HOW FAR have we got in rethinking the management of banking and financial services? Almost nowhere, was the verdict emerging from a recent workshop by the Centre for Research on Socio-Cultural Change (Cresc) in London. The session gathered a rich cross-section of politicians, bankers, academics and commentators who sharply challenged the official analysis of the crisis.
It may be, as The Guardian‘s Larry Elliott suggested, that we are still in the fourth, ‘panic’ stage of the crunch – following the bubble phase (’it’s different this time’), denial (’don’t worry, the fundamentals are sound’) and acceptance (’more serious than we thought, but well placed to recover’) yet underneath all the frenetic activity, the remarkable thing is not how much underlying assumptions have changed, but how little.
For make no mistake: the tectonic plates are shifting. On the one hand, as Professor Mick Moran of Manchester University made clear, the crisis has fatally holed the grand project of the past three decades to shrink democratic control of the economy and deposit it in the hands of the technocracy. The edifice built on an independent central bank, independent regulatory agencies and a business-friendly regime for the markets is tottering. With the technocrats in retreat, economic problems are pushing back into the political and democratic domain: ‘politics is flooding back’.
Yet it is unreflected in either institutional or technical reactions to the crisis. Institutions charged with managing the response, such as government investment managers UK Financial Investments and the Shareholder Executive, remain independent agencies run by the usual Treasury/City suspects. The banks may be effectively nationalised, but governance is still at arm’s length and has no other aim but orderly exit. Shareholder value is still the discourse.
In other words, business as usual. But as other presentations demonstrated, it was business as usual that got us into this mess in the first place. An investment banker acknowledged that three of the miscalculations that caused the meltdown – neglect of liquidity, staggering concentration of risk, and failure to allow for the business cycle – were management errors of the most glaring kind that he was at a loss to account for.
For a second academic speaker, Ismail Erturk, however, the explanation was plain: ‘The problem is shareholder value.’ He argued that this concept, much favoured by the business-friendly financial regulators of the grand project, had driven an ‘unsavoury revolution’ in the banks that damaged the interests of borrowers and depositors and showed itself to be ultimately incompatible with banking’s basic utility function.
In retail, the banks turned themselves into mass marketers selling fee-earning financial products that could promptly be removed from the books by securitisation, while the investment banks switched their focus from corporate services to proprietary trading on their own account. Both sidestepped none-too-onerous regulation to build up formidable levels of leverage. Each of these models has now unravelled.
Erturk’s conclusion is stark and far-reaching. As long as shareholder value prevails, some kind of defensive separation of trading from basic banking functions is essential. More positively, the Cresc researchers propose a remutualisation of retail banking: a gradual euthanasia of shareholders, and a substitution of bonds for equities, giving investors ‘predictability and security of returns on a class of paper whose quality could be second only to government bonds’.
Other workshop participants were quick to extend the diagnosis from the banks to publicly quoted companies in general. If – as it is now becoming permissible to suggest – shareholder value is indeed the problem, then, as Einstein said, ‘the significant problems that we face cannot be solved at the level of thinking we were at when we created them’. A wholesale recasting of today’s unfit-for-purpose corporate governance becomes another urgently necessary response. In short, we are a very long way from business as usual.
Of course some people argue that the situation is now so bad that preventing a future crisis takes a distant, second place to getting things moving again. One inhabitant of the real economy feared that the squeeze would suck so much life out of companies like his that we wouldn’t even care about the possibility of another bubble.
Assuming it doesn’t go that far, the dilemma is poignant. The softer the landing, the more the government will be tempted to shore up the crumbling orthodoxy, making another crisis certain. The worse the depression, the better the chances that Whitehall can be pressurised into a fundamental rethink. Neither prospect is a cheerful one. But as the Obama team keeps repeating: ‘Never waste a good crisis.’
The Observer, 15 Mar 2009