Thursday, August 27, 2009


Gillian Tett, who recently presented and debated her new book at the Edinburgh Book Festival this week and who then participated at the Prospero conference where Lord Turner raised the prospect of TT. Gillian weighs in to the question too of “Does the world need a global Tobin tax? (see previous blog) that she finds is buzzing around London’s financial circles this week. She says, “the really interesting thing about Turner’s suggestion is the wider intellectual impetus behind it. For as the FSA chairman surveys the financial crisis, he is increasingly convinced that Western policymakers are at a crucial intellectual water-shed”… (saying) “the whole efficient market theory, Washington consensus, free market deregulation system…” (that it) was so dominant that it was somewhat like a “religion”. This gave rise to “regulatory capture through the intellectual zeitgeist”, enabling the banking lobby to swell in size and power. But now, he says, there has been “a very fundamental shock to the ‘efficient market hypothesis’ which has been in the DNA of the FSA and securities and banking regulators through-out the world.” Hence “the idea of that more complete markets were good and more liquid markets are definitionally good” is no longer trusted. “[This crisis] requires a very major reconstruct of the global financial regulatory system, [not] a minor adjustment.” John McFall MP, Chairman of the House of Common finance committee says TT is "impractrical" and possibly there speaks the voice of Gordon Brown too on this question? But the moral imperative behind this issue is not so easily gainsaid. Gillian rightly sees the possibility here of “…mere political posturing. The FSA, after all, has faced criticism for failing to get tougher in curbing banking bonuses, and if also fending off proposals to put it under the Bank of England.” To this I can add that the FSA was (with the SEC) entirely duplicitous over short-selling curbs, stock-lending, and calls for enquiries into misleading statements to shareholders attendant on capital-raisings in 2008, and to which longer term could be added indifference to quality of markets, markets per se, systemic risks, and failed to make the case for more resources to do the job they are statutorily obliged and expected to do. Both FSA and SEC, if not many other national regulators, are severely under-resourced, but also have been suspected of conflicts of interest in being as ruthless and authoritative as circumstances demand (see blogs passim).
Gillian says, “Turner’s comments are a striking sign of the times. And they raise a crucial question: namely what type of intellectual framework should Western regulators now use, if their prior bible – or compass – has now turned out to be so flawed? Sadly, Turner does not offer any pat answers. He has a long list of ideas he thinks that politicians and regulators should debate. Aside from the Tobin tax, he would like to consider more curbs on financial innovation, and a review of market dominance and pricing activity in the wholesale finance sector. But those ideas are not really a manifesto; instead, he stresses that regulators are “still trying to work out” what to do “after a fairly complete train wreck of a predominant theory of economics and finance.”” Gillian sees here a moral compass question on a global scale, which is of course fascinating since, as we all sort of know, even if money is morally-neutral, global finance surely is not even if global financiers are like arms-traders infamous for taking the moral low-ground of saying if I don’t do the deal all that happens is someone else does; “I was only following (buy/sell) orders”. This is reminiscent to me of Jonathan Swift’s Tale of a Tub written in the wake of South Sea Bubble, where he makes a na├»ve but morally-driven fool of himself in seeking to promote global solutions to the book of common prayer etc. (for which read the FSA’s Prudential Sourcebook), doomed to failure for the infinity of distractions into dead-ends amid acres of turpitudinous apologia. Gillian echoes that reminiscence, “No doubt, that agnostic stance will infuriate some (or confirm the impression that regulators are toothless). But that may be the wrong response. After all, the real problem with finance in the past few decades is not simply that policymakers and investors were using flawed economic and financial theories, but using them in such a blind way that they often disengaged their brains.”
To repeat my own refrain – the problem is that while we may have theories, but we lack comprehensive macro-economic-financial models in which to validate and test the theories, and by we I mean everyone including governments and central banks. At the book festival Prof. James Lovelock (90, and booked on Virgin Voyager) yesterday was making a similar point about “Global Heating”. He said Gaia (the term he invented for a self-adjusting global system) does not move in linear ways, and yet governments will sponsor computer models but not fund people to go out in ships and gather the data we need to validate the model-theories. Hence, our long-term forecasts are no better than short-term weather-forecasting. We will spend billions at CERN to find elusive bosons in neutron collisions to try and prove the standard theory of cosmology, but all oceanic research ships have been retired! Similarly, in credit crunch, we entertain policy-theories, but are not undertaking fundamental research to gather the data we need to answer the questions raised by what some describe as financial weapons of mass destruction.
Gillian says, “Bodies such as the FSA, for example, were so wedded to ideas of market efficiency that they only intervened when there was a clear case of market failure. Similarly, investors were so obsessed with narrow, short-term definitions of shareholder value, that they – like regulators – often appeared to be acting on auto-pilot. However, the unpleasant truth is that there is never going to be any complete intellectual system to explain how financial systems ‘should’ work.” Gillian concludes, "That is not an easy idea to sell to politicians, voters – or even regulators. After all, as Turner points out, world without a reliable compass is frightening, exhausting and time-consuming to navigate. “For the regulators of the world, once you have accepted that you don’t have an intellectual framework of “more market is always better” you’re in a much more worrying space, because you don’t have an intellectual system to refer each of your decisions.” And it remains crucially clear whether Turner will ever be able to actually turn any of his rhetoric into policies, given the scale of backlash that his comments will undoubtedly spark from the banking world. But I, for one, reckon he is to be applauded, for at least trying to think the unthinkable again - and move away from a crude reliance on creeds. The only question now whether other regulators will follow, not just in Europe, but, above all, in the US, where so many of the free-market dogmas first sprung to life?" Unlike Gillian Tett, I am confident, or at least hopeful, that a fairly complete intellectual system cannot be constructed is not true - it's my job, and not above my pay-grade; even Prof. Lovelock remains hopeful about Global Warming despite his realistic expectation that because Global Heating has progressed so far we are in for an inevitably terrifying time that he compares to WWII? In my view we can empirically determine how financial systems work, and do so at least as well as IPCC predicts global warming, and how macro-finance relates to the so-called “real macro-economy” globally; the ideas and most of the data exists and merely need the sponsorship to be brought together into useful analysis. But, I do not believe in the desirability or our capability to banish asset bubbles as critics of Bernanke suggest when they blame him and Greenspan for loose monetary policy leading to bubbles. We are in the 33rd credit & economic set of cycles since the 1850s, and I confidently expect many more in this century alone. And here I agree also with Gillian when she writes, “…ideologies are always rooted in shifting power structures and struggles. And just as the old intellectual model proved imperfect, any new ‘theory’ that might yet replace it – with or without a Tobin tax – will have limitations too. What is needed now, in other words, is not so much a new ‘creed’ or magic-wand policies, but policy makers, politicians, investors and bankers who are willing to engage their brains, and keep remaking policy, as the world evolves.”This brings us on to what are central bankers thinking at Jackson Hole? (next blog)

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