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I took a detour from my usual intellectual pursuits at lunchtime yesterday and wandered over to my former workplace at CEPS, to hear the Financial Times journalist Gillian Tett talk about her book, Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe. I was CEPS' researcher on Balkan issues when I was there in 1999-2002, but its strongest area is on the economic side, and although I don't know the field I always suspected that Karel Lannoo, the chief executive, had carved out a commanding position in the world of intellectual analysis of how capital markets function and should be regulated.

Gillian Tett, given the task of summarising her 350-page book in 20 minutes, presented it as effectively an anthropological study of the small tribe of bankers at J.P. Morgan who invented the credit default swap, in the blind faith that the three deities of globalisation, innovation and market capitalism were infallible. (She mentioned her own much earlier anthropological field work in a village in Tadzkhikistan before she became a journalist.) The book is also an attempt to overcome what she described as the "information asymmetry" between the inside and the outside of the banking industry, where the technicalities of what was going on were too complex (or at least were presented as being too complex) for regulators, let alone politicians, to understand. This asymmetry happens within institutions as well; she feels that we should not describe banks as "too big to fail" but should ask if they are in fact "too big to manage".

I found myself very sympathetic to both of these general points. I have remarked before that although I work in politics, I find that it is anthropology, rather than political science, which gives me much better insights into what I am doing and more useful ideas about what to do next (see several books on Cyprus, also this one.) It seems to supply a set of analytical tools which are operationally more useful, some of which I was fortunate enough to absorb when doing my PhD in the Social Anthropology department at QUB (though my subject was rather different). I am also fascinated by what Tett calls "information asymmetry"; my job at the moment is effectively ensuring that sensitive information reaches the information-poor in time to affect sensitive political decisions, which is a fascinating process; the role of information poverty in political decision-making doesn't often get taken into account by IR analysts who assume that all actors have access to much the same set of facts. (The two sets of issues are more or less combined in the Haas concept of the epistemic community.)

The discussion afterwards was pretty high-powered - those who spoke included Ireland's Permanent Representative to the EU, the top official of the Commission's Directorate General for Economic and Financial Affairs, and the number two in the Internal Market and Services Directorate General - so I sat back and kept my mouth shut. At CEPS the discussion part of the meetings isusually off the record, but you won't be surprised that it was more about debating (and failing to agree on) policy solutions rather than challenging Tett's basic assumptions or intellectual framework.

It's an interesting subject, I also had an interest in attending in that the author and I were exact conteporaries at Clare College, from which we graduated twenty years ago last week. In our first year, she lived on the same staircase as three future CUSFS committee members, nickbarnes, deborah_c and myself. We have all changed in the meantime, but she did catch my eye when telling a Star Trek joke as part of her presentation...


( 9 comments — Leave a comment )
Jul. 2nd, 2009 07:36 am (UTC)
"I have remarked before that although I work in politics, I find that it is anthropology, rather than political science, which gives me much better insights into what I am doing and more useful ideas about what to do next"

What's sad is that I agree with you, and I'm a professional political scientist (in training, anyway). We're good at some things but highly granular accounts of how systems (or towns, or businesses, or bureaucratic agencies) actually work, are not among those things. Your average political science study, at least on my side of the Atlantic, is really heavy on models and high-level explanations, but the details sort of suck. You wouldn't learn much about how anyone actually does anything by reading most of my colleagues.

Mind you, I'm from a minority faction of the discipline that is more anthropologically-minded, so it's self-serving of me to say what I just said. But there you have it.
Jul. 2nd, 2009 10:31 am (UTC)
I love her stuff and also heard her speak recently, as part of a panel on press coverage of the financial crisis. The problem is not, as some in that room claimed, that the press didn't warn and inform about the property bubble (exacerbated by new accounting practices) and the derivatives mess. Tett for one wrote about it regularly from at least 2005-2006. Did she or the room come to any conclusion on why the warnings weren't heeded - was it that they didn't come early enough, when the regulations were being made, or the issues weren't popular with politicians or the politicians found themselves powerless against bankers or what?
Jul. 2nd, 2009 11:06 am (UTC)
These problems are systemic for a given (international, inter-organisational, inter-industry) scale of system. Every system/organisation solves problems local to itself, leaving any problems arising for the larger system outside of the local scope.

If you have enough perspective on the problem to give the systemic warning you are not in the class of people taking the local decisions. And if you are in the class of people taking the local decisions then the most weight you will give any warning from people outside that class will at best modify a decision taken primarily on local factors.

My experience as a business systems analyst would indicate that the majority of people making business decisions have little systems understanding, and are not generally encouraged to understand how their local systems are embedded in and affect the larger systems. This is especially true for people who work hard for years in very narrow, locally comples disciplines before becoming decision makers.
Jul. 2nd, 2009 01:20 pm (UTC)
"she feels that we should not describe banks as "too big to fail" but should ask if they are in fact "too big to manage"."

A brilliant insight. The arguments against bigness in capitalism are all philosophical, whereas the arguments in favor are all supported by the numbers.
Jul. 2nd, 2009 03:11 pm (UTC)
Do you mean it that way round?

I summarised her argument rather brutally, though the soundbite was hers. What she was saying was that the difficulty of tracking all the relevant information in a very large bank is excessive, and we might do better in general with smaller banks.
Jul. 2nd, 2009 04:54 pm (UTC)
That's exactly what I mean, though I was also expanding her remark to ecompass capitalism (and I am a capitalist). Capitalism tends to oligopoly, which is just a fancy word for big and concentrated, because that's how you get more efficient and cut costs. But, as any good risk manager knows, concentration is not a good thing in the long run. Which suggests that capitalism, in order to survive in the long run, requires regulation and control.
Jul. 2nd, 2009 07:17 pm (UTC)
My impression is that coming up to the crisis there was a big problem with bad information, not just between the banks and retail investors, but between the holders of bad debts (such as CDSes) and the (supposedly sophisticated) institutions that bought those bad debts. CDSes and other instruments were systematically thought to be less risky than they actually were.

In so far as there was a single point of failure, it seems to have been with the credit ratings agencies, who all the players relied on for risk assessment, and who rated these dodgy assets higher than they should have.

This was for a number of reasons, both technial and anthropological. The technical reasons include: CDSes are very complicated and hard to analyse; the entire purpose of CDSes was to disguise where the risk was going. The anthropological ones include the fact that the ratings agencies *should* have an adversarial relationship with the entities they rate, but in fact they're paid by the entities they rate, so in the interests of getting more business they will tend to provide answers closer to what their customers want to hear. Since there are only three ratings agencies, competition didn't produce better quality output (though TBH even if there were more I think the cozy relationships between agencies and vendors would still have been the main problem, and the quality of the information wouldn't have been much better).

So my first step at an answer to the question would be to have more oversight of the credit ratings agencies. Possibly this could be done by having a team of government analysts review a random sample of ratings from each agency every year. Maybe it would be a step in the right direction simply to require them to grade on a curve -- no more than 1% of your rated securites can be AAA+, for example.

In general, I focus on the agencies because they're meant to be the honest brokers -- you expect a certain amount of exaggeration elsewhere in the system and it seems likely that trying to correct that at source would just lead to creative ways of avoiding regulations rather than a significant improvement. But I don't mean this comment just to be about my brilliant ideas. Did she mention the ratings agencies as a point of failure? Was there a particular point of the system that she identified where unrestrained greed was meant to be restrained and wasn't?
Jul. 2nd, 2009 07:53 pm (UTC)
As far as I followed the talk (and I'll obviously have to get the book now), she placed the crucial failure point a step farther back: the bankers themselves ought to have damn well known that CDSes couldn't reliably be applied to mortgages, as indeed was the conclusion of the banking tribe she first studied at J.P. Morgan who didn't want anything to do with such a project. Her explanation for why other bankers did not realise that extending the credit market in that way was unsustainable is simple: greed.

It's not really true that the information was not available, at least to anyone who cared to listen. George Soros was talking about the problem years ago to anyone who was in the same room (I certainly remember him talking to me about it at some point in 2005 or 2006, but heaven knows how long he had been aware of it). So was Vince Cable. Gillian Tett admits to being behind the curve but indicated that she had spotted what the problem was by early 2007. I'm not a financial services insider but the fact is that I'm on first name terms with two of those three people and reasonably well connected with the third, and none of them is without influence. So why did the information not flow to the point where the right decisions could have been made?
Jul. 2nd, 2009 09:38 pm (UTC)
Ah, 1986. I had a brief and hopeless crush on Gillian, and seeing her name all over the financial media these days always brings a faint smile.
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