Four years into a succession of crises and still no reform: Time for some Long Finance
4 November 2011 12:51am
FOUR years into a series of financial crises, from Bear Stearns and liquidity shocks in 2007, to Lehman and RBS failures, Irish and Icelandic collapses, and now Eurozone currency-quakes, there have been no financial reforms to match the magnitude of the problems. An Olympiad later, the world feels more brittle and people jump at any hint of another imminent pop in the system.
Bubbles sound lovely – soft bath foam, socialist champagne pétillant – but they are lethal. Real economies make poor decisions that waste people’s jobs and lives. If bubbles are froth, then froth sure hurts. In 2007, inspired by Danny Hillis’s 10,000-year Clock of the Long Now project, the Long Finance initiative took a 100 year timeframe to explore an impertinent question – “when would we know our financial system is working?” Bob Giffords and I wrote The Road to Long Finance, in which we explored the bubbles that led to the crises, arguing that leverage and regulation lead to more risk rather than less, and that banking competition is crucial.
With support from Gresham College and the City of London Corporation, Long Finance returns to two themes: a need to link economics with communities; and the nature of money. We have organised and supported over 100 free events, posted over 200 reports and argued for big reforms such as confidence accounting, pension indemnity assurance, standards market financial regulation, index-linked carbon bonds, utility banking and new monies. Two long-term investment scenarios recur, population growth and resource scarcity. Bank of America Merrill Lynch hosted our spring conference on prosperity and scarcity, while last year we had 350 people singing about financial reform with Brian Eno in the Willis Centre (video online for doubters). HSBC hosts today’s Bubble Trouble autumn conference. People who work in financial services are developing deep reforms, but increasingly wonder why bother if the status quo, our trade bodies, our larger banks, our politicians and our media just stymie them.
At this year’s Chartered Institute of Securities and Investment conference, alderman – and now sheriff – Alan Yarrow said we are living in a “cloud of risk aversion and mediocrity”. The first four years of responses to the financial crises have been a cloud of committees, councils, conferences, conclaves and one independent commission on banking, all to thunderous inaction. In 2008, I was controversial for noting the financial crisis of 1929 didn’t result in genuine reform until 1933, four years later. As another Status Quo put it, perhaps I’ve been a “little dreamer”.
Despite repeated bubble-pops we are more prone than we were in 2007 to boom and bust. Rather conveniently for the status quo, the UK press release the pressure for genuine reform before it builds by shouting “sovereign debt” or “euro crisis”, instead of “yet another banking crisis”. Is it modesty that prevents us suggesting hundreds of new banks or mutuals, portable account competition or perhaps even zero leverage banking?
Occupy Wall Street occupies short-term attention as it extends its franchise round the world, arriving at St Paul’s. Perhaps long-term good will come from their McProtest movement. I was encouraged to hear the Bishop of London invite investment banker Ken Costa, my successor as Mercers’ School Memorial Professor of Commerce at Gresham College, to spearhead an initiative reconnecting the financial with the ethical. But complex, technical reforms are essential too. We need to address why long-term money supply growth exceeds GDP and look again at bank leverage. At today’s event, John Redwood MP will address root problems with fiat currencies, inflation, government finance and the search for extra spending. Long Finance panellists from Schroders, LSE, Volans and environmental firms will explore whether bursting one bubble leads to another – and whether green finance might be the next bubble rather than planetary saviour. Short and long, we need both types of discussions about reform.
Without real reform, London may be a big loser. The Germans would write their own EU directive after a manufacturing crisis, the French their own after an agricultural crisis. A London Directive would have each of the various financial services, banks, auditors, rating agencies, exchanges, clearing houses and even insurers propose one genuine EU reform they would support to make financial services better or more robust. Banks on separation, competition or leverage; auditors on indemnification; rating agencies on Basel; exchanges on high-frequency trading; clearing houses on OTC.
Yes, Brussels has had daft ideas on offshore centres and hedge funds, but surely Londoners can’t fail to have noticed the scale of financial crises surrounding banks? As the leaders in European and global finance, our trade associations can’t just say “no, Brussels – sorry, what was the question?” Developing the London Directive would be true leadership. Admitting you need reform is the first step to recovery.
Professor Michael Mainelli is the director of Z/Yen. For details of today’s Gresham College conference, visit gresham.ac.uk/lectures-and-events/bubble-trouble-pop-goes-sustainability
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