I had an interesting exchange on Twitter this morning with Rupert Harrison, formerly George Osborne’s chief of staff, now Managing Director at Black Rock, and tweeting under his own name.
He wondered out loud whether the financial crisis might have been prevented if we had already had the Financial Policy Committee up and running.
My own view is that the crisis was caused by a failure of insight, not a failure of institutions. The key problem was the failure to apprehend the risks building up in the system, and to realise that we had therefore chosen the wrong place on the trade-off between regulatory tightness and growth.
Today’s institutional architecture I wager would have fared just as badly, staffed with the economists with the same misapprehensions, and the same over-confidence in the tendency for financial intermediaries to self-regulate. [I’m not blaming others here, I was just as deluded]. And overseen by a Treasury peopled by economists taking the same view, and headed by politicians inhabiting a political consensus over light touch regulation that derived from the same incorrect economic analysis.
If today’s institutional architecture has its advantages, and the pre-crisis architecture was lacking, that itself is a manifestation of this changed insight. But I wonder how important it is.
Rupert pointed out on Twitter that the Financial Services Authority, once carved out of the BoE, had lost its focus on the macro aspects of financial stability.
That may be true, but I wager that it was mostly due to the fact that these maro aspects weren’t considered relevant – because of the same prevailing economic analysis of financial stability – and not because they had offices now further from their monetary policy specialists.
Recall too that FSA was carved out of the BoE in the first place because it was thought – not without good cause – that the BoE had lost its supervisory focus and discipline, lines of responsibility muddled in an organisation that had many things to do.
The latest reshuffling of the regulatory chairs – bringing supervision back under BoE control – may be optimal. Or it may simply recreate the old problems of the past. Manifest in successive management studies tilting backwards and forwards on the question of prioritising synergies versus specialism and focus. [Note to self to read the next Mais lecture and McKinsey Review].
Ian Martin pointed to the failures of the old Tripartate grouping of the BoE, HMT and the FSA, and the Memorandum of Understanding on which it operated. What a mess it looks like now.
Well, maybe. But we can apply the same critique to this view.
The same 3 people [now Carney, Bailey, Osborne] will still have meetings, and essentially about the same topics [should we put taxpayers money at risk to rescue/lend, or not?]. They will sit on chairs that have different labels, and the minutes will have different headers and footers, but will those labels really make a difference? I speculate ‘not much’.
Though what will make a difference is the lived experience of the near total collapse of finance in the last decade.