So banking is back in the news – big time. We now have in front of us a set of recommendations to deal with a crisis made manifest in 2006-7. I say made manifest because the events of 2006-7 were in reality the result of a storm a long time in the making. Still, for our own comfort, and that of the regulators, government and all other interested parties it is easier, more comfortable, less self-critical, to pinpoint the entire blame on a specific group of people (bankers) behaving in a particular way at a precise time in economic history. The benefit of this approach is that allows those charged with dealing with the issue to make concrete and, seemingly, highly targeted recommendations.
Scapegoats can easily be established – the blame lies in the system, and as we know the system is always the fault of the previous political regime. The suggested recommendations combine the structural with the legal by splitting up the banks, into so called ‘good’ and ‘bad’ banks (interesting use of the language of virtue and vice!). The regulators and politicians, whose ‘oversight’ enabled the crisis, are apparently now to be trusted to decide on that which is ‘good’ and, yes you have guessed, that which is ‘bad.’
A prediction from a former fund management executive (me!): the ‘bad banks’ will provide far greater long-term returns than the so called ‘good banks.’ Why?
Well, firstly because the so called ‘good banks’ will in effect become utilities. Secondly, because the ‘good banks’ will over time start to take ever greater risks in order to compete with each other to win market share and to provide greater ‘shareholder value,’ (the sacred cow of capitalism). ‘Good banks’ will become increasingly opaque about their investments and accounting policies and so forth. The ‘bad banks,’ by contrast will be freed to invest, transparently, in more speculative investments, of the sort vital for long-term prosperity and sustainability such as green energy, new medical technologies and, so forth. So it could be that what are now being regarded as ‘good banks’ may become ‘bad banks,’ and vice-versa. Why do I think this?
1. The ‘consensus’ seems to accept the proposals outlined. Beware the consensus it is almost always wrong!
2. Economic history. So called ‘good’ financial institutions have a long-established track record of getting it very badly wrong, and behaving very ‘badly’ indeed.
It is very much in vogue to define whether an institution is ‘good’ or ‘bad’ in relation to its corporate structure. This is delusional!
If I had to pick one event that should have acted as a predictor of the much larger crisis that was to follow it would be the collapse of Equitable Life in the mid-late 90s.
Equitable was a mutually owned business that made a virtue out of the fact that it treated all of its customers fairly (look at its name for heavens sake) and, was able to do so because it was a mutual, i.e. it had no shareholders. So how did this mutual behave?
Highly educated people, actuaries, discovered the short-term benefits of financial engineering, to offer ‘market leading’ products in order to gain market share in the life assurance industry. It was, in plain language, greedy. And, so lets speed ahead to 2013, the highest profile bank to get into trouble this year is……….yes, another mutual, the Cooperative Bank.
It may be unfashionable to say so but I don’t think that regulation is a significant part of the solution. Why? Because, it is not as if the financial sector has, for the last two decades, been under, or lightly, regulated. Maybe badly regulated, perhaps wrongly regulated, but, not, under regulated.
Now don’t get me wrong, even though I really do think that the overall approach to reform of the financial sector, has been and continues to be akin to shifting deckchairs on the Titanic, governance and corporate structure do have a part to play. A small part, yes, but a part nonetheless.But, they are not the primary issues.
The primary issues are…………….the state of our hearts and the direction of our worship. The bible makes it clear that our hearts tend to be set on one of two things. God or money – it really is that simple! So let us not make it more complicated.
My experience, between 1989 and 2006, is that ‘city system’ worships money above all else. One of the reasons I left the City was that I was falling into the same trap. The story of the Rich Young Ruler by the time I left felt deeply personal. Now making lots of money is not necessarily a bad thing – it can be a very good thing.
But, the more important questions would seem to be about how we make money and for what purposes. Is wealth an outcome or the goal? And yes, we can always ‘justify’ make huge personal gains by invoking the ‘just look how much tax I pay’ game. But what governments, regulators, corporations and individuals have tended to do (whilst in most cases paying lots of tax) is to have created a new ‘kingdom on earth,’ whose every interest must be served, and whose primary interest is greed, and no amount of regulation, governance or changes to corporate structure is capable of modifying greed. C.S. Lewis warned about the dangers of changing the system but leaving in place the ‘same rusty old tubs.’ I agree with him. The real issue is that we first of all need to:
‘seek ye first the kingdom of God and His righteousness.’
So we are faced with two theonomic choices: the kingdom of God and His righteousness or the kingdom of man and his self-justified righteousness.
Trying to sort out the financial system in isolation the state of our hearts is simply to defer the next crisis.
The financial crisis is also a theological crisis.