The crisis: a modest proposal
Writing in today’s FT David Blake makes a devastating attack on Former Federal Reserve Chairman Alan Greenspan. Blake argues that Greenspan knew about the growing risks of the dot com bubble and the factors that led to the credit crunch but in both cases refused to act and has since sought to wash his hands of responsibility. Blake is surely right that Greenspan’s formerly sky high reputation deserves to come down to earth. But let’s also understand how hard it is to act when contagious greed sweeps the markets.
In particular, imagine the outcry had Governments in either the US or the UK sought to stop sub prime lending or 100% plus mortgages. ‘We want to borrow’, ‘the banks want to lend’ and ‘why shouldn’t we be allowed to get our share of the housing boom’ would have been the loud and angry public response. Government could have been portrayed as both interfering and a block on aspiration. To have done this when City experts were dismissive of any warning voices would have made it even harder.
Two characteristics of bubbles are that the later you get involved the more you lose and that the late comers are usually those with the least to fall back on once things go wrong. This will happen again.
Greater regulation will stop a bubble just like this one reoccurring but bubbles are endemic to the City’s casino economy. New regulation will simply provide the contours for the excesses of the future. So as well as regulation to stop problems we need to boost the legitimacy of those who cry ‘danger’.
I propose the establishment – maybe by the OECD or IMF – of an international panel of wise people. This group would be asked to comment every six months on major trends in world markets using a traffic lights system. If the panel flags up an amber danger in the global market or in one major country it can demand the Government of that country responds to its concerns. If the light turns red the Government in question can be required to attend a special public hearing to answer the concerns being raised by the panel.
One of the most difficult to bear facts about the current crisis is that people saw it coming. Warren Buffet and George Soros were only the most prominent Cassandras. Had such a panel existed and had it included people like Buffet and Soros these is no question that it would have been flashing red lights about both irresponsible lending and complex derivatives years ago. Maybe we would all still have plunged headline into disaster. At least we couldn’t have said we weren’t warned.
Navigating the financial crisis, and the moral maze
An even-briefer –than–usual update today as I am rather distracted (not to say terrified) about being a Moral Maze panellist tonight. The programme is live, the other panellists have done it loads of times before and the subject is really difficult – whether NHS patients who top up their cancer treatments with drugs not available on the NHS should be denied NHS care. If you want to listen in it’s on at 8.00, or you could ‘listen again’ on the podcast tomorrow.
Really good seminar yesterday on Tomorrow’s Investor. Rowland Manthorpe and David Pitt Watson made a good case to a very knowledgeable group that there is a gap in the market for a simple, low fee, high accountability, ethically robust pension fund. The next stage is to look more thoroughly at the viability for such a fund and explore what possible regulatory barriers there might be. The first stage was funded by INVESCO and PWC – whose representatives also made invaluable contributions to yesterday’s seminar – so thanks to them.
I have a piece about behaviour change policies in today’s Guardian. It’s the lead article for a magazine called Ethos which I guest edited on the subject of behaviour change for the company Serco. The magazine includes an interesting article by neuroscientist Susan Greenfield and an interview (by me) with Oliver Letwin.
Lessons from Lehman Brothers
Apart from hard line anti-capitalists (who must be having a great laugh) all anyone wants now is for the bad news about finance and markets to stop. That the RSA will probably have to write off a few thousands pounds in unpaid room booking fees owed to us by Lehman Brothers is a small symbol of how this bad news will travel a great deal further than the city bankers having to return their Porches to the showroom.
There is no question now that the future will see a radical overhaul of regulation in the banking and financial services sector. The best name of any new legislation might be the Stable Door Act. The problem with regulation is that to a large degree its effectiveness relies on things that are much harder to create than new rules; culture, norms and ethics.
What drove the excesses of sub prime, 125% mortgages, and impossibly complex derivatives was not just lax rules but also a lack of realism, restraint and responsibility. Without these virtues new rules will simply be an invitation to find ever more complex, perverse and risky forms of circumvention.
I am far from an expert but it seems to me that certain key principles stand out if we really want to learn the lessons of the last fifteen years. We need to restore the link between accessing and making money and generating value.
Whether at the national level where countries like the US and UK were spending much more than they were producing, at the corporate level where company finances could be the outcome not of goods and services produced but of abstruse forms of gambling, or at the individual level where almost everyone seemed to be able to borrow at will, the link between producing value and getting hold of money became more and more attenuated.
It may be true – as Government ministers say – that the real economy is much healthier than the collapsing world of finance. But, the hunger for spending and borrowing among nations, companies, the super rich and millions of ordinary people long since became detached from the real economy.
We also need much greater transparency, which is a function both of openness and comprehensibility. Whether it is executive pay and bonus systems, the distribution of risks, the real performance of companies and investments, not only do we need to know the facts, we as citizens need to see the importance of holding people and systems to account.
This afternoon we are holding a seminar to discuss our Tomorrow’s Investor project. At the heart of this is the thesis that there is market failure in the pensions sector. Our work with small and indirect investors suggests they want a product that is low fee, high accountability and ethically robust. Very few of us are willing to be active in making our current investments fit this pattern but if the right product was available to us we would grab it.
A good (albeit hypothetical) measure of such a fund would be that if there were future possibilities to invest in products like sold on sub prime mortgages the fund managers would have to explain clearly to investors the risks involved.
As for investors we too have to take responsibility. I wouldn’t put a bet on a horserace if I didn’t understand the odds or the possible losses I might incur. In the future we need to be similarly circumspect about how we foundations of our future livelihood.
The confusing nature of public opinion
It may be a somewhat arbitrary measure, and we couldn’t have done it without the BBC, but yesterday’s RSA fringe meeting at LibDem conference was a mark of great progress. This time last year we held only one fringe meeting and attracted an audience of about 30. This year we are having a meeting at each conference and we started last night with an audience of over 150.
The event discussed the question ‘what do voters want’. An excellent presentation from Bobby Duffy of Mori underlined the confused and confusing nature of public opinion. The facts are surprising, and they got some rueful laughs from a good humoured and feisty audience.
So satisfaction with the NHS is at its highest recorded level, but 56 per cent believe it is in crisis. Or try this one – voters are very worried about climate change with 74 per cent saying we are heading for environmental disaster if we don’t change our ways. But then 59 per cent say they themselves are doing nothing about it. People think it’s up to government to solve our environmental challenges, but green policies won’t actually be the deciding factor when it comes to the ballot box. In fact it won’t even be close.
This goes to the heart of a key problem in modern politics. The voters, or more accurately the general unwillingness of politicians to have an honest conversation with voters. As citizens we have insight into the problems are that our society faces but we seem to want to have our cake and eat it. We don’t want government to meddle in our affairs, but we want it to protect us from all ills. We want American tax levels but Scandinavian welfare provision.
As we approach an election politicians will be increasingly tempted to pander to rather than confront the public’s contradictory desires, which is why these fringe meetings are timely as well as entertaining.
We are looking forward to the next debates – over the next two Sundays David Miliband and then Oliver Letwin will be giving us their take on what the voters want and what their parties can and should do.
A range of explanations for pessimism
I have just been reading a draft article about public attitudes soon to appear in a current affairs magazine. The article uses a battery of statistics to highlight the paradoxical nature of our attitudes. To put it in a nutshell:
- Generally, we are happy and optimistic about own lives and families
- Important objective aspects of our lives ranging from health to affluence (notwithstanding the current crisis) to life expectancy are improving
- Many ‘social fabric’ indicators including crime levels, teen pregnancy, divorce and even drink and drug consumption, are either static or going in the right direction, and are anyway not that much different from ‘happier’ countries like Denmark
Yet despite all this we – like the other big four Western European countries – are ever more pessimistic about the direction in which we think the country is going. There is a range of explanations for this phenomenon.
Inequality. Many social researchers and progressive commentators argue that the more equal a country is the happier it is. We may be better off than we were but we are also more unequal, hence more unhappy about society.
Migration and diversity. Robert Putnam and others have shown how people who live in diverse and fast changing communities are – regardless of their own background – less content.
Politics. Our pessimism about society is really just pessimism about this Government. Would a new Government restore the heady optimism of the summer of 1997?
Decline in values. From Melanie Phillips to Richard Reeves to David Cameron there are those who highlight a decline in morality and public spiritedness. Is this why we are so open to the Conservative’s Broken Society mantra?
Private hubris, public despair. This is the thesis I outlined a few months ago. The rise and rise of individualism coupled with the decline of collective institutions means we have an exaggerated account of our own efficacy (which appears to be a hard wired trait) and a diminished account of society’s scope for collective progress
The media. Bad news sells. Most of us get our information about the world out there from a media ever more desperate to get our attention by peddling rage and fear. This view is underlined by the gap between the positive story we offer about our own communities and public services and the negative view we have of communities and services at large.
Each of these accounts is worth exploring but none of them are wholly convincing. But social pessimism is a bad thing – it undermines trust and the myth of decline contributes to bad politics and policy making.
‘The only thing we have to fear is fear itself’ said Franklin D. Roosevelt in his inaugural address. The modern version is ‘we have nothing to be pessimistic about but pessimism itself’.
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