There is a theme to all the discussions of the tenth anniversary of Lehman that are now beginning. It is that we have not really learned anything from the crisis.
What's the evidence? I hope to reduce things to basics, but I would suggest just three issues make that clear.
The first is that there has been no real reform of banking and related financial services. The strongest evidence of that is the fact that the rating agencies, who played such a vital role in creating the crisis, continue as if unaffected by it, with the same models, and maybe the same people, doing the same job in the same way for the same people. Nothing has changed there.
The same could be said of accountancy, of course. It's taken ten years for there to now be a hint that they may pay some price for the massive role that they too played in creating the banking meltdown.
But the strongest evidence is in banking itself. The models have not really changed. It is true that they are undoubtedly better capitalised, but the incentives appear the same, the excessive lending appears similar, the ability to exploit risk that they can pass to others is identical, and the rewards for doing so remain enormous. I am not saying it would be impossible to spot the changes from 2008: they exist. For example, the ability to use almost entirely risk free money provided by the state is something that looks very different from 2008. But that said, it is the similarities, and the fact that around the globe bankers, and those who share their mentality, still think that they are the rulers of the universe is the really big issue, and nothing has been done to challenge it.
Which brings me to my second point. This is debt, and private debt in particular. There are places where public debt is an issue, particularly where it is not denominated in the currency in which the government raises its tax, but this is not the major concern in most of the markets at that had much to learn as a result of the crisis, which was not caused by public debt, but by private debt. And as is now widely reported, private debt is now back at 2008 levels. In the UK net saving actually disappeared in 2017. UK house prices may have stabilised, at present, but they are still at record levels. And car finances are heading to be the new sub-prime, both in the UK and the USA. Whilst household incomes have stagnated debt has accumulated as a result of the deliberate policy of the government, in the UK at least, which has been forecasting this trend ever since the financial crisis first eased. It is as if we have learnt nothing at all.
That point is at the core of my third point. In 2008 global capitalism nearly failed. It should have done. It was time expired: the model of Hayek and Friedman had ceased to be of value, as it still is. Very briefly those on the left thought that 'we are all Keynesians now'. But if we were, it turned out most were profoundly neo-Keynesian, with the belief in the power of central bankers, monetary policy, and the paranoia about fiscal intervention of any form. And that meant that bankers stayed in charge. There was, then, no alternative to the failed model that won popular support. Only tax justice made a lot of progress, to be honest. As for the green movement, there has been little progress of consequence. And in terms of coherent economic thinking on alternatives, apart from MMT, little at all.
This is worrying. Few now doubt that we will have another global downturn. It is not a matter of if; it is only a matter of when. But the real crisis is that we have no new weapons left to address it. Ten years on we are little better prepared for what is going to happen than last time. And if you're in doubt note this from Gillian Tett in the FT this morning, writing about this same issue, where she says:
For centuries, the craft of banking has revolved around the relatively simple business of collecting deposits from companies, governments or consumers, and then lending the money out.
When one of the FT's leading commentators does not even know what banking is, how it works, and what it does in the macroeconomy we need to be worried. In ten years it seems we have learned almost nothing at all.
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Frightening. Apart from small increases in UK forest area, tiny increases in disposable incomes, fractionally lower ratios of debt to national and personal incomes, less drinking and the internet, I cannot think of a single way in which this bit of the world has gotten better since the Lehman collapse.
Oops, tiny increases in life expectancy, and mobile phones which even the desperate now have. I missed out them.
One of the problem with banking viability has been the duration mismatch between assets an liabilities.. the assets (mortgages predominantly) and long dates and illiquid and the liabilities (to an extent where there is dependency) on money markets are ultra short dated and liquid. This asset liability mismatch is fundamentally still a problem although capital ratios are much improved. The insolvency led to the collspse of co-operatives and mutuals when the short term money markets dried up.
Tett seems to have learned from anthropology that testosterone and tribal behaviour has something to do with finance. This insight made her a minor celebrity for a while. How odd it is we have not all been for injections of testosterone and tribalism training to improve scientific theories and practice. Or have I got this wrong and the reason we have working theories is because we have learned something about blocking getting carried away with human foibles and accounting as reading poison oracles and seeing how the headless chicken falls?
To be honest I can’t find numeric evidence that capital positions haven’t improved, yet given the way banks were accounting for themselves as doing so well before the crash and that I don’t see anything other than re-jigs of the spreadsheets then in use by the same people, how am I supposed to do more than keep faith already demolished by the “accurate accounts” of 2007?
Tett’s comments serve her badly. That’s a shame really – as you say – not only for herself but the rest of us too.
Stupidity and dogma seem hard wired into British finance these days.
How can we short circuit it?
Is it not also true that the vast majority of human beings on the planet fail to understand why Capitalism’s Invisible Hand Economy (economists’ General Equilibrium Theory) is flawed like Communists’ Command Economy? In the case of the former there are a variety of reasons, risk uncertainty in investment, lack of equitable distribution of income, unfair currency manipulation and subsidisation in global trading, military domination facilitating reserve currency domination, the failure to understand Modern Macroeconomics for economy optimisation, etc.
The built-in human adaption of adopting other human being’s ways of doing things and thinking about things to save energy is a double-edged sword which few seem yet to acknowledge. Indeed the virulence that flows from individuals and group challenging conventional ways of doing and thinking about things reveals how many value stability and order over change and innovation/adaption.
Schofield
What you describe sounds like path dependency (PD) to me from my change management studies . The two things I know about PD are that (1) it is favoured by those in advantageous positions who have benefitted and will continue to benefit from things staying as they are and (2) PD ideologies can be changed usually by external forceful events (known as ‘punctuations’ I believe’) that challenge the established patterns and lead to change.
So, looking at 2008, the crash should have changed things according to PD theory because most of those private firms who caused it would have (and should have) gone to the wall. However, the punctuation effects was prevented by of all things Governments pumping QE in the financial system. You could call this ‘PE’ – Punctuation Easing.
When Governments interfered in the previous Great Depression I am not sure what financial assistance was given to the financial sector at the time but we did get law like the Glass-Steagall Act that aimed to prevent it happening again (which along with other checks and balances – and not to mention an unwillingness to deal with new financial products like derivatives – was repealed prior to the 2008 crash and contributed to it a heck of a lot).
So to me, Government bailouts are the green light for bankers to keep behaving badly. Hence the PD we have now in banking. That is why next time is should PQE to ‘main street’ and ……….well a big fat nothing to the City. Yep – that’s right. Leave them to fail – as some Republicans in the US unwittingly advocated for their financial sector.
However, I have to disagree strongly with you about the state of widespread knowledge about the financial system amongst the general public. Was it Henry Ford who said that if the public knew how banks really created their money there’d be a riot or a revolution? He is still right to this day. Ignorance rules – aided by continuous obfuscation.
Take derivative trading. People like Satyajit Das who even wrote a text book manual about derivatives say that many traders themselves in the business do not understand the products they are hawking – let alone the general populace.
And Richard mentions this issue again because just how can the banks be using other people’s money to make loans? Especially when it is well know that households in much of the Anglo-Saxon West are saving less and less money? Add up the loans and up the deposits in this country and lets see what you’d get? I think you would see a huge gap between the two. For example, loan books are being sold between banks who use the receipt to create a new loan book and then that too is sold ……….and on and on it seems to go.
In the documentary film ‘Inequality for All’, Robert Reich charts the wage decline in America alongside the growth in credit and the decline of one and the growth of the other seem to correlate . As Marxian economist Richard Wolff says – the modern corporate world would rather under pay workers and then offer them loans (for cars, houses, white goods)to make up the short fall so that the business earns more from the interest from the loan.
The mortgage industry runs on fiat money – created by the banks out of nothing with a smallish amount of collateral put down by the purchaser (something that is becoming harder to save for as wages continue to fall behind house prices and other costs necessitating riskier 100% loans).
Most people I know are totally ignorant of much of this and believe that their small savings pots are used by the banks along with everyone else. What is ‘Everyone else’ though is shrinking in numbers.
If you want to see a good explanation of how derivatives work, watch the film ‘The Big Short’ where they are explained in a casino in Vegas. The setting could not be more apt.
I offered a GCSE Economics teacher the loan of my copy of ‘Inside Job’ and she declined saying that there was no room in the curriculum for that sort of discussion. It would not contribute marks to the exam or course work. It was valueless within the context of the course.
The fundamental issue here concerning the creation of money is education. Because those people that Ford allegedly says would ‘rise up’ are being deprived intentionally of what they need to know.
Your penultimate paragraph summarises modern economics so well
Thanks for all the rest
The time factor since 2007-9 crash and now is very scary when you think both world wars would fit in. Academics are still writing about necessary curative measures as though we could ask the Luftwaffe to hang on for ten years until we were prepared for them. This is a recent example:
http://apps.olin.wustl.edu/faculty/thakor/Website%20Papers/PostCrisisRegulatoryReformInBanking.pdf
Anjan Thakor is typical of the field in not treating the crisis and its current continuation as essentially criminal in character. The call to recognise the crisis as one of insolvency rather than liquidity is fair enough, though ignores how accounts were lying about the solvency of many institutions, which were still trading in this knowledge (criminal or mega-incompetent). ‘Two world wars on’ the recommendations remain at Captain Hindsight level like ‘radar would have been a good idea’. Some kind of ‘safe bank culture’ can be created by increasing capital, limiting inter-bank competition and reducing the chance of bailouts – this won’t need monitoring as it will spread like wildfire! There is frankly as little understanding of the banking-network and abilities within it to subvert regulation as in Richard’s quote from Tett. I seem to remember her in better form at some point. Retired now, I don’t have to trawl though hundreds of papers that miss the point this is still about accounting fraud and dubious politics disguised as economics. When I see clawback of ill-gotten pay and bonuses – a practice once in force – as a way forward, I give up. The current standard is about 10 recommendations, 10 years too late that I might have got from undergraduate analysis of a case-study. In this patronising paper there is even the notion of educating banks’ consumers not to borrow unless they can afford it! No thought about ensuring employment, decent rates of pay, how we might do this, not need to borrow or have money left after paying lunatic rents forced on us by Uncle Ponzi’s circus. The fallback of doing anthropological research in darkest Peru is not an option for me, sadly.
Elon Musk has his faults: given the problems on Earth, I see no point in sending humans to Mars and, yes, perhaps some of his tweets were injudicious. But two of his enterprises at least — electric car design and the development of enormous batteries — are potentially planet changing enterprises. He is (some say unwisely) working extraordinarily hard — yet derivatives traders, who produce nothing worthwhile, prosper beyond dreams. (“Investors betting against Tesla made $1.09bn since Elon Musk’s tweet” https://www.theguardian.com/technology/2018/aug/21/tesla-elon-musk-short-sellers-made-1bn)
Didn’t derivatives trading contribute to the 2008 crash? I know little about finance but could derivatives be outlawed?
I think that derivatives should be outlawed – yes most definitely. It can be akin to betting rather than investing at its worst or it works like insurance but on someone else’s asset and YOU get a payout if something goes wrong (in the real world you can only insure what you own. In the parallel universe of finance such rules do not apply). The problem in the latter case is that it then means it is in your interest that something goes wrong.
So if you took out (say) insurance on my house in the form of a derivative, you might want to see my house burn down and even contribute with others to ensure that it did in order to get the payout. This is apparently what happened during the 2008 crash in some markets.
Satyajit Das explains all this very well in the documentary ‘Inside Job’. Dig it out and have a look. Banks knowingly sold bad assets to (say) pension funds and in doing so insured themselves against the assets going wrong and in effect made a profit from the pay out as well as causing problems for the insurer so that the insurer was technically made bankrupt!
To me, contemporary derivative trading is perverse and nothing short of criminal. Efforts were made in the US to regulate them but people like Alan Greenspan and Larry Summers fought hard to keep them away from any sort of regulatory regime.
Here is a balanced overview from a legal point of view you may find interesting:
https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=1824&=&context=facpub&=&sei-redir=1&referer=https%253A%252F%252Fwww.bing.com%252Fsearch%253Fq%253Damerican%252Beconomists%252Bderivatives%252Bregulation%2526qs%253Dn%2526form%253DQBRE%2526sp%253D-1%2526pq%253Damerican%252Beconomists%252Bderivatives%252Bregulation%2526sc%253D0-42%2526sk%253D%2526cvid%253D190E92F10EB64FFBB14A97108BE7EA3D#search=%22american%20economists%20derivatives%20regulation%22
£180 billion from the US Government to bail out AIG!
Richard, this is not totally relevant to your article but I wonder if you would give me your opinion on how much you rate Mark Blyth for economics?
I have real trouble taking in any detail on financial matters or economics, but have been watching quite a few of Mark Blyth’s presentations – particularly on why austerity is a bad idea, and how things work in Europe – on YouTube, hoping to get a clearer understanding. He relates economics and politics so I find the videos more engaging – and maybe because he still has a fairly strong Scottish accent, easier to understand?! Anyway, I have no way to judge if he is a good source or not, and hope you can give me some idea before I gormlessly take in everything in he says? (As I do rate your judgement!).
More recent presentations seem to be focusing on the reasons why bad economic policies abound, and have just watched this (for an example):
https://m.youtube.com/watch?v=lq3s-Ifx1Fo
Maybe it helps a bit with the ‘why?’?
Hmm. If you don’t rate him, sorry about the link, and feel free to remove it.
I certainly don’t agree with his opinion of Scotland mind you, near the end of the above video he gives his disparaging opinion and the broad sweeping view that scots are a bunch of scroungers – but then he left Scotland quite a few years ago and probably doesn’t realise he doesn’t have to hate himself or his country any more, as was the accepted norm back then (okay, there is still a core group that believe in self-loathing, but it’s changing!). Even in that, he makes some valid points after.
I think Mark Blyth’s book on austerity was good – and a useful focus at the time
Otherwise – and I don’t claim expertise on his work – I associate him with what might broadly be called the Simon Wren-Lewis school of thinking
Left, but not wiulling to move beyond neo-Keynesianism
I stand to be corrected if that is appropriate
Thank you very much for your insight Richard, I did not expect you to be an expert at all, and if I understand correctly your references to his ideology, that seems to be the impression I got – he seems to be very clever, but his presentations have a bit of a ‘playing to the audience’ feel so I didn’t know if I was just being taken in by the drama. He doesn’t ever suggest radical reform of the system, but seems to give a good overview of why policies, such as austerity, harm an economy, and in what ways – I just wanted to check he wasn’t a complete numpty 🙂 .
I watched another of his presentations last night, which had a far more political focus on it, and is more recent, though is mainly aimed at his American audience:
Mark Blyth – why we vote for those who work against our best interest
https://m.youtube.com/watch?v=BsqGITb0W4A
He doesn’t believe we do vote against our own best interest – and gives an interesting explanation for the rise of populist movements, why the anti-immigration sentiments, etc. In this presentation, he does, for once, give some possible solutions to help the American economy – I was shocked at the high spending on healthcare in the US, why on earth would anyone want a fully privatised healthcare system, and why is Westminster doing it to the English NHS? – People want change away from austerity (and bad management) and will vote for perceived straight-talkers to get away from it. Immigration is actually essential, in the west, to balance out the aging baby-boomers that are sucking the economy dry (my interpretation, my words!), but in some communities the micro-economic facts make immigration undesirable.
So, why no change to the systems since 2008? I think Mark Blyth gives some credible explanations from the economic perspective – the top 20% who own nearly all the assets/wealth do not want change because the system favours them, and they hold the wealth and the power. Democracy? Pah, only if you have enough money. If you aren’t given real choices, how can there be any real democracy? Mark, I believe, also predicts another crash if the financial systems aren’t changed.
My interest in looking at all this – I really do not have the right brain cells to get to grips with tax and finance and markets (quantum physics, no problem, tax – not a clue – weird isn’t it?) so just want to get a broad scope of how it all works together – is that say, hypothetically speaking, you wanted to set up a newly independent country that will have an economy and tax system that works – where do you start, which features need to be established first, how do they interact, which way would cause the least disruption etc? Now, no country is in isolation, so global macro-economics matter – but is that secondary to internal function, or in fact should it be held central to your planning? I know you would like to see complete reform of the tax system in the uk Richard, but can it be done in small steps and reach the same goal? Hypothetically speaking, would the first thing you would want to do in a newly independent country is set up the tax collecting system, even before negotiations were completed say? Then, hypothetically, to keep the economy rolling along, would you keep the (messy, complex) tax systems that were already in place, along with the same currency for a transition period, keep a similar banking system, (markets?, ugh) – and then, hypothetically, change each in a graded system so there was no major shocks to businesses and livelihoods? To my pea brain, that sounds a good way, but maybe a clean-slate transition would actually make it slicker? But then, to appeal to the 20% wealth-hoarders politically, would you, hypothetically, have to say ‘nothing will change!’, anyway?
Essentially, I want to understand enough to make a rough judgement on what might be the best process – sequences, timing, interactions – on a hypothetical situation where one country might decide to leave a union. Certainly I am not getting any clues for best practice from the Brexit fiasco, and that doesn’t even involve an integrated tax system. From Mark Blyth I can see that the Euro, a currency union, was one of the worst ideas in history – and that your own currency is essential to the success (or not) of your economy. I only learned of the existence of fiat currency and modern monetary theory last year, and how much the household budget analogies we are fed have zero meaning in the context of a country’s economy – so I reckon I am making good progress in understanding, and maybe one day I’ll have enough knowledge to have an opinion and actually have a debate on some of the issues you raise!
Anyway, sorry for rambling on, and thank you again for your input, it is always nice to see professionals with open minds and willing to engage with the population at large.
Thanks for this
You may want to read my white paper on Scottish taxation
[…] Cross-posted from Tax Research UK […]
Sadly very sadly Richard you are correct and well stated.
The evolution since the big bang with the growth of accountants power over government, MPs, when in reality they contribute so little – numbers put into which box, this are past figures and don’t tell us about the qualitative side of the economy such as trust, reliability, fair justice from court judges, trial by their peers by jury, independence of regulators with lifetime jobs immune to pressure,
Also sadly the FT journalist thinks of physical money like gold and silver and she describes that model without realising that in the new world 97% of money is an electronic ledger entry and not physical at all. Hence the power for banks to create money once you the borrower signs the loan agreement.
The bank no longer needs to have miners dig for gold or borrow the limited amount between each other.
I can only see a nasty crash coming or more like a further prolonging slow torture unless the politicians correct and root out the corrupting influence of the big four in skimming and persuading for their interests rather than the client. A change in the insolvency law that has gone european it seems to me,
There is Too much politics to undermine the current or incoming government and too little for the country’s benefit whether its red or blue.
MMT would make a big difference but the rigged long bond market with pension fund buyers still needs to be tackled.
The combination of Derivatives and Brexit look likely to detonate the next financial disaster. prospectmagazine.co.uk/economics-and-finance/financial-weapons-of-mass-destruction-brexit-and-the-looming-derivatives-threat
They have always scared me witless
And I think with good reason
I’m not so sure that it’s about lessons not having been learned and nothing having changed. Could it be that there’s been a grand zeitgeist shift in how banks see themselves and their roles over the past 10 years? I think what initially was woo woo has now been legitimised over the past 10 years
1) The 2005 “Citibank Plutonomy” files have been implemented… ie a paper describing the need for the banking industry to move away from supporting the general masses of folk by providing cheap loans and support to predominantly focusing all attention and support onto the Plutonomy (the uber-wealthy) at everyone else’s expense.
2) The Morgan Chase paper “The Euro area adjustment: about halfway there” (May 2013) .. as you yourself commented on a few years back, talking about the intent to shift the Eurozone away from social concerns to that of a more right wing authoritarian nature, is now being very obviously implemented – I would suggest that the Overton Window of discourse has substantially shifted to the right.
Through the managing styles of Six Sigma and Lean managing we have a business orthodoxy that is essentially bleeding the country dry through ideas of austerity. All focus is on reducing costs, reducing risks, asset stripping and getting as much as you can from nothing. Hostile environments exist within structures that should have been safety nets. While at the same time there’s a bizarre blanket of ‘positive thinking’ where any criticism is seen as failure, nihilism or nay saying.
And that’s all before making any connection to Brexit or Trump.
Thanks
As we’re almost a vassal state of the US, certainly in terms of the corporate hegemony, it’s worth understanding what’s really happening over there because if the puppet masters (Koch Bros, Steve Bannon, Robert Mercer, Stephen Miller et al) successfully enable Lynton Crosby to get Boris Johnson into Downing Street then it’s inevitable the country will increasingly be ‘managed’ according to the ‘principles’ that currently prevail in the US, where not only have no lessons been learned post 2008, but the financial mafia have an ever tighter grip on society in general.
Do I hear shrieks of conspiracy theory? Just listen to this recent talk given in Canada by Chris Hedges (29 August). He’s not the best speaker in the world but he is one of the few journalists who has the courage to spell out publicly what the reality of life in the US is at grass-roots level. His direct experience in East Europe and the Balkans gives him unique insight into how fascism creeps up on an unsuspecting public and how it can be thwarted.
At 1h 33m it’s long (including a worthwhile Q & A) but IMHO it’s time well spent when you’ve nothing better to do. The only negative is his response to a question on ‘economic sustainability’ because he clearly needs to speak urgently with Stephanie Kelton or Randall Wray!
There are many parallels with the UK, such as with the Blair and Clinton administrations. (Where is a credible and effective opposition when you so desperately need one?).
Anyhow, this is the link for anyone interested – https://www.youtube.com/watch?v=csI8JLJ15Ak.
I’ll see if I can find the time
But it’s in scarce supply…
With the mass takeover after big bang by the US banks of the city advice was bound to be squewed for privatisations.
Then it’s other advice.
Then when the US took over the investment asset management was when real power came and went out the door. Passive management and when there is a takeover a simple roll over vote.
Time and again i now see on big listed companies the system of somehow getting a ruthless corporate psychopath eg the dead Steve Marshall to be the chairman they then kick out the ceo, create and declare a crisis, cut employees that are expensive gradually trussing the UK company up like a turkey with a restructuring committee holding the boards powers eg Torex, Balfour Beatty escaped, that trashes the share price add on further statements and costly investments then lo and behold the US 3 headed dog, supported by black arts KK Rs, Carlyle’s of this world leverage up after taking over the cheap quality UK assets.
Deprive HMRC by offsetting debt interest from taxable profits and laugh as the UK corporate sector disappears from the newspapers and the country has rent extraction from overseas.
Pensioners get fired to reduce the contributions undermining stability and resilience.
What’s it for Competition? – hardly this is only an innovation in how to conduct a conspiracy to defraud the Shareholders (incl pension funds and insurance) UK citizens, policy makers, govt etc
Sage Software PLC is the latest with the latest preferred Chairman attacking from the inside a high quality company. The Investors Forum and ShareSoc should act now with the govt to kick out the Chairman and acolytes before it’s too late. Imagination Technologies is another.
British steel was close and almost took a whole extended supply and customer chain with it (the exchange rate has turned that round.)
The Minister for the old DTI needs temporary pre and post brexit powers to delay and intervene in any case or company or he will have nothing left to intervene in after the storm and turmoil.
Time for a radical sweep up of failed competition ideas IMO. Expect £500mil to be spent to keep the status quo.
PS i expect politically Corbyn is biding his time to avoid a poisoned chalice of an inheritance however to await their manifestos and hope to God that they game play and scenario analyse what will happen before doing it. Also have someone from the street give a view common sense is not common anoungst highly paid big four consultants!!:-)