Dealing with short-term consequences of short-term thinking

The latest Queen’s Speech will have been eagerly awaited by consultants, setting out as it does the Government’s stall for reform of the financial services industry. Opportunities will abound, even if only from the fact that the Government’s intention to create three new high street banks enriches a currently rather target-poor environment.

It should also have been quite eagerly anticipated by consumers, still reeling from the credit crunch, which for them is unfolding as a Kafkaesque nightmare: the people who were supposed to look after our money threw it away. Then the Government took the rest of our money and gave to those very same people. Perhaps they will have been reassured by the opening words of the Speech.

“My Government will continue to reform and strengthen regulation of the financial services industry to ensure greater protection for savers and taxpayers.”

Excellent. Clearly the Maginot Line of regulation we had already constructed just wasn’t big enough. Next time our defences will be so impressive the Nazi war machine won’t be able to resist flinging itself against them instead of marching through Belgium.

After the devastation of World War Two a rare outbreak of sanity among Europeans caused them to realise that we just couldn’t go on like this. Instead of building bigger fortresses and armies they decided to create a new paradigm for an entire continent. And they succeeded: even when snorted in contempt, the very word “Europe” carries vastly different connotations than it would have done 80 years ago.

Is something similar about to happen to the financial system? A quick skim through the platitudes of the Queen’s Speech suggests not, particularly when you arrive at the bathos of it final paragraph, which commits the Government to “Banning unsolicited credit card cheques, to prevent financial institutions from encouraging customers to borrow more than they can afford.”

Yep, that ought to do it. I haven’t felt so relieved about the future of the planet since the NatWest Bank wrote to reassure me that my remortgage had been “carbon neutral.”

In crude terms the government’s response to the crisis is like turning up at a gunfight, not so much with a knife as a strongly-worded note from your mother.

What is going on? Some of the answers—and more pointedly, many more pertinent questions—can be found in the recent publication The Road to Long Finance by the Centre for the Study of Financial Innovation, by financial analyst Bob Gifford and Professor Michael Mainelli.

I won’t attempt to summarise it, partly because turning the Credit Crunch, or “Scrunch”, as the authors prefer to call it, into sound bites is part of the problem. Taking a “systems view” of the Crunch/Scrunch, the work is itself a severe boiling down of a horribly complex picture, one of “systemic failure with multiple causes and multiple effects.” It does act as a severe corrective to some of the emerging narratives about the current crisis. For example, that it was all caused by naughty bankers who inadvertently exposed the inherent flaws of naked free market capitalism, and now wise government must sort out the mess. Yes, there are naughty bankers aplenty in here, but much else besides. If one chose to be selective, one could construct many narratives, with many different villains, out of the events described. And they’d all miss the big picture, a landscape over which the law of unintended consequences rampages like Attila and his Huns on motorbikes.