ and other questions about banking accountability

July 24, 2009

There are at least four ways of holding someone to account; through the market; through democratic means; through law; or through peer censure (including family). Each can be applied to bankers embroiled in the crisis that we are in. Starting from the perspective that those responsible for events should be held accountable for them (which seems fair enough to me, and I’m sure to most people), then what can this kind of analysis show us?

Holding bankers to account through the market means letting insolvent banks fail, and encouraging consumers to move their accounts to banks that they believe are and have behaved responsibly. However, we haven’t let insolvent banks fail for fear of systemic failure of the banking system, and the extent to which most bank customers understand whether or not their banks have been responsible is probably questionable. This doesn’t mean that this system can’t work – banks can be allowed to fail, and customers can get better educated about their financial choices. But neither seems to be happening right now, which does ask questions about whether banks are being held to account through market choices.

Holding banks to account through democracy means working out a regulatory regime through open public debate (which could be minimal or very extensive, depending on the country involved), and making sure that public regulation system works through government scrutiny of it. I’m not particularly hopeful, again, that either is the case. I’m not sure there’s a great deal of public debate or understanding about banks, never mind how to regulate them. This might not matter if our elected politicians understood them, and could offer us worked out alternative schemes that we could debate and vote for, but that doesn’t seem to be the case either. The US and UK scrutiny of banking leaders often seemed more like public showboating than any attempt to understand what happened and to act appropriately. There are also substantial problems around banking regulation and government involvement including regulatory capture (especially when significant politicians often seem to leave politics and join banks), and through banks funding political parties and even individual politicians. Rather depressingly for those of us that want democracy to work better, it doesn’t seem to be working in relation to banks – something that is even more alarming now that the state has nationalised some of them.

Holding banks to account through law would mean either the state or private individuals taking legal action where they believe that bankers have acted illegally. There are certainly cases in the nineteen century where banking collapses were followed by widespread lawsuits, and I’m sure there are lawyers on both sides of the Atlantic looking for possible angles for filing law suits now. Suing bankers to hold them to account has an immediate appeal – justice is linked to law in lots of people’s minds, and it would mean that bankers or fraudulent mortgage brokers are held to account even when they have moved on to other firms. They wouldn’t be able to evade responsibility for their actions by moving onto another job. However, doing things through the law is incredibly slow, extremely expensive, and doesn’t deal with the problem that most of practices that led to the financial crisis were probably legal, even if they weren’t terribly ethical on many occasions, and may not have made a great deal of sense when viewed with the benefit of hindsight. The law can’t protect us from practices that are legal, but unethical, or just unprofessional. However, that doesn’t mean that we shouldn’t use the law from time to time to remind those in positions of responsibility, either inside or outside the financial sector, that they have to work within the law.

That takes us to the fourth option – holding banks to accountability through peer censure. I think this asks an interesting question. Is banking like professions like medicine? In many respects it is. We trust bankers to do things that we don’t really understand ourselves (creating what are often called principal-agent relationships where a party acts on our behalf). This is because bankers have (or are supposed to have) expertise in what they do. Now we wouldn’t trust a surgeon to operate on us if they hadn’t passed their medical exams and weren’t a registered doctor. So I wonder whether we should be trusting banker with our money, and in many respects with our financial future, if they aren’t qualified and accredited to deal with it. Bankers often argue that they should be self-regulating, but it’s hard to see how they can be self-regulating unless they are able to operate censure for those that choose to operate within the law, but unprofessionally and unethically. Banking is special – it isn’t just another business – because bankers can create money. That’s a significant responsibility, that at present, doesn’t seem to come with too much accountability in return. If other systems of accountability aren’t working terribly well, then perhaps we need to try something new.

Holding bankers to account through peer censure would mean treating it as a profession. It would mean that other bankers (and lay members) would be able to decide whether bankers about whom there were complaints or concerns should be allowed to continue to practice as a banker or not. If they are not, then they would have their licence to be a banker effectively removed. In turn, banks would not be allowed to employ those people in any kind of banking role. Banks themselves would be responsible for drawing up clear standard which they expected their members to operate within, and would be able to move closer to a self-regulation model as there would be clear penalties for bankers behaving unprofessionally – they would lose their livelihood. The medical profession manages to make this kind of system work at least moderately well.

Maybe it’s time to take bankers at their word in terms of self-regulation, but make them take full accountability for the remarkable profits and earnings they are able to make during the good economic times through a system that defines, amongst themselves, which practices are acceptable and which are not, and which clearly censures those that step outside the limits. This might also help consumers in making judgements about who they wish to trust their money with – if given a choice between an accredited banker and an unaccredited one, I know who I’m going to trust.

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Regulation and the logic of the banking sector

July 24, 2009

What the events of the last two years have made clear is that the state is not just the lender of last resort to the banking sector, but is also effectively is guarantor. This is rather uncomfortable for many of us. In the economic good times, the banks make lots of money, pay lots of tax, give staff what, compared to what most of earn, are extraordinary bonuses, and, because of their importance and status in the economy, end up advising governments and becoming destinations for ex-politicians to move to once they leave politics (hence Tony Blair and Al Gore now being part of JP Morgan Chase). However, in bad times, then the government is expected to bail the banks out, whether the problem, to use Charles Morris’ key difference, is whether the banks have become illiquid, or insolvent. Banks are viewed as too big to fail, and too important to fail because of the potential implications should they collapse. The ghost of the Great Depression continues to haunt us.

So on the one hand the profits of banking are privatised, and although they are subject to tax, taxation is often avoided or at least reduced through banks, entirely rationally from their perspective, doing everything they can to reduce their liability. But on the hand, the risks of banks are socialised. It isn’t just banks that are now so big that the risks of their operations have become socialised, as governments have bailed out all manner of businesses since the recession began. But banks are still special, because unlike other types of business, they literally create money.

Banks create money by lending more money than they hold in terms of capital deposits at any moment in time. One of the joys of having taught first year economics in the past is the look of wonder on students’ faces when you show them how credit spreads throughout an economy, and how deposits expand and expand when lent over and over again. This means that banks are special – they can do things that other types of business can’t (at least not to the same extent).

So banks have a key social role – they provide liquidity and credit to both individuals and businesses. Allowing them to fail means that that whole system is subject potentially to systemic risk and potential collapse. So, on this logic, it makes sense for banks risks to be at least partially underwritten by the state. This is usually referred to as the lender of last resort function, where, if a bank gets itself into trouble and runs out of the everyday funds it needs to run things, its working capital, it can borrow from the central bank. Doing so, however, means that it has to pay a higher rate of interest than it would do than if it could simply borrow from its own sources or from other banks. Lending from the central bank is done at a premium, so is a last resort on the part of the banks (who have to pay more interest) and the state (which only wants to lend to banks on this basis when there is a danger of systemic collapse).

However what’s happened in 2008/9 is that banks have not just lent as a last resort, they’ve taken over banks, bought shares in them, provided them with liquidity, and allowed banks to lend against assets which the marketplace (such as it is for paper such as CDOs) have come to regard as so troubled as to be worth only a small percentage of its original value. They’ve also guaranteed bank loans and so face potentially massive exposure should those loans fail in the future. Central banks have done far more than the lender of last resort role – they’ve intervened to stop banks from failing. This is not temporary funding to deal with a liquidity problem, but medium and even long-term funding to deal with a solvency problem. Governments have taken the risk associated with banking into the public sector.

Banks are now beginning to make profits again. This is great as loans made to the government are being repaid, and banks will pay taxation on those profits, helping to at least partially fund the massive bail out. However, it does raise some rather difficult questions about what the role of banks exactly is.

If banks are bastions of free market capitalism, then what on earth is the state doing preventing them from becoming insolvent? If banks are too big to fail, then that would indicate a huge flaw in the way they’ve developed. If size is the problem, this would point to a policy of breaking banks up so that they can be allowed to individually fail safely in the future. Perhaps we need to look back to Theodore Roosevelt who understood that sometimes capitalism needs to be made more, well, capitalistic. In a free market firms need to be able to both enter and exit freely without disturbing the market as a whole. Banking is an awfully long way away from this. Regulation would be about breaking banks up into smaller units, and having a strong role in making sure that banking systems as a whole are adequately capitalised (Canadian banks seem to have got through the crisis rather less bruised than in other countries because of this). It would also mean that central banks are limited to being lenders of last resort and no more. Banks would be made to conform more to the capitalistic model of smaller organisations in fiercer competition with one another, with a regulator looking for systemic risks, and individual banks being allowed to fail.

On the other hand, if banks are going to depend on being bailed out by the state, then it not clear whether we gain from having private banks being bailed out publicly. This is probably the worst of all possible worlds. Banks can take what risks they like, ultimately, knowing that if they come off then they make huge profits, and if they don’t come off, then they can rely upon the government to help. This makes no kind of sense. Under these circumstances the government might as well nationalise the banking sector on the grounds that banking is a social function with a unique quality (the ability to create money) as this will at least cut down the risks to the taxpayer.

Neither of these options is particularly palatable. But we do begin to have to think about the role of banking in an economy, recognise that it is not like other kinds of business, and have some kind of debate about what we want to happen next. Resentment against banks and banking remains high and may be rising as redundancies and unemployment more generally rise. But it does seem to me that banks have to recognise the logic of either being competitive businesses, or being extensions of the state. They can’t be both.

Villains and victims in the financial crisis

July 23, 2009

Media coverage in the UK at least is very clearly assigning roles to various groups involved in the financial crisis. This is both in terms of the news, as well as in first attempts to dramatise events.

At the bottom end of the chain of events are those who were involved in the buying and selling of houses. The BBC drama ‘Freefall’ presented a family living in social housing (housing provided by the state), based on what looked like a traditional family unit with a husband working as a security guard (and so being the breadwinner) and a mother at home with children. Their house is clean and tidy, but they lack a new kitchen and possibly access to a good school. They are a family who would not normally be able to afford to buy their own home, the first group of people in the chain of events. One day the father meets a former school friend in the shopping centre that he works in. That old friend is now a mortgage broker, the second category of people.

The mortgage broker is a born salesman. He drives around in an expensive car, and sings along to the radio when he makes sales. He isn’t particularly scrupulous, selling people the dream of buying their own home, and getting them to sign application forms without explaining to people what they are getting themselves into. When selling the deal to his old school friend, he does explain that the deal is a ‘low start’ product where payments will go up, but completely underestimates how much they will go up by, even when we describes the worst case scenario. The mortgage broker is a selfish, self-centred individual who cheats on his girlfriend and is regarded as wide boy even by other mortgage brokers who work with him.

The outcome of this is that, a few months into their new home, the family receive letters notifying them of increased payments that they are unable to meet, the father works increased hours to try and get more money, but falls asleep on duty and gets sacked as result, and the family lose their home. The father goes to try and find his old school friend, but finds out he has ‘moved on’ from the mortgage brokers because of complaints about his practices.

The clear implication of this set up is that mortgage brokers mis-sold low-start deals to vulnerable people who didn’t understand what they were signing up for, and may even have been lied to during the process. Those who took out mortgages they didn’t understand are victims, and We still don’t know how widespread this practice was, but certainly the news coverage around US banks now making profits again portrays those whose houses have been foreclosed as victims of the crisis, and those who sold them their mortgages as villains. Unfortunately, as with most things, this is rather a caricature on the part of both the news and the drama.

We certainly seem to have created a perverse situation where brokers made money based not on the long-term viability of the loans they sell, but for selling mortgage products instead, regardless of whether they were sold honestly or whether the potential homeowner could actually pay the loan back. Anyone who has ever worked in sales on commission will know the temptations that come with that, and the possible lies that might get told in order to get a sale. There is clearly scope for villainy. However, presenting people who signed up to such agreements as so easily duped is rather depressing. Either they are adults expected to negotiate their way through the world or they are not. If we create a situation where people aren’t accountable for the decisions that they make, then we might as well give up on capitalism now. If people are fully functioning adults then we can expect them to make mistakes, but to portray them as innocent victims who didn’t understand the forms they were signing is to treat them as fools, and if we start from the assumption that vast swathes of our people are fools, then, again, we don’t have much of a future.

There is certainly a case for trying to increase financial literacy. However, whether this for schools or for the government in some other capacity is something of an open question. What seems odd to me is that firms spend hours wondering about how to get consumers to buy their products, treating them as complex and sophisticated decision-makers, but, in the next minute, we are saying that people who bought mortgages that they didn’t understand are victims, innocents in life who didn’t know what they were doing. I’m sure that large numbers of people were lied to, and we need to hold those mortgage sellers to account (and I mean individually, not just through their firms, although they need to take responsibility too), but for very large numbers of people who signed up for mortgage deals that went bad, they simply made a financial commitment they couldn’t honour. In no way does that diminish the trauma that those who made such decisions have been through in terms of eviction, and the problems that their families have suffered as a result. But it doesn’t mean we should automatically assume that they are victims.

The problem with capitalism

July 22, 2009

What’s very striking about much of the pro-free market literature, it seems to me, is that it tends to present organisations in a way that doesn’t quite work out in practice. We can illustrate this through the work of Ayn Rand, amongst others.

Rand is interesting not only in terms of her huge influence and readership, but also because of her influence on figures like Greenspan, who was part of reading and study group. Rand was heavily in favour of individualism, and heavily pro-market. There’s a great deal to admire about what she says; she talks about the responsibility of achieving intellectual independence, of continuing to learn throughout life and rightly in my view, that capitalism is the economic system most likely to achieve these things.

However, for capitalism to work properly, then consumers need to take on a great deal of responsibility that they often struggle to deal with, and employees of producers, those that we actually have do deal with, have to have their futures far more aligned with their employers than is often the case at present. I’ll try and deal with each in turn.

Being a consumer is a heavy responsibility. By choosing products which aren’t the best, you reward firms that aren’t the best, running the risk of institutionalising mediocrity. By taking poor customer service rather than complaining, poor service gets rewarded and no-one acts upon it. Being a consumer in capitalism is hard work. But it gets to be even harder work when you start dealing with complex products like financial services. At present there are arguments going on about the extent to which individuals got themselves into trouble by borrowing too much money in the financial crisis. From Rand’s perspective, they got themselves into this mess, and we shouldn’t feel sympathy. There is at least some sense in this – no matter how sorry we might feel for people losing their homes, they did sign mortgage agreements they had no way of being able to service. If we trust people to vote in elections, surely we can also trust them to understand the contracts that they sign? Capitalism begins to fall to pieces pretty quickly if we can’t be relied upon to make contracts competently.

However, most of us don’t always choose the optimal product, and don’t always complain when we get bad service. In the UK we are substantially worse than people in the US – we don’t like to make a fuss. I do also wonder how many people over here really understand their mortgages either. We are pretty flawed consumers much of the time. We have to hope that we are doing a good enough job to make capitalism work reasonably, and when products and services get complex, as they do in the case of financial services, there is certainly scope for things to go wrong rather quickly. You can take that as a wake-up call for consumers to get on and educate themselves, or a major flaw in the market system. I would prefer to think of it as the former.

The problem is arguably bigger on the producer side however. Rand’s work tends to assume that poor producers will suffer in a marketplace, and that producers providing a poor service will go out of business. However, this tends to conflate those working within institutions with their institutions – they are not the same thing. I am not my University, and neither is it me. The person who sold me my mortgage is not the bank that they represent. The problem with all of this comes when individuals perform badly but their organisations either don’t know, or are unwilling to do anything about it. A firm of mortgage brokers might have the best intentions at the managerial level, but end up employing one broker who mis-sells and gets the whole firm into a mess. That’s a managerial problem, sure, but it’s one that might be very difficult to pick up.

The problem gets worse when those working for organisations are able to move on to another job before they have to take responsibility for what they have done in a previous one. If we have someone who mis-sells mortgages, they might be able to move on before the problem is discovered, leaving behind a firm with massive problems, and with the individual responsible no longer accountable for what they have done. Something that particular bankers involved in the financial crisis spoke of was an ‘IWBT, YWBT’ situation – where an asset was sold from one organisation to another which both parties knew was of dubious quality, but earned them both bonuses. Why did they do it? Because ‘I won’t be there, you won’t be there’. If the individuals responsible for bad behaviour aren’t held accountable, then that creates a significant problem for capitalism.

I don’t want to advocate a situation which involves lawyers more than it need to, but perhaps they are the only way out of this. If industries were to set up self-policiing bodies that went after malfeasants regardless of whether they had moved on to other firms or not, then people might think twice before setting up the IWBT, YWBT situation. That would surely be a good thing. What worries me, however, is that we seem to have still awarded bonuses to people who created deals fully in the knowledge that they weren’t doing anything of value either individually for their firm or collectively for the financial system as a whole. If self-policing in capitalism, especially in financial markets, is to work, it needs to have more teeth than at present.

What US healthcare can learn from the NHS

July 22, 2009

Healthcare reform is on the agenda in the US. It’s a contentious subject, with the UK NHS referred to, often pretty pejoratively. Can the US learn anything from the NHS?

First of all, the systems are radically different. Both have their strengths. It’s a nice feeling to know that every UK citizen has the right to treatment. There has been a lot written about the problem this brings in terms of long waiting lists, lack of choice and lack of access to facilities and treatments.

Waits in the UK, however, have fallen dramatically. We have a framework whereby increased government investment has resulted in falling waiting times (Labour have got something right over here), and although everyone still doesn’t get treated when they would ideally like, people, on the whole, get treated reasonably promptly. Certainly, treatment for life-threatening diseases like cancer have speeded up considerably, and aren’t a million miles from what you might expect in the UK.

In the UK primary care physicians (the main access route to specialist treatment) are now obliged to offer choice when referrals is made. However, the evidence tends to suggest that most patients don’t really want it – what they want is to be reassured their local hospital is a good place to go to, and that they’ll be seen promptly. On both fronts things have got a lot better. In terms of choice of primary care physician, governments have been trying to get the public to choose more carefully since the 1980s with little success. It seems we don’t really want choice there.

In terms of lack of access to facilities and treatments, the NHS has a comprehensive care system, which means that it guarantees to treat you, but not necessarily with the treatment that the patient demands. Treatments are approved for the NHS by the National Institute for Health and Clinical Excellence (NICE), and then has to be affordable locally through the budget available there. But if you’ve got something treatable, the NHS will offer to treat you.

So the NHS treats people pretty quickly, offers choice (even if the public don’t seem to want it) and will treat you, although not necessarily with unproven or very expensive treatments. And of course, if you don’t like it, you can always take out private health insurance – although most of those working for our not-for-profits and private healthcare providers also tend to work for the NHS as well.

What’s remarkable to a non-US citizen, is that your public health system costs you nearly as much as our NHS, but provides a much lower standard of service, and much less comprehensive care. That makes us wonder what on earth you’re doing with all that money.

And then there’s the private sector over there. You spend more than any nation on Earth for healthcare, and yet the health outcomes of your nation, according to bodies such as the WHO, aren’t that good. This is because of the 40 million plus uninsured, but also because the care you get is extremely expensive in the private sector, and there still seem to be a whole range of what seem to be perverse incentives leaving to over-prescribing and the use of expensive unproven health technologies.

If you’re going to spend as much money as you do on healthcare, it surely makes sense for you to do it efficiently, and the relationship between cost inputs and health outcomes suggests you’re not really achieving this at the moment. In contrast, the NHS doesn’t do at all badly – in simple input-outcome terms it does a great deal better than the US system. Somewhat extraordinarily given how productive the US economy is compared to the UK, we do healthcare a lot more efficiently than you.

I appreciate that talk of an extension of public healthcare in the UK gets allegations of socialism and even communism, and so doesn’t fit with your prevailing ethos too well. I guess the question is whether you want to continue to pay so much more for your healthcare system than the rest of the world, and whether there is a justification for treating healthcare as a right, as we do in the UK. John Rawls’ idea of the veil of ignorance is useful here. If you were in a position of not knowing which position you were to adopt in society – that you were about to be born to a family in the US say, but you didn’t know who you were to be born to, but you had a say in what kind of health system your country would have, what would argue for? You could take the chance of being amongst the lucky insured, but that carries risks if you’re unlucky. Surely it would make sense to argue for a healthcare system that allowed private practice for those that could pay for it, but guaranteed care for those that could not? Or perhaps I’ve been living too long in the UK.

Equally, it seems to me that lots of lots of choice is not necessarily something to aspire to in healthcare. Barry Schwartz’ work suggests that people, before they contract a serious illness, claim that they want a choice in treatment, but upon actually contracting that disease, change their mind pretty quickly. I don’t have the medical knowledge that a doctor has, and more disturbingly, am not sure I could tell a slick medical fraud if I came across one. I could ask for a second opinion, and try and assess who was telling the truth, but have to respect, even then, that I may get it wrong. When it comes to my healthcare, I want a doctor who gets it right on my behalf, not to have to choose myself. I think choice in healthcare is over-rated.

I’m aware that the NHS gets things wrong too. People aren’t encouraged to take full responsibility for their health as they know they’ll always be treated, but I’m not convinced that people behave any more irresponsibly in the UK than they do in the US. A great deal of our buildings need refurbishment, and our equipment certainly isn’t as up to date as yours. But you can get better buildings and get access to more expensive machines if you go private.

Perhaps it’s time for the US to get over it’s problem with public healthcare, and focus on getting a great deal more for the great deal you already spend on it. What the UK can teach the US is how to provide a public-funded healthcare system that everyone can access at a remarkably low cost. I’m not suggesting that you take away your private healthcare system (although you really do need to stop it costing you so much). But you could get a great deal more care for the amount you already spend on your public system.

Extreme versions of the financial crisis

July 22, 2009

There are two versions of events leading up to the financial crisis that seem to be emerging. The first is based on the assumption that capitalism, as a system, is not at fault. What happened is that banks became lazy in their risk management, overextended themselves through excessive lending and investment in assets that they did not understand, and ran into problems as a result. Advocates of this viewpoint suggest that banks that made these mistakes should be punished – they should have had their assets taken over by other banks, even if this meant that they were sold off at low market values due to the ‘fire sale’ nature of their problems. There are arguments that the banking sector did not go through a lack of liquidity, but particular banks became insolvent, and as a result, they should have allowed to go bust. Having a central bank as a lender of last resort results in banks believing that they can behave recklessly, leading to moral hazard, and be bailed out if they make mistakes on the assumption that they are ‘too big to fail’. What is therefore required, then, is not more regulation of international financial markets, but less, but with banks being allowed to fail and be taken over by more successful banks if they mess up.

A second version of the crisis looks at it from the politically opposite end. In it banks, once again, failed in terms of their risk management, and over-borrowed and over-lent because of low interest rates. However, this view suggests that this is an inevitable feature of capitalism, where speculation runs riot and where, because the public sector must pick up the tab when things to wrong, profits are privatised and risk socialised. In this view of the world, banks must be heavily regulated, with their capital holding requirements increased significantly (the Canadian banks came out of the crisis relatively unscathed, goes the argument, because of their capitalisation) and with banking playing a much smaller role in the economy after the crisis as the gains and profits made from it over the last twenty years have been largely written down. Some writers suggest that capitalism as a whole is now stagnating, so that any growth is illusory, and down to bubbles emerging which are largely illusory, and which do not result in growth for the real economy at all.

So, even in the extreme views of both accounts, there is a shared recognition that the banks failed comprehensively in terms of risk management. There is a longer story here about the creation of abstract financial instruments that I’ll deal with another time, but the central problem seems to be that banks created financial instruments based on assets that aren’t particularly liquid (houses), and then proceeded to treat these assets as if they could be traded effectively as money, even though there was no marketplace for the assets (which were traded between institutions rather than through an exchange), and when the underlying asset (the houses) was found to be falling in value, the risk management systems the banks has put in place completely failed to foresee the possibility that the market for housing, as a whole, could fall. This is because the models underpinning these assets were based on data that only included time periods in which house prices had been rising, and also possibly because they used the wrong kind of mathematics – they were based on Gaussian systems (normal distributions) rather than non-linear (complex) modelling. This is because, for most everyday events, the Gaussian systems were good approximations, and because it seemed to the managers running the banks that the assumption that house prices would continue to rise was a reasonable one.

The accounts differ in terms of what happens next. The first version is based on banks being allowed to fail, assets prices going through a short sharp shock to correct markets, after which things should pick up. There is certainly a kind of natural justice in this. If banks are going to be responsible, it does seem odd that we should bail them out in the bad times and allow them to make huge profits and pay out massive bonuses in the good. The problem comes in whether the banking system, as a whole, was so swept up the purchase and sale of the illiquid assets that there were no good banks left to bail out the troubled ones, and the financial system as a whole would have collapsed. We still don’t really know how big the losses from the financial crisis will be. Charles Morris’ great book ‘The Trillian Dollar Meltdown’ was changed to ‘The Two Trillian Dollar Meltdown’ for the paperback edition, and Morris freely admits the losses could be far greater even than that. When a collapse occurs on this scale, there is certainly the danger of a systematic failure.

The second version of the crisis suggests that what is needed now, following Hyman Minsky, is for banking to be socialised, taken over by governments, and given a role of supporting the real economy instead of engaging in speculation. This seems both unlikely and rather incredible. Just because we may find speculation and the bonuses that go with it rather repugnant doesn’t mean that it doesn’t fulfil a useful function. Speculation, short-selling and overnight money markets might appear to be bizarre constructs, and in many ways they are, but all provide liquidity to the financial systems of the world. Indeed there is a good argument to suggest that the world economy’s problems come from financial flows being interfered with, especially from budget surplus countries like China, Russia and the oil producing nations, international currencies being held down artificially low, and a surplus of cheap money circulating that flooded to assets producing returns above those that government debt could promise – particular in financial instruments attached to housing. Had those surpluses been reinvested back into the nation states from which they originated, the standard of living for people living with them might have been improved, and the world economy been in a more stable situation.

It seems to me that we’ve got ourselves into a bizarre situation. On the one hand, we underwrite banks by saying that they are too big to fail, but on the other, say that they aren’t subject to much in the way of regulation in good times that might mitigate against a repeat of the crisis of 2007/8 in the future. Governments across the globe are presently tinkering with regulation systems, apparently on the assumption that they can fix this. However, while central banks are prepared to bail out banks, then they will always have an incentive to take on more risk than we might like. Banks aren’t being held accountable for their actions, which is odd considering that they have been presented as the paradigm of competitive success for so long. Perhaps it’s time to rethink what the role of central banks is – the present situation seems rather untenable. It is not reasonable for banks to expected to be bailed out through public money, and be making huge profits a mere year later, and this seems to where we have got to.

Starting a blog

July 21, 2009

Well, here we go. I’m entering the information age, and intend to blog on a range of subjects, time permitting. I’m an academic in the UK, with interests in healthcare, the financial crisis, as well as finding good books and making better use of my Apple Mac. I’ll get on with this as an when things occur……..