what you get here

This is not a blog which expresses instant opinions on current events. It rather uses incidents, books (old and new), links and papers as jumping-off points for some reflections about our social endeavours.
So old posts are as good as new! And lots of useful links!

Monday, April 2, 2012

Responsibility, accountability and all that

What would you make of a zoo which kept its more harmless animals under strong guard but which allowed its man-eaters to roam free? I am beginning to feel this is a good way to look at Western systems of social control and regulation.

Some 15 years or so ago, transparency and accountability became a big issue in my professional field (of governance). I have only recently begun to question the motives which have been at work.
Reassuring, at one level, in the story it told of how various public organisations were held to account by citizens, it demonstrated one of many apparently superior elements of the capitalist model of governance over the communist one which had been the default system of the countries in which many of us were working post 1989. For example, in 2001 I myself wrote this briefing note on the issue for my beneficiaries in a Central Asian State.
But, at another level, the emphasis (in the UK at any rate) on the need for more and more scrutiny of government business has perhaps had a hidden agenda – part of the wider drive there has been for several decades to convince people that government activities were inherently inefficient and malevolent. After all, while we were devoting more and more energy to scrutiny, for example, of local government activities, regulations and controls were being lifted from banks and financial agencies.

Bank profits these days – as most people have noticed – are pocketed by members of the 1% but their losses are nationalised. And only in Iceland, it appears, are attempts being made to prosecute a few (including a Prime Minister) who are deemed culpable for the banking crisis.
It was only Shaxon’s book Treasure Islands which made me realise that bank bosses and owners had managed only a decade or so ago to wriggle out of their legal responsibilities – by having their legal status altered to that of "limited liability”. Until then, bank bosses stood to lose everything if their banks went down. No more!
And I noticed yesterday that no less a figure than Nassim Taleb (of Black Swan fame) has suggested that we return to this simple model of accountability for financial insititutions -
Instead of relying on thousands of meandering pages of regulation, we should enforce a basic principle when it comes to financial oversight:
The captain goes down with the ship;
Every captain and every ship.

In other words, nobody should be in a position to have the upside without sharing the downside, particularly when others may be harmed. While this principle seems simple, we have moved away from it in the finance world, particularly when it comes to financial organizations that have been deemed “too big to fail.”
The best risk-management rule was formulated nearly 4,000 years ago. Hammurabi’s code specifies: If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.
Clearly, the Babylonians understood that the builder will always know more about the risks than the client, and can hide fragilities and improve his profitability by cutting corners—in, say, the foundation. The builder can also fool the inspector (or the regulator). The person hiding risk has a large informational advantage over the one looking for it.
Of course, despite the public condemnation of bankers (a word which appropriately rhymes with wankers) there is by no means an intellectual consensus on the precise role which various groups have played in this global crisis.

Robert Skidelsky looks briefly in his book Return of The Master at 6 possible groups to blame (bankers, hedge funds, credit-rating agencies, central bankers, regulators and governments) before turning his fire on economists.

And, in a very-well written 2009 book The Financial Crisis – who is to blame, the ex-Chair of the British Financial Services Agency (Howard Davies) explores 39 different explanations of its possible cause. You can see some overheads and videos from his various presentations here, here and here
A wikipedia entry also gives a useful summary of the various explanations. Those looking for more complex treatment should have a look at this paper which
reviews current explanations of crisis whose differences are classified according to whether the causes are located in structure or agency or in neither as part of a kind of third way explanation.
In this section we argue that these explanations of the crisis (as accident, conspiracy or calculative failure) share common assumptions about how crisis is generated within socio-technical systems amenable to technical, mainly technocratic, fixes.
The second section shifts the problem into a much more political frame, initially by introducing the politics literatures on policy fiascos which are more commonly associated with foreign policy humiliations than with economic crisis. Within this frame, the section focuses on the massive failure of regulation before the crisis and argues that the crisis was then permitted by the inaction of political and technocratic elites whose hubristic detachment was such that they made no serious attempt to control the finance sector.
The third section explains how the process of financial innovation produced a fragile latticework of connections that was inherently ungovernable. A brief conclusion draws out some implications.
 My basic point, however, remains - that we should be responsible for our actions. That is the sysem in which 99% of us work - the systems created in the past few decades have lifted that basic rule from the 1% and encouraged total irresponsibility.

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