WHO’S TO BLAME?
Recent events have given everyone plenty of food for thought. We now see that so many, so-called experts in the world of global business have turned out to be amateurs and innocents, playing with fire and unaware of the potential consequences. As a result a lot of even more innocent people have been badly burned.
It is easy enough to attribute the debacle, like the Prophet Job, to such basic human attributes as greed and hubris. But the surprising thing is the insouciance and inconsequentiality of so many people who contributed to it. Cutting up risk and selling it on may be a clever idea, but nobody seems to have thought of the global implications.
In an issue of the Hansar Executive News six years ago, we said that “many of the excesses reported in the US can be attributed to a set of unique circumstances that have developed in an incremental way and have recently burst into full bloom. These include: too much emphasis by Wall Street and institutional investors on the need for CEOs to ‘deliver the goods’ every quarter; too much latitude for corporate leaders; too cosy a relationship between the CEO suite and the auditors; too little control by the shareholder; and too slack corporate governance.”
To bring this statement up-to-date, we should now add to this list the political classes, regulatory agencies, regional authorities, municipalities, and national governments. In the words of a leader in The Economist newspaper: “today’s bust – and the bubble that preceded it – had several causes besides dodgy lending, including a tide of cheap money from emerging economies, outdated regulation, government distortions and poor supervision.”
So there is an awful lot of egg on an awful lot of faces. According to ‘The Gambler’s Fallacy’, chance is a self-correcting process, but a lifetime might not be long enough to honour the god of statistics. Maybe all these people believed in chance, but chance is seldom a friend, whereas informed reason is. And it looks as if the real enemy was negligence and a simple lack of foresight…
Almost everyone in the Western world contributed to the crisis. The seeds came from the basic theory that man is acquisitive. This is not new and was expounded by Plato and Marx, but was probably never so evident as it was in the past 20 years.
It was the self interest of those with access to capital, and even those with the opportunity to earn bonuses by lending other people’s capital that fuelled an unsustainable boom.
How banks allowed personal credit to grow so high among borrowers that could never repay can be traced to the manager’s self interest in his own short term gain. The same applies when the borrower is on a bigger scale, maybe for a large property acquisition. In these cases the potential earnings for the lending individual were enormous, and so on up the chain of command.
Who had the authority to call a halt to the escalation of lending and borrowing? Anyone who had a vested interest in keeping the ball rolling was never going to speak up.
Economists who suggested it was unsustainable, and there were some, were derised.
Yet, it is not clear how it can be prevented from re-occurring. Can countries introduce legislation that will make them uncompetitive versus other countries. UK talks about new supervision and controls for its financial services, to which the response is a threat of relocation to a less restricted base.
It is similar to the debate on climate change. No country wants to disadvantage itself to save the planet.
Will individuals become more responsable, and live within their means? Not if Karl Marx was right.Man will always be acquisitive, and will take risks. Therefore, there is much for the legislators to do.
Thanks Des. Well put! There are another few factors worth taking into account. In an unorganized state one would expect the human being to be utterly selfish (as in the Selfish Gene by Richard Dawkins) and predatory. What happens when we then enter into a social contract (Rousseau, Hobbs, Burke etc)? We modify our behaviour to become less selfish and aggressive in return for safety and security.
Enter the Politician and the Regulator as the guarantors of that social contract. The politicians nowadays are seldom elected for their moral fiber. Their selfishness is to maximize the number of votes they can get. So, as you say, ‘they will not want to rock the boat’. Is the Regulator going to be better and stronger? Hardly! In fact, the recent events in the UK show the opposite.
A third factor of interest might be if there is a combination of elements that inevitably leads to a breakdown of a social process once one has passed a certain threshold. There might currently be a few studies applying Catastrophe theory to what we are living at this moment. I shall search for those results. ANDERS
Excellent thought provoking debut post Anders. It seemed during last year that many salutary lessons had been learned by public and politicians alike. But as the recovery gets gently underway, there is already a strong indication that any up – swing will be accompanied by a return to the practises which got us here in the first place!
Look forward to future posts.
Dorothy
That’s very cheerful and uplifting,Dorothy. Can’t say that I disagree, though. It is a bit of a Sisyfos task but I will go on relfecting on the predicament.
Thanks
ANDERS