Left vs right: out of date

For me, this post of Tim’s raises a thought: could it be that much of the left and right are stuck in an out-dated mindset?

Tim points out that of the many ways in which UK banks failed, none would have been prevented by a financial transactions tax. I think he’s right; the banking crisis was not due to a simple, single market failure. But what Tim doesn’t point out is that the fact that banks failed in so many different ways highlights a systematic organizational failure. The problem wasn’t (isn’t) just that banks were (are) too big to fail. It’s that they were too big to manage.

In other words, the issue is not one of “markets vs. state”  - “free” markets vs. “sand in the wheel” transactions taxes. It is: how can banks be better organized? And not just banks. The issue of NHS or schools reform poses the same questions.

In this sense, the traditional statist left and free market right are both wrong.

The right is wrong because it overlooked issues of the organization of private companies because it believed that the market would select against bad forms of organization and in favour of good ones. This belief ran into two problems - that bad organizations were (are) widespread*, and that selection against them can be a hugely disruptive and costly process.

The statist/Keynesian left is wrong because its faith that the state can manage the economy by macroeconomic policy and regulation ignored the organizational failings of the state - that there’s a danger of regulatory capture, or that inadequate knowledge would yield bad regulation and policy.

Neither side, then, is naturally well-equipped to address issues of organization. To make a start, here are four principles:

1. Institutions are brittle, and prone to sudden collapse. The question is: how to minimize the costs of such collapse? In many cases, ordinary market forces are useful here: when Woolworths collapsed, people just got their pick n mix elsewhere. But in the case of banking collapses, market forces are not enough.

2. Behaviour is context-dependent. One reason the NHS works as well as it does is because of the power of conditional reciprocity; many staff provide unpaid overtime and many patients don’t make huge demands on the system.  The trick is to maximize this gift exchange.

3. Power should flow to knowledge. Decisions should be taken by those in the know. The argument for the coalition’s NHS reforms, for example, is that GPs should have more power because they are closer to the patient. The question is: is this true?

4. Principal-agent problems are ubiquitous. The alleged dumbing down of education and banks’ excessive risk taking might look like different issues. But in a sense, they are not. Both arise from misaligned incentives which result in teachers teaching to the test and traders or mortgage originators taking on too much risk.

Although the principles are general, their application is not. But it is here - rather than in the paradigm of “markets vs. states” - that so many key issues lie.

* Remember, many of the banks that avoided collapse did so either because of dumb luck (if Barclays hadn’t been outbid, it would have bought ABN Amro), or because they benefited from cheap money and the bail-out of their counterparties, or because - in the case of HSBC and Standard Chartered - their vintage capital gave them access to massive Asian savings.

Comments

[Alimack]

So what's the answer - I think you're right basically but how do you frame the question to get right answers?
Both the approaches you detail at at least are a guide to action.

[LordSidcup]

Citizens -VS- Corporations?

http://www.ritholtz.com/blog/2010/09/you-vs-corporations/

[sean]

Very similar to Leopold kohrs "cult of bigness" argument.l, My favoured explaination of the crash. You missed the Eu and the euro off though which is the same issue. Too big to endure.

[Metatone]

Tim is very strident, but it's a silly post.

If HBOS and RBS had fallen over without the context of a global financial crisis, we'd be in a much different (and likely less stressful) position all around.

And all the things he posits as not relevant to individual UK bank crashes were part of the global crisis. And putting grit in the sand of that system is very valuable.

Reason is that whilst Tim hews to the facile religious belief that extra transactions improve liquidity and this is good for everyone, the reality (c.f. Beinhocker - Origins of Wealth) is that the extra investment and extra transactions in the financial sector lead to increased volatility that starts a vicious circle that often leads to a Minsky moment.

And that's where I have to disagree with the learned helplessness you evidence about regulation. You've been told so often that it can't help that you believe it. It's true that it's not easy, but it can help and until we learn to try and keep trying to improve it, things will go on as they are.

Worth noting as well that the rightist attempts to solve the principal agent problem, in corporate life, in banking, in education and in health have each time made the problem worse... because while incentives matter, the way they work is not how the right imagines... I'd agree that the left has not solved agency problems, but it's a deep irony that the instincts of the left actually seem to have more evidence supporting them...

[Chris]

In business if you make a massive mistake your business goes bust. The banks should have gone bust no matter what would have ensued. That way, in the future, bankers will be more careful.

Besides, if I recall correctly, fractional banking does not account for interest. Eventually it always falls over no matter taxing transactions or any amount of regulation.

On regulation: if banks are too big to manage - which they probably are - then they are too big to regulate.

[CharlieMcMenamin]

The *NHS* as 'conditional reciprocity' ? Surely that's socialism per se. & surely we have endless evidence that marketised relationships destroy this?

The question of effective incentive design might be a conumdrum for both left & right, but the question of 'incentives for what' is very different for the two poles of the spectrum.

[Ralph Musgrave]

The answer is simple. Make depositors come clean and say whether they do or don’t want their money loaned on by their bank. If they don’t, lodge their money at the BoE. If their bank fails, their money is safe.

Alternatively, if they want their money loaned on, that is a commercial transaction, and it’s not the taxpayers’ job to subsidise commerce. I.e. if the bank fails, depositors lose their money (so that dispenses with the TBTF subsidy which according to Andrew Haldane is bigger than bank profits). Also no instant access should be allowed to this money: it’s been loaned on, after all.

If their bank fails, again, there is little deflationary effect because the money was not available for immediate spending anyway.

[David Ellis]

`The right is wrong because it overlooked issues of the organization of private companies because it believed that the market would select against bad forms of organization and in favour of good ones.'

The what became traditional right, the monetarists Thatcher and Reagan, have been blasted out of the water by the banking collapse. Who will forget the expression on Alan Greenspan's face when he realised that his entire world view had been completely bogus and self-deluding. The monetarists took away the ability of politicians to spend demagogically (i.e. on schools, hospitals, etc) privatised the money supply convincing every idiot who would listen that `enlightened self-interest' would keep supply and demand for money in perfect equilibrium. The result: a thirty year credit bubble/Ponzi scheme with global reach and bottomless depth that has ended forever capitalism as a system that can take the productive forces even an inch futher forward.

As for Keynesianism. Its discrediting is what gave rise to Monetarism in the first place.

[Dipper]

what exactly does a bank going bust mean? And why is this good?

As a shareholder of a couple of bust banks, I wasn't bailed out. And nor should I be.

As for employees, surely the number of employees in an industry is determined by the economic activity in that industry, not the number of ways that industry is carved up? So probably not much change for employees if they had gone bust?

Which leaves depositors. Why would depositors losing their shirts be good? what lessons would be learned out by old ladies losing their houses because of a banking bust?

[Dipper]

"The problem wasn’t (isn’t) just that banks were (are) too big to fail. It’s that they were too big to manage."

how was Bradford and Bingley too big to manage?

[Dipper]

... and ... pushing John Lewis style businesses, state support for manufacturing industry, nationalised banks with a directive to lend to industry ... is it just me or is David Cameron implementing Old Labour's Alternative Economic Strategy?