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.

Is there an alternative?

In March, I drew attention to a new sub-site on Europe established by the Guardian newspaper – and reproduced my response to its invitation for comments and suggestions on possible people who might contribute to the site
Thereafter I forgot about it – but went into the site today and found a useful piece from the historian Mark Mazower about a possible Marshall to deal with the economies of the European periphery. It has set off an interesting discussion thread – with many useful points being made – eg
• The role of the rating agencies (ineffective (they didn’t pick up the practices which led to the global crisis) unaccountable; corrupt (their resorces come from the companies they are rating!)
• The different contexts of post-war Europe and now
• The incentive banks still have for buying dud Greek bonds (they make more than the minimal rates available elsewhere)
• The basic issue about Greece being not their life-style but 2 other things - its political system (its conflicts being so great that it was felt necessary as early as the 1930s to give civil servants constitutional protection for their jobs – with the result that the system has swollen to 800,000); and the immorality of its richer middle class (who simply don’t pay taxes)
One particular post caught my eye -

The private sector caused the crash. The private sector created the conditions for the crash by ceaselessly chest-thumping for ever-greater deregulation and lower taxes (with threats to depart the country if its wishes aren't granted, an undemocratic influence which often outweighed the voices of voters). The private sector also causes the deficit (both here and in Greece) due to its persistent failure to pay the correct amount of tax.
And by relying on unreliable, undemocratic, random, greed-led and potentially catastrophic "market forces", they have created a national and international economy that makes no sense whatsoever - not for people, not for the environment, not for society.
It's time we stopped letting the private sector - in other words, the rich and powerful - hold us, our society and our children, as hostages to the fortunes of capitalism. Anything useful that the private sector makes or does, ought to be done in the public sector. It can be done there without the inefficiencies of competition or stuffing the pockets of the wealthy with profit margins and dividends. And anything useless that the private sector makes or does - and there's a lot of it, from advertising junk food to poodle-grooming parlours and conservatory-salesmen - would not be missed if it were shut down. That might reduce notional GDP, but if those figures place profit above people, then they were useless to start with. The opportunity cost of having a private sector are simply unsustainable in the 21st century: every pound or professional wasted in the private sector is one not being used to shore up the NHS, to build our green energy resources, rebuild our infrastructure, or research the cure for cancer. It's time to cut the parasitic private sector loose, and focus on our society's really valuable economy instead.

Perhaps a bit over the top. But a lot of basic truths. The rich and powerful just don’t seem to get it – that most of them are useless parasites who live in a bubble world separated from reality. It’s all too easy, however, to vent one’s energies on such emotive outbursts – rather than patiently selling an alternative. And the alternatives do exist – as is shown in The Equality Trust’s second Digest which looks at inequality trends and reveals how Sweden’s policies cut inequality there between 1960 and 2005 by 12% - whereas it rose by 32% in the UK in the same period. One June 10, I referred to an article in Social Europe about the Nordic model.
It was Thatcher who undermined our belief in political and collective action. Her mantra was TINA – There is no alternative. And the underlying agenda of the triviliality which overwhelms us in the press and television is the old “bread and circus” one. Powerful media barons want to keep the world the way it is – for their sort. They define what is feasible – and are drumming still the TINA agenda.

Finally, some useful clues on how to assess whether the money in your bank is safe.
Today I'm showing an Angela Minkova print I acquired recently. Astry Gallery had an exhibition of this talented artist's work. She also does quirky little scupltures (see May 5 for an example)

New perspectives on democracy and the global financial crisis

Just as my watering poor eyes are beginning to tell me that I should be dramatically cutting back on the time I spend in front of this screen (and blogspot helped by going offline for 36 hours!), good internet articles seem to be increasing. In the last hour, I’ve encountered several fascinating pieces.
First the good news. I’m glad to see that I’m not the only person who has felt unease at the exploding number of indices of good governance and democracy. Open Democracy has just sent me their latest batch of thought-provoking articles – one of which by Jorge Heine puts the issue very clearly Another article on the same site introduced me to a new democracy manifesto which at last moves the focus away from the West.
And Anthony Barnett – the driving force behing the Open Democracy site (which I have now rather belatedly added to my links) – also has a good piece on the manifesto.

Democracy is spreading and it will be with us to stay. That is the good news. The bad news is that, through some sleight of hand, this powerful idea that has mobilized so many people and so much human energy around the world, has been turned by some into a highly parochial, procedural version of what self rule is all about. It is the specific political practices of a few (ironically) self-appointed countries around the world, mostly in the North Atlantic, that have come to be defined as setting the tone and the parameters for what democracy is and is not.

Globalization, by spreading the idea of democracy, has helped to liberate people from many a dictatorial yoke. But globalization also embodies the danger that a ‘one-size fits all’ model of democracy be imposed from abroad and from above. an upsurge of efforts to categorize, classify and rank countries around the world according to a variety of ‘democracy indexes’, which purport to tell us how democratic any given country is.

And this is not a mere academic exercise. Real-life consequences flow from it. Funds are disbursed, loans are approved or rejected and countries are suspended from international organizations as a result of these rankings. One of the great paradoxes of all this is that movements and governments that empower people and bring large numbers of the formerly disenfranchised into the political realm are often the targets of these self-appointed ‘democracy policemen’.

A number of countries in Latin America, like Bolivia, Ecuador, Venezuela and others have experienced this treatment. New leaders, new constitutions, new rights for the hitherto marginalized aboriginal peoples have brought about enormous changes in these countries in the course of the past decade.

Bolivian President Evo Morales is the first Amerindian to be elected head of state in the Americas. Lula was the first trade union leader to become president of Brazil. Rafael Correa has brought political stability to Ecuador and a willingness to stand up against the oil majors to defend his country’s rights.

Yet, far from being welcome as major architects of the deepening of democracy in South America, some of these leaders are often demonized as populists by this fake international consensus about what democracy is and is not.

I was going to say that the bad news is that a special poll for the Labour parties of Sweden, Germany and UK (all of whom lost power recently) has revealed the extent of the distrust in these countries for these parties (despite the global conditions in which they should be thriving). But, as the poll reports a lack of faith in the ability of governments to stand up to vested interests (just 16% believed they could in the UK, 21% in Germany and 27% in Sweden).

That could actually be good news. If a significant percentage of the public understand that the parties have in fact sold the pass and cannot stand up to corporate interests, this could pave the way to stronger political demands. However it is not easy to overcome fataliasm. 29% in the UK were scepticical about the ability of government-led action to improve societies, with and 27% in Germany questioning whether governments can be an effective force.
It’s time parties which purport to be left use arguments and facts such as the following

And another post from Real World Economics reminds us of the strong report on the global financial crisis which came from a UN Commission of Experts (helped by Joseph Stiglitz) in September 2009 which had suggested the establishment of a panel of experts modeled after the Inter-governmental Panel on Climate Change (IPCC).

This summer the UN is to decide whether it should implement this. Should there be a panel? And if so what would its function and structure be? The last thing the world needs is yet another glossy report with yet another take on the financial crisis. And why bother if such an effort gets mired in UN bureaucracies and is not fashioned into a voice that would have traction with governments across the world?

The UN is the most legitimate and among the most qualified global bodies to weigh in on the global economic system and it would be ridiculous for it to sit on the sidelines. The UN has economists and experts in numerous global agencies such as UNCTAD, DESA, UNDP and beyond, as well as regional efforts such as ECLAC, ESCAP and others. If the UN does not weigh in, the only other options are the G-20 and the IMF. The G-20 as an institution does not include more than 170 countries in the world, and the IMF has a very poor track record on analyzing, preventing, and mitigating financial crisis. The UN is looked to for balance.

We very much need a meta-analysis of the global state of understanding on the causes of financial crises and measures to mitigate them, with the goal of making suggestions for reforming global economic governance—as recommended by the Stiglitz Commission. The UN has the track record here. The UN has already created two (while not perfect) efforts on climate change and on agricultural development. The IPCC is a body that analyses the state of climate science and its impacts, and the Intergovernmental Assessment of Agricultural Knowledge in Science, Technology, and Development (IAASTD) analyzed the state of knowledge on agriculture from the perspective of fighting hunger and poverty in a manner that can improve human health and environmental sustainability. 

What would an inter-governmental panel do? Like the IPCC and the IAASTD, an Intergovernmental Panel on Systemic Economic Risk would perform a meta-analysis of the state of knowledge on the causes, impacts, and implications of financial crises. This would not be just another report; rather, like the IPCC effort it would be the “report on the reports” where eminent persons make sense of the thousands of peer reviewed articles and agency (UN, IMF, etc) assessments that have been done. This would synthesize the similarities and spell out the differences in thinking about these issues to help policy-makers make better decisions about reform.

One of the volumes would look at causes and impacts, while another could serve as a clearinghouse for financial regulatory reform efforts. Nations and regions around the world are reforming their financial systems but there is no single place to catalogue and make sense of these new regulations. This is important for investors and policy makers as they seek to maneuver in a post-crisis world. It will also help stimulate policy diffusion whereby innovative regulation from one country can be applied to another.

If such an effort gets bogged down in UN processes it will be doomed to fail. Like the IPCC and the IAASTD the effort will need to have relative autonomy from the standard UN process. It should also engage with the International Monetary Fund and World Bank. The IAASTD has a Panel of Participating Governments (governments of all participating agencies) but also has a 60-person “Multi-stakeholder Bureau” that formally advises the plenary. Thirty of the members are governmental officials, 30 are from civil society, the private sector, and academics. Furthermore, IAASTD has seven cosponsoring agencies: the FAO, UNDP, WHO, UNEP, UNESCO and yes even the World Bank.

A UN panel on the financial crisis could model itself on IAASTD to some extent, having some of the governmental officials in a stakeholder bureau come from Central Banks and Finance Ministries, and having the sponsoring agencies be among UNCTAD, UNDP, UNDESA, some of the regionals, such as ECLAC, ESCAP, and the IMF, and World Bank.
It seems clear that at present the UN is not weighing in with a clear voice on the reform of the global economy. This is a pity. The world’s most powerful leaders and the press that follow them have found solace in the G-20 and the IMF, which are not delivering either. The UN is among the most qualified and certainly the most legitimate bodies to deal with the truly global nature of economic crises and their development implications. It started off better than any other body with the establishment of the Stiglitz Commission. Let us hope the UN is up to the task of following through on the Commission’s recommendations. The health of the global economy depends on it.

The painting is another Nenko Balkanski - which I came across on Thursday in the great Kazanluk municipal Gallery. It's of the painter's wife - and is quite similar to a painting in the Smolyian Gallery.