Tag Archives: Matthew Green

Lib Dems and the Quality of Life

One of the more entertaining episodes of the last Lib Dem conference was the debate on the party’s new Quality of Life policy paper.  This paper had wended a long but largely uncontroversial path through the policy formation process, including extensive consultation, before reaching the conference – and I was a member of the working group – interest declared.  And generally policy that has followed this path gets more or less nodded through.  Not this time.  The motion and paper got the backs up of many representatives, and there were a number of well-delivered and entertaining speeches against.  For a flavour of this ire see Alex Wilcock’s blog – scroll down past the Dr Who stuff to 20 September.  If you click through to the comments page, you will find Alex describing yours truly as “not so much a thinking liberal as a sneering one”!  The paper was passed, but the margin was quite narrow by the usual standards of these things.

And that’s a bit of a problem.  This is policy that stands behind other policy – important not so much for its direct recommendations as its influence on subsequent policy.  I hesitate to call it philosophical – since it does not attempt to develop the core values of the party, but rather to apply them in a new way.  But if it is considered contentious, it may get ignored.  And for all that it is official policy, this would be quite easy.

What’s the fuss about?  The starting point of the paper is that public policy is too dependent on “hard” economic statistics, such as income and economic growth, to measure success.  But these are only intermediate measures – in other words we like them because they lead to good things, rather than being good of themselves.  That is because of the difficulty of measuring success in itself – the hitherto rather woolly concepts of wellbeing and quality of life.  But social science has been advancing rapidly and it is now possible to measure wellbeing in a rigorous way – mainly through asking people to make subjective judgements on their state of mind.

What the paper recommends is to make wellbeing an explicit policy goal, alongside the traditional economic measures.  To ensure this is done rigorously, it recommended that a National Institute of Wellbeing is established to promote standards. Various other devices (a cabinet champion, for example) were recommended to get it embedded into the business of government.

So far, so good, perhaps – but for liberals some loud alarm bells should be ringing by now.  This could be a charter for highly paternalistic government.  And especially when you come up against the evidence that many people seem to have a poor understanding of what is good for their wellbeing.  So the beating heart of this policy paper is the insight that individual autonomy (“agency” in wonks’ jargon) is central to wellbeing.  The idea is to help people help themselves, and not bullying and cajoling them into making better choices.

Education is central.  And, to make a small digression, this takes you in a very interesting direction.  A lot more is understood about life skills – emotional intelligence, resilience, and such – and the wellbeing insight gives these a much higher priority at all levels of education.

Fortunately there is a wealth of evidence to support the liberal view.  There one further thing – the measurement mechanism of choice for social sciencists, self-reported wellbeing, is a thoroughly liberal idea.  Wellbeing is what the population says it is, and not an arbitrary idea imposed by policymakers.  It’s like voting.

What were people objecting to?  One faction distrusted anything with so little in the way of concrete recommendations – especially when those few recommendations sounded like more bureaucracy and a new quango.  At best they interpreted it as harmless, and so a cost-free policy to rebel against; at worst they thought it was opening the party up to being criticised for being irrelevant in times of widespread economic hardship.  Others, Alex was amongst these though he was not called to speak, understood how dangerous the the quality of life idea could be in the wrong hands, and felt that it was too toxic to touch.  Or, possibly, that the detail of the policy paper did not live up to its liberal intent. At any rate that is my reading of what they were saying.

All this put the promoters of the motion in a bit of a difficulty – it is really quite difficult to push abstract ideas in this kind of debate.  In a short speech you don’t really have much opportunity to say more than “I think this is a good idea” rather than why you think it is good – at least not in a way that will connect to more than a minority of the audience.

Does it matter?  The problem is that the wellbeing agenda is slowly but surely infiltrating itself into the public policy process already.  The word (or “well-being”, the spell-check compliant variant which I don’t like) and quality of life come up with increasing frequency in all kinds of public policy contexts, and especially in health.  The concepts, if not the measurements, lay behind so much of the last government’s meddling in people’s lives.  And David Cameron is an enthusiast too, though with an entirely different agenda -but no doubt paternalist in  a different way.  Liberals need to get into this debate and push back hard against paternalism – but using the language of wellbeing, and not just pronouncing the plague on all its works.

And there is something else, even more important in my view, which the paper doesn’t really touch.  And this is the usefulness of the idea in promoting a more environmentally sustainable economy.  It is important to break through the tyranny of current economic measurements to show that a more sustainable way of life does not equate to poverty – and indeed that it can be better for everybody.  This is why the New Economics Foundation is so interested in wellbeing.  I particularly like their paper on Measuring our Progress.

So we need to keep pushing.  As one of the motion’s supporters said to me afterwards “Who remembers how close Nick Clegg’s margin of victory was for the party leadership?”.  Still, we that understand and support the policy have a selling job on our hands.



British banks shoot themselves in the foot.

Oh dear!  The Vickers review on banking reform hasn’t been published yet, and the news is full of people taking positions and what it might or might not recommend.  I have a lot of sympathy with our Prime Minister, who wants the blessed thing to be published before we have a row about it.  What to make of it?

The reporting is a bit confusing.  The Independent has hyped the thing up to be a war between the Vince Cable and George Osborne, not so much about the proposed reforms, but how quickly they will be implemented.  Meanwhile somebody has briefed the FT that Cable has pretty much given way on timing so there is no real row at all.

The proximate cause of this flurry is a lobbying campaign by the banks.  This campaign will do nothing to redress their general aura of incompetence.  They are basically saying the reforms should be kicked into the long grass because they will interfere with their lending to British businesses, which is critical if business investment is going pull us out of the economic doldrums, as most people hope.  There is some merit in this, because some of the reforms (on capital requirements and liquidity) could have just that effect.  But the ineptitude of their stance is staggering.

Politics is built on simple messages, and the banks are offering the Liberal Democrats a very tempting proposition.  This is a wonderful opportunity for them to show what they are doing in government by showing that they are resisting pressure from the banks.  As the banks themselves continue to insist on paying large bonuses for reckless trading activities, this is a popular stand.  Ed Miliband and Labour have not been slow to take up the anti-banker sentiment.  The Tories, meanwhile, don’t seem to know what’s hit them, and none of their side are sticking their necks out on the banks’ behalf.  Meanwhile John Cridland, the CBI director general, has weighed in on the banks’ behalf calling a rapid implementation of the reforms “barking mad”.  It is difficult to understand what he thought he was doing; the CBI’s credibility has been badly damaged as a result.

There may not even have been much of a row in the coalition in the first place.  There is consensus on the general thrust of the reforms; no doubt Vince Cable was quite flexible on the timings of some aspects, provided others proceed fairly quickly.  Now it is important to him and the Lib Dem part of the coalition that they are seen to get results.  A public row makes things worse for the banks.  If ever there was a time for quiet lobbying based on dry details, this was it.  Using the megaphone is totally counterproductive.

Not that I have much sympathy with the banks.  They are making too much money, and any sensible reform would reduce their profits, both by taking away the implicit government subsidy and by increasing competition.  It’s bound to hurt.  If the banks want to take some of their activities, and even their HQs, elsewhere, then so be it.  I’m not actually sure where they would go though.  Switzerland has dramatically increased its capital requirements for banks, and the stratospheric Swiss franc doesn’t make operating there cheap.  If they don’t have the implicit backing of a big government then their business model breaks down anyway – ruling out places like Ireland and Bermuda.  Going into the Eurozone when its own banking system is under incredible stress hardly looks a good idea either.  In America they have a habit of sending bankers to prison.

The central reform is to separate banks’ trading activities from their “ordinary” ones of taking deposits and lending to the public and non-financial businesses.  This was quite contentious in the commentariat when it was first mooted a year or so ago.  But there seems to be a much greater consensus behind it now.  Who would have guessed it?  A lot of people assumed the bankers would get away with it while politicians tried to make up their minds, and the disaster of 2007/08 faded into the memory.  Not so.  The banks’ inept PR machinery can take some of the credit.



Accounting for Libya

So now we are in a sort of endgame in the Libyan war.  It is not over, but Gaddafi’s government has been decisively beaten.  This outcome arises despite a constant stream of scepticism amongst experts and commentators, right from the start, and from a broad political spectrum.  I was not one of these sceptics, and I must admit to being annoyed by the patronising tone of much of it, assuming that politicians and supporters were muddled naifs who had failed to learn from history.  While these sceptics rapidly move on to point out the considerable difficulties that will arise in rebuilding the country, I feel that some accounting is called for.

As I said at the time, Libya’s situation was unique.  It’s geography is such as to make air power particularly effective.  Gaddafi’s rampant egotism had made him diplomatically isolated, tolerated by his allies and not liked.  In spite of claims by many that there was no clear strategy for the intervention, the strategy was clear all along.  Use air power to protect the existing rebel strongholds and then strangle the Gaddafi regime.  After this it would basically collapse from within.  This was mainly about momentum and morale.  Apart from a core of die-hard loyalists, who had much to lose from regime change, the regime’s power depended on two sources of support: loyal tribes and mercenary soldiers.  These would only be effective as long they thought the regime was going to win.

And so it has transpired.  The fall of Tripoli was remarkable.  Yes the core loyalists fought hard, and they are still there – but there were not enough of them, and they seemed to lack organisation.  The mercenaries had melted away into thin air.  The sympathetic tribes just looked on.  The turning point seems to have been the cutting off of the capital from succour coming in via the Tunisian and Algerian borders.

None of this is hindsight – seem my post last March.  What annoys me about the many critics is their inability to look beyond the generalities to the specific facts of the case.  To them, it was this way in Iraq, so it will be this way in Libya.  I am afraid that this kind of unthinking generalisation is a general disease right across modern society, and especially amongst people counted as experts.  From medicine to economic policy.  People don’t bother to analyse the particulars of the case, simply spouting forth the general rules with confidence.

It is too much to hope this will change.  But we fight on.


Seeing with the eye of faith

A little while ago I blogged on the subject of Islam and the modern world, following the BBC series on Mohammed.  This included some rather dismissive comments about Christianity, which I contrasted with Islam in some rather unfavourable ways, at least with regard to consistency.  Unsurprisingly this annoyed a (Catholic) Christian reader, and we subsequently engaged in a prolonged Twitter conversation, mainly about the crusades.  Twitter isn’t a good medium to explain ideas, and I feel strangely compelled to explain myself properly, even though I am not going to persuade anybody to change their views.  My point is this: I hold my views on Christianity not through ignorance but through a lack of faith.  This has led me to rather a long post, taking me through my own Christian journey.

Faith is an important part of any religion – and any relationship in fact.  To be a Christian you have to subscribe to a whole series of beliefs which you take on trust.  It’s your membership subscription, or, more aptly, the club rules.  You believe these things because you are a Christian; you not a Christian because you believe in them.  Or mostly, anyway.  People will be drawn to the faith because they come to believe, through reflection or experience, in some critical parts of Christian gospel; they then take the rest on trust.  For me I was drawn to the faith in the first place because I believed in my church community and wanted to be part of it; subsequently I was overwhelmed by the truth and beauty of the message of love, forgiveness and redemption that came through in the Gospels and the early Epistles of St Paul.  I lapsed mainly because the burden of faith became too much to bear – the accumulated superstructure of doctrine.  In my heart of hearts I could not believe that God is a person who intervenes in the world beyond the workings of immutable natural laws; neither can I believe in any meaningful afterlife, certainly in the sense of heaven, hell, judgement and so forth.  But I am a secular agnostic, not an atheist.  I am sometimes moved to take Communion in a C of E church service, on the rare occasions that I attend.  It is not inconceivable that I will come back to the faith one day, provided I’m not pushed too hard on the infrastructure of beliefs.

I was brought up as a Church of England Christian.  Both my parents had a strong faith, and took a philosophical interest in it and we talked about Christianity a lot as a family.  My mother’s father was a canon and professor of divinity (at Oxford), though he died long before I came into the world.  Our house was full of religious books, and my mother, who had a degree in Philosophy, studied theology and comparative religion as a mature student.  Our church was rather High, in the jargon of the C of E, meaning that it liked a lot of traditional, catholic rituals.  The biggest controversy at the time (it was the 1970s) was whether women could be ordained to the priesthood – my parents strongly beleived they could, but some of our clergy did not.  At university (Cambridge) I fell in with a much more “Low” group in the Christian Union, associating with Methodists and Baptists.   Here the issues were mainly about how to interpret the Bible, with a strong fundamentalist faction.  I had something of an intense religious experience while meditating in a retreat, as the message of love seemed to explode out of the New Testament in a burst of light.  That experience remains with me still, but I started to lapse pretty much as soon as I began to live on my own in London.

Two experiences in particular stand out in as I passed over the invisible line between faith and agnosticism.  I attended one my local churches (St Mary’s Islington), and the preacher considered at length whether dancing was to be allowed under scriptural rules.  Although he came to the right answer so far as I was concerned (yes), I was appalled by the idea that talking about these sorts of rules was an important part of church life.  In a second instance I visited a packed evangelical service in Nottingham with a couple of university friends.  The preacher there was developing the theme that the Apocalypse was near.  One his arguments: “The price of gold has trebled in just a year [or some such statistic]: that means that the value of money has fallen by two thirds!” – to a chorus of approval.  This dates the story to about 1980, the last time the price of gold shot through the roof.  To me then, as now, this is utter drivel.  Ever since I have had a visceral hatred of the use of gold as a substitute for money.  But more the point I thought to myself: “Why do I have to put up with all this nonsense?”

And so my views of on Christianity became very detached, as I was liberated from the eye of faith.  I have come to see it as a very interesting human phenomenon, and not a process of divine intervention.  It is an outgrowth from the Jewish faith, promulgated by a few years of radical and inspring preaching by Jesus Christ.  Something strange happened on Jesus’s death; his followers became inspired to accept Jesus himself as divine, and to spread the religion further.  There were several strands to this outgrowth, but the most important to us in the west was that of St Paul, who took the message to the Gentiles.  The faith was the right idea at the right time and its popularity exploded.  It survived persecution, with its adherents apparently welcoming martyrdom.

But then it was adopted as a state religion by the Roman empire.  This was a major challenge.  Christianity was at heart a revolutionary creed, with some burning beliefs but with a certain lack of coherence.  Some of its beliefs, especially a very strong strand of pacificism, were inimical to running a state.  Gradually it had to be knocked into shape, and a series of doctrines were established to create an orthodoxy compatible with a state religion, starting with that of the Trinity.  In due course the great thinkers of St Augustine of Hippo and St Thomas Aquinas added to this process to create a coherent framework of doctrine.  This has subsequently been added to and taken away from both by the orthodox branches and various breakaways – the latter often trying to recapture the early Christian magic from the dead hand of the orthodox (that is Catholic and Orthodox) institutions.

These doctrinal systems may or may not be quite tidy, but they really do need the eye of faith to make them work, and the more so as time passes.  They are simply part of a process of divine revelation.  But without faith they just look awkward.  This awkwardness has two roots.  The first are the compromises required to get the cat back into the bag.  Monotheism is one of the most conspicuous casualties here.  The divinity of Christ was an early theological problem, and the Holy Spirit crept in too.  To this pantheon has been added the Blessed Virgin Mary and countless saints, to whom many Christians pray.  Of course Christian theologians offer a reconciliation of this pantheon to monotheism, but these sound very similar to any other defence of polytheism.  The contrast with Judaism and especially Islam is quite striking – though some Islamic sects (notably Shias) have blurred the difference by consecrating saints.

A further difficulty is that the doctrinal view is increasingly at odds with modern beliefs about the universe.  On my kitchen wall hangs a facsimile of the Mappa Mundi, the early medieval map in Hereford Cathedral.  The world is a flat disc, with Britain at the edge and Jerusalem at the centre.  Such a world view was quite compatible with the idea of God being a person, a bit like us, inhabiting a nearby world, and intervening in our affairs.  We can begin, perhaps, to understand the idea of Atonement, that “God so loved the World that he gave his only Son to be a living sacrifice”, which comes through from the very earliest Christian writings.  But now we understand the universe as being vast, which leaves this idea with a problem: either God is much bigger and more powerful than we thought in which case the idea of the son of god, and sacrifice, and indeed the whole concept of God as a person is impossible to get a handle on.  Or else God is much smaller than that, like The Authority in Philip Pullman’s His Dark Materials, in which case it becomes impossible to offer him the respect the religion demands.

And the Crusades?  I am rather shocked that any modern Christians seek to defend them.  The intent, apparently was to protect and liberate Christians in Jerusalem (and elsewhere, for that matter).  This might be argued as an extension of self-defence.  But they have become associated with the slaughter of infidels, and many other crimes (such as the sack of perfectly Christian Constantinople).  These may or may not have been part of the intent, but it is quite futile to separate the “justifiable” bits from the crimes.  Christians do not do that sort of thing now – and Christian communities remain under attack in many parts of the world.  Violence begets violence; early Christians turned the other cheek.  It has allowed Muslims to convince themselves Christianity is something that it is not.  If you’re in a hole, stop digging.  Best to put it all down to a horrible mistake, based on values that we have long left behind.

Compared to Islam, Christianity is a chaotic muddle of a religion.  But in that muddle there remains a burning light, which the muddle, paradoxically, seems to magnify rather than diminish – that light burns more brightly for me than any equivalent understanding in the faith of Islam.



What is going on in Libya?

The chaotic goings on in Libya expose the weaknesses in modern journalism.  I am particularly disappointed in the BBC, whose radio news is one of my main sources.  The modern journalists job, it seems, is to relay the latest dramatic report, and pass on the odd rumour.  Analysis isn’t their job.  And the biggest crime of all is to report news that is out of date, no matter that it may be more accurate than earlier reports.  24 hour news coverage simply tries to substitute quantity for quality.  I can only stand it for short periods.  The BBC was particularly weak in reporting what happened at the western oil town of Brega yesterday.  This morning I found the best coverage in the Independent, though I have to say I didn’t do a thorough search.  There was a reasonable overview in the FT as well (behind the paywall…).  This matters because what is actually happening informs public policy decisions back here.

The situation appears to be quite chaotic.  The Gaddafi forces clearly have strong grip on Tripoli.  They have some reasonably well organised forces, with access to some heavier weapons, including some air power.  They have control on some other towns too, including Sirte, Muammar Gaddafi’s home town, which is on the coast roughly halfway between Tripoli and the second city, and main rebel stronghold, of Benghazi.  But we shouldn’t exaggerate their strength.  Air attacks seem to be occasional sorties by single aircraft.  In their attack on Brega they needed to use civilian cars.  Mostly they seem unable to dislodge determined resistance from even lightly-armed irregulars.  That is just as well, because the rebel forces lack organization and weapons.  The regular army seems to have dissolved, and probably wasn’t up to much in the first place.

The Gaddafi forces seem to be consolidating.  The main priority for them, apart from continuing to hold Tripoli, is to retake the towns to the west of Tripoli up to the Tunisian border.  This seems to be slow going.  The attack on Brega was interesting because it is in the west of the country, not all that far from Benghazi.  The rebels managed to get in reinforcements, and this seems to have held them.  They may make another attempt today.  Apparently they want to control the airfield, no doubt so that they can get reinforcements and supplies from Tripoli.

What this seems to boil down to is stalemate.  Gaddafi is militarily too strong to dislodge what he holds, but too weak to extend his control very far.  Never mind taking new ground, he probably hasn’t go enough loyal forces to hold much more than he already does.  Meanwhile the economy has collapsed and Gaddafi is politically isolated.  No doubt he has lots of weapons, fuel and ammunition in Tripoli – and cash to pay the mercenaries – but it is difficult to see how he can get reinforcements or replenishments. This means that things could get very ugly in Tripoli, as Gaddafi forces throw their weight around, commandeer food for themselves, and so on.  They will only be defeated when their morale collapses.

So what are we to do?  Military intervention would be very messy.  NATO forces have the competence, but would be very messy politically – getting them out would be difficult as they would be left with the baby in hand.   Arab or African forces would be less politically difficult, but I question their ability to avoid many civilian casualties.  A no-fly zone looks a non-starter; it would take a lot of resources to implement, while not making all that much practical difference.  Isolating Gaddafi will help, but what is needed is some way to break the spirit of his forces.  I don’t know if there is a way to offer his mercenaries or other loyal forces an easy exit – but this could reduce their will to fight.

But in the end, we in the west need to accept that we do not rule the world, and nor should we.  Events will have to take their own course; we can only limit the human suffering at the margins.

Update: 4 March 2011

As usual, some very good coverage in the Economist this week, as consensus settles on the situation being a military stalemate.  The Economist points out that the real significance of the Gaddafi airpower is the ability it gives them to transfer their forces from place to place, and to attack groups of fighters crossing the desert between the main towns.  I think they are exaggerating Gaddafi’s airpower somewhat.  Air forces (and especially combat aircraft) are notoriously difficult to keep in airworthy condition.  The regime may not have the capability to fly more than a few of their aircraft at a time, without external help.  His diplomatic isolation is critical here.


Get ready for a big fight over bank reform

The recent shenanigans over the government deal with the banks (project Merlin) now make more sense, following Anthony Hilton’s revelation in the Evening Standard (reported here in Lib Dem Voice).  The deal was weak on the banks because the banks did not get what they really wanted – which was to emasculate the Independent Commission on Banking Reform.  George Osborne was quite happy to oblige, it is reported, but the members of the Commission threatened to resign en masse.  This means that if the Commission does propose anything radical, an important part of the government will be against it.  This will (or should) provoke a major national debate.  Time to start marshalling the arguments, and to be all them more ready for the flood of obfuscation and irrelevant arguments that is bound to surround such a debate.  Let me offer some thoughts.

Even in a quick and selective overview, I have shot over 1,500 words.  I offer this below, but for those without the patience to read through this, my conclusions are these:  it is necessary to restrict the activities of wholesale banking so that the returns it makes are substantially lower in ordinary years, and the losses they make in bad years are also much lower; it is also important to make the banks less interconnected.  International reforms on bank capital are already doing some good, but we should not be afraid to do more since we are particularly exposed to a future crisis here in Britain. When it comes to the important business of improving finance to support small and medium sized businesses and innovation, we will need new institutions – the big banks will be of little use; the state must promote this type of financial innovation.

One thing is for certain: the established banks will not like any effective reform.  If Mr Osborne is taking their side, we can expect a battle royal.  It will take both determination and guile to face them down.  I will be reflecting on the latter in future posts.

What’s the problem?  First, there are two clear and legitimate issues for state policy.  We want to avoid the risk of another expensive state bailout of the banking system like that which was forced on us in 2008-2009.  Second we want the banks to lend more, at better rates, to small and medium sized businesses with decent prospects, in order to promote job-creation and the improved efficiency of our economy.  A third issue is politically toxic, and drawing most of the attention – that a lot of bankers seem to be grossly overpaid, with bonuses drawing particular anger.  It is less clear whether this is a legitimate issue for government interference, but we need to understand the issues here nevertheless.

Time to clear the decks a bit so that we can concentrate on what’s really important.  Here are some red herrings, to switch metaphors:

  • Bank bonuses are often blamed for promoting the crisis, on the basis that they distort incentives and incite reckless behaviour.  But why aren’t shareholders, whose stakes are at risk, managing this?  In fact the shareholders were as much a part of the problem in the banking crisis as bonus-crazed staff.  It is the incentives for shareholders that need real attention; sort this out, and the shareholders will sort the staff out.
  • Bankers’ pay is not comparable to that of film stars, sports stars or other entertainers who attract massive rewards.  Entertainment stars are a retail phenomenon which, with modern communications, works on a winner-takes-all basis in a mass market.  This is different on two counts from banking: the mega-profits are on the wholesale side of the industry; and it isn’t winner takes all either – a huge number of individuals and firms are able to attract oversized pay, not a lucky few in sea of wannabes.
  • In fact the issue isn’t really banker’s pay, but why the banks can afford to pay them so much.  Investment banking is hugely profitable in the good years.  This high level of profitability is a sign of wasteful economics, not a reward for value added to society.  A properly functioning industry is not particularly profitable because competition reduces profits.  A company at the frontier of technical innovation can deliver big profits and still be economically worthwhile – but this is not what is going on here.  There has been a lot of innovation in the banking industry, but not much of it has been to the overall benefit of society.
  • For the British, a defining moment of the crisis was the fate of Northern Rock, which had to be bailed out.  The reason why a bailout was forced on the state was that retail deposit insurance arrangements were inadequate, which caused a run, and put too many individuals’ savings at risk.  This problem has largely been fixed, and what happened to Northern Rock is pretty much irrelevant to the ongoing debate – it is simply a source of obfuscating arguments.
  • It is the banks that are the real problem, and not other players like hedge funds and private equity.  These institutions may be responsible for some egregious behaviour, but they also address a big weakness in our system of finance: an excessive aversion to risk in most investment institutions. They are not systemically dangerous. To the extent that they are dangerous, it is because of the ease with which they can get finance from the investment banks and over-leverage…which brings the problem back to the banks.
  • Finally dodgy lending by banks was at the bottom f the crisis, but it is not the main problem that needs to be fixed.  The question is why did so many lenders felt able to suspend the laws of proper management and common sense, and how were they allowed to carry on doing so for so long?  The answer is because it was too easy for them to pass buck to somebody else, in the form of securities put together by the investment banks. Securitization was justified at the time as a method of spreading risk – but this proved a fallacy.

Now, the real issues.  The first is that wholesale banking (services delivered largely within the finance industry, and not to retail customers – mainly investment banking) is much too profitable for too much of the time.  Why? This deserves more analysis, but one problem is clear from the bailouts.  Banks are making bets that pay off well most of the time, but deliver occasional disaster.  If you add up the bets that pay off with the costs of the disasters, then profitability may not look excessive.  But when disaster strikes the downside for bank employees – and shareholders – is limited, and others have to come in to bail them out.  In fact many bankers seem to think of the disasters as acts of God that really shouldn’t be their problem.  This leads to the risks being systemically underpriced.  What to do?  The critical thing is to look at how the bets are financed, and to limit the amount that is done through borrowed money rather than the shareholders’ own capital.  When things go bad, it the money banks (and various intermediaries they do business through) borrowed from elsewhere and can’t repay that cause the systemic problems, not the loss of their own capital.

The second problem is contagion.  If one institution fails then it can bring down others with it, forcing the government to bail the firm out, and creating a wider moral hazard problem referred to as “too big to fail”.  The essential problem is that too many financial institutions are lending too much money to each other.  Retail bank customers can be dragged into this mix, which tends to force governments’ hands.  This is a tough one to tackle, but the key points are to reduce the amount of lending between financial institutions (as in the previous paragraph) and to make sure that banks with retail deposits don’t lend them to other financial institutions, or severely restrict such lending.  While trading in securities by investment banks rightly attracts attention, the lending of money to other financial institutions that is used directly or indirectly to buy securities is just as much a problem.

The third problem is the lack of interest by banks (shareholders as much as managers) in lending to smaller businesses.  The problem is that to be successful this type of business requires information and relationships, and this requires good quality human input.  And that’s expensive.  We see big banks polarising into two types of business: wholesale services within the finance industry or mass retail services using computer algorithms and call centres.  Not much space in the middle.  I don’t think our big UK banks will ever be good at this; it is just too late.  We need innovative new institutions.  Two avenues are worth investigating: trying to improve venture capital facilities, and setting up publicly sponsored and locally focused institutions to lend to businesses, perhaps drawing inspiration from the German and Swiss systems (see this interesting paper from Civitas).

Basically this boils down to two things: cramping the style and reducing the profitability of investment banking.  And encouraging innovation in the supply of finance to small and medium sized businesses.  Forcing the current banks to lend more to businesses will not help; they simply won’t understand what is needed.  Making the big banks separate investment and retail banking would probably be a helpful reform, but it is not necessary and would not be sufficient.  Barclays have managed to insulate their retail from their investment banking businesses quite successfully.  Retail banks become exposed by lending money to investment banks or to the shady investment vehicles they create without them being part of the same organisation.

Some progress has been made on restricting investment banks internationally.  New international rules on capital are already putting investment banking profits under pressure, although not yet to the extent that they are having to cut pay (see this article in The Economist).  Is this enough?  Britain is uniquely exposed to financial crises, and we were lucky not to go the way of Ireland and Iceland, with mass bank failures on our hands. We can’t expect much solidarity from our European friends, given how stingy we have been to them.  An oil crisis is in the works; property prices could yet fall further; monetary policy and fiscal bailout have run out of road.  We shouldn’t shy away from extra measures to reduce our exposure.

Forcing the banks to cut pay is going to be tough going – but it is only then that we will know that reform is working.  High pay is rooted into the culture of these organisations.  Probably some banks will have to fail first.  We must hope that this will be the orderly winding down of some units, but we can’t rule out something worse.  And that leads us to a key paradox that will be at the heart of the argument.  Measures to make banks behave more safely may well cause some systemic instability.  The idea isn’t to abolish financial earthquakes, but to make them smaller and less threatening – even at the price of having more of them.



Fontcrime: Comic Sans lives on

Readers who had seen my post on Public services are different may remember that somebody had been fraudulently buying up phone contracts under my name.  Last Friday I received this letter from the Carphone Warhouse UK Fraud Department.  Apart from the clumsy, evasive wording of the letter, what really hit me was its font.  Comic Sans should have died of ridicule years ago.  There’s even a website called bancomicsans.com.

Actually, Comic Sans has its place.  Its rather childlike appearance makes it quite appropriate for use in primary schools or nurseries, for example.  But what on earth is a fraud department of a major company doing using it?

If nothing else this shows that this department is disconnected from the rest of the company, which no doubt has strict house style rules. This is not a bad thing of itself.  The evasive and non-empathetic wording also shows that no communications professional has been anywhere near it.

As for the outcome, this letter says to me that my case has been filed in the closed category, with a bar being placed on anybody quoting my name an address buying anything from Carphone Warehouse.  I’m not complaining; I have no plans to buy anything from Carphone Warehouse after a couple of rather bad experience with them a few years ago, including another fraud.

But I’m still amazed how so many people are fontblind.