Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!


Thursday, December 08, 2011

 
It gets worse, then it gets worse, until it can't get any worse, and then it gets worse

Elsewhere on the internet, I am running into pushback on a key thesis regarding undifferentiated banker-bashing, inadvisability and general political pointlessness of. I'm gathering together ideas for a post on this, but a key part of the thesis is that we have to be aware of the potential for metastasis here. If you look at the oil[1], tobacco and defence industries (and ye gods, the nukemen), you see that there is a certain pattern of behaviour seen in industries after they give up on having any hope of getting anything approaching a fair hearing. If you chuck enough hostile and ill-informed criticism at an industry, then sooner or later it will retreat into its shell, develop its own private reality and stop listening to any criticism at all, internal or external. With pretty predictable results in terms of the possibility of ethical behaviour. Or to put it shorter; if you keep telling people that they're evil, dishonest, predatory locusts, sooner or later they're going to believe you.

As Douglas Adams said:

There is a theory that if the universe is ever understood, it will immediately disappear and be replaced by something much more incomprehensible. There is a theory that this has already happened

This thesis does invite the objection - how much worse could the banksters get? In my view, a lot worse. Just a top of the head list of ways in which the industry could act if it was a genuinely antisocial and evil actor, rather than an absurdly myopic and unusually greedy part of a complicated market economy system:

1. It should be noted that the only people actually providing debt relief to Greece are the banking system, through a voluntary exchange. There will be holdouts to this exchange, but they will be small. There is very little of the regulatory strong arm in the debt exchange (which was actually suggested by a bank) - there is just a general recognition on the part of the industry that their collective interest in maintaining a stable and prosperous Eurozone is greater than their individual interests in getting 100 cents in the Euro.

2. Similar, in the case of Hungary and Romania, where the "Vienna Accord" between private sector lenders stopped these small and volatile economies from experiencing catastrophic capital flight.

3. The UK could see the dawn of US-style foreclosure practices. These are, of course, the effect of the regulatory developments which pushed mortgage servicing out of the normal base of the banking industry and into specialist, largely unregulated subsidiaries. No UK bank would ever do this, because the brand on the mortgage foreclosures is the same as the name above the door, and, for the moment, they have an interest in maintaining the value of their good name.

4. In general, a *lot* more activity would migrate to the offshore, tax haven and unregulated sectors (hedge funds at the top end, payday lenders at the bottom). At the moment, there is effectively a social constraint on the size of the tax and regulatory avoidance industries. You can do business much more profitably if you operate in this way, in return-on-capital terms, but you can't do it at large scale, which limits the amount of capital you can earn that high percentage return on.

The reason why you can't do it at scale is that if you are too aggressive in pushing the envelope on regulation or tax, you will find it difficult to get counterparties and brokers. The reason for that is that there still survives in the industry a perception that tax and regulatory avoidance is (while often necessary) a slightly hinky thing to do, and that people who are too blatant and aggressive about doing it are likely to be hinky people, who might be just as willing to bilk you as they are the taxman. Despite what you read about clever accountants (one for the catechism of course ... and what type of schemes do clever accountants find? Complicated schemes), most people in the industry have a visceral horror of corporate finance bells-and-whistles as being "too clever" and likely to conceal a con game.

Obviously, if the industry turned inward, and the social stigma attached to those upstanding and necessary people in the tax structuring industry were to be lessened, then it would no longer be the case that the only people who did hinky deals were hinky people. And you would see a *hell* of a lot more such deals.

Of course, if you think that the financial industry created the asset bubble off its own bat, purely in order to earn short term bonuses and in the knowledge that it would burst and impose costs on someone else, then this isn't going to be very convincing. Which is why I think it's very important to explain that this wasn't what happened. There needs to be a space kept open for people like Andy Haldane to tell the industry what's wrong with it and to be listened to.

[1] Oil is an interesting one, as there is a continuum of standards of behaviour from BP to ExxonMobil ...
18 comments this item posted by the management 12/08/2011 04:52:00 AM


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