The Return of Ethics: Panglossian Banking?

The financial crisis has led to a lot of talk about the failure of ethics in the banking sector. Greed overtook wisdom, we’re told. No doubt this is the case. Yet whilst bankers are to blame, it’s hopelessly naïve to suppose that a ‘return’ to some golden age of ethical business will solve all our problems.

There is a parallel with the expenses claims of British parliamentarians. Caught with their hands in the till, some cried out that the system was to blame for letting them get away with it. For all the cheek of that response, there is a lesson in it.

Individuals must take responsibility for their sins. But if we’re serious about making sure that these things cannot occur again, it really isn’t enough to call for more ethics in business. In fact, I’m beginning to suspect that this is a way to avoid having to enact any real change. As the crisis seems to be settling down, the British Chancellor of the Exchequer Alistair Darling has shied away from significant reform of the regulatory system and chose instead to blame bosses for being irresponsible. ‘Don’t worry,’ we seem to be being told, ‘we’ll just ask bankers not to be greedy any more.’ Forgive me, but I had hoped for something more robust.

It must be conceded that in sharp contrast to the plans of the British government, Barack Obama’s planned reforms are substantive and bold. But on a global level, concerns are growing that the opportunity for broader reform that this crisis provides is being missed as optimism returns alongside talk of ‘green shoots of recovery’. The Bank for International Settlements (BIS), often described as the central bankers’ central bank, published its annual report on Monday. According to the FT, the BIS:

said it was vital that thought be given to the ongoing structure of the financial system while the patient was still on life support. Efforts so far, it concluded, had been a “messy mixture of urgent treatment designed to stem the decline, combined with an emerging agenda for comprehensive reform to set the foundations for sustainable growth”.

It highlighted two main risks: first, that not enough will be done to ensure a durable recovery from crisis; and second, that the emergency action to stabilise the financial system will undermine efforts to build a safer system.

The G8, too, is jumping on board the ‘return to ethics’ bandwagon. MBA graduates have set up their own code of ethics, taking inspiration from the medical profession’s Hippocratic Oath. This is welcome. We do need to create a public environment in which ethics and responsibility are more emphasised (and more respected), but to expect a firm whose raison d’etre is the pursuit of profit to apply the brakes is painfully naïve. Business (and politics) should be conducted on more ethical grounds. This year’s Reith Lectures, given by Michael Sandel, address this point well. But in the meantime (between now and hell freezing over), we need rules that acknowledge people’s tendency to ignore ethics, especially in the heat of the moment. The great theorists of capitalism itself, such as Adam Smith, knew well that the system wasn’t moral. But neither is capitalism immoral – it’s simply amoral. If we want a moral system, we have to bring in the morality ourselves. But to expect bankers to do so on their own is to invite a conflict of interest. We do not expect the players at Wimbledon to make line calls on their own shots and, similarly, we should not expect the financial sector to judge the morality or wisdom of its own practices.

This is an important moment, but it’s not a moment of a new ethical kingdom, or of a new form of capitalism. Instead, we need to return to an older scepticism about the role of private interests in our society and the degree to which the doctrine of self-regulation is a realistic solution.

Anglo-Iranian relations face new low: AKA spooks on a plane

In the light of ongoing events in Iran (which sadly seem to be in danger of being utterly overshadowed by the other thing), various commentators have been focusing on why exactly it is that the regime reserves its greatest hatred for Britain? Surely America is the ‘great satan’? Why are we taking the flak all of a sudden? Of course, it’s historical. You can look at pretty much any world trouble spot, rogue state or basket case, and find the legacy of the British Empire behind it somehow. (more…)

21st century finance: too complex to exist?

As we push on through the recession, one thing that we haven’t seen enough of is solid original thinking about the causes of the crisis and what can be done to stop such a systemic disaster ever happening again. However Duncan Watts, writing in the Boston Globe, has a bold idea. Not only were banks to big to fail but the system as a whole is simply too complex to exist.

Rather than waiting until the next cascade is imminent, and then following the usual modus operandi of propping up the handful of firms that seem to pose the greatest threat, it may be time for a new approach: preventing the system from becoming overly complex in the first place.

It’s well known that few in the financial sector (let alone regulators) understood the instruments that were being used. Risk assessors refused to believe that a firm like Lehman Brothers could ever fall so easily and as a result, the consequences of such a collapse were not accounted for in risk models. In an ever more interlinked world, the danger of contagion effects means that everyone has an interest in the way the system works. If only a few people understand it, so much the worse for the rest of us.

An alternate approach is to deal with the problem before crises emerge. On a routine basis, regulators could review the largest and most connected firms in each industry, and ask themselves essentially the same question that crisis situations already force them to answer: “Would the sudden failure of this company generate intolerable knock-on effects for the wider economy?” If the answer is “yes,” the firm could be required to downsize, or shed business lines in an orderly manner until regulators are satisfied that it no longer poses a serious systemic risk. Correspondingly, proposed mergers and acquisitions could be reviewed for their potential to create an entity that could not then be permitted to fail… Perhaps what we need is an “anti-systemic risk” law that would aim to avert systemic risk before it is too late.

Watts concedes that this degree of intervention in the market is concerning, but one thing that everyone seems to agree on is that the era of market fundamentalism is over. If we’re willing to allow the state to intervene in bailing out failed banks, why not intervene to prevent them becoming unmanageable in the first place? Think of it as bonsai banking. As E.F. Schumacher said, ‘small is beautiful’.

Fool’s gold

The good stuff - Flickr User BuillionVault

The good stuff - Flickr User BullionVault

It’s well known that in times of crisis, people fall back on the certainties of old. Among these is that gold is a good investment, for gold always holds its value far better than, say, real estate. The current recession is no different. Back in October there was a brief media hullabaloo about people buying up gold in droves, forming queues outside bullion merchants.

Now we are seeing something totally new. Indeed, there is no end to human ingenuity. While Japan has long led the pack in eccentric vending machines (purportedly used underwear being the most famous among many products available), in Germany a bright spark named Thomas Geissler has hit upon just what’s needed in these trying times: gold bullion vending machines! I’m kicking myself for not having come up with that one. According to the FT:

For €30 airport shoppers could buy a 1g wafer of gold, with a larger 10g bar priced on Tuesday at €245 and gold coins also on sale.

When the Financial Times bought the cheapest product it was dispensed in an oblong metal box labelled “My Golden Treasure”, with a certificate of authenticity signed by Mr Geissler but no receipt and the wrong change. Mr Geissler said he hoped to have a more advanced prototype available this month.

Still, I suppose spending your money on gold from a vending machine has to be a better investment plan than that of the woman who saved $1 million in her mattress, only for it to be thrown out by her daughter.

Geldof slams ‘poor, sad Italy’

Development charity has released its annual report examining how far G8 countries are meeting their Gleneagles commitment to double aid to Africa. The US, Japan and Canada are headed towards meeting or exceeding their pledges, while Germany and the UK are said to be ‘striving’ towards their ‘big commitments’. Unfortunately, France and Italy are letting the rest of us down. Apparently, they account for 80% of the shortfall in aid increases. Italy’s efforts in particular are described as an ‘utter failure’. Bob Geldof is quoted as having commented in a characteristically forthright manner:

Poor, sad Italy. That their economy is in such a disastrous meltdown condition that they must steal from the poor, rob the ill and snatch education from the minds of the young not only beggars the imagination, but must also surely beggar the soul of that most beautiful country. Shame on you. Your government disgraces you.

‘Nuff said.