Last summer a group of economists at the London School of Economics felt impelled to write to the Queen in response to her question posed the year previously when she was on a visit to the university as to what had caused the banking collapse.
The letter explains that there was a ‘psychology of denial’ affecting all those concerned, and in a touching note of humility drawing attention to the fact that many very intelligent people were caught up in this collective denial, the letter goes on to explain that “it is difficult to recall a greater example of wishful thinking combined with hubris”.
“Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well,” they say. “The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction.” (my emphasis added)
Professor Luis Garicano of the LSE went on further:
‘I think the main answer is that people were doing what they were paid to do, and behaved according to their incentives, but in many cases they were being paid to do the wrong things from society’s perspective. There was a very complicated, interconnected set of issues, rather than one particular person or one particular institution.
In summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.’
There are a number of themes which one could point to in this letter which Ralph mentions in his post. The first is the idea of standard measures of success, which is a dominant idea in many organisations involved in benchmarking, setting key performance indicators (KPIs), or trying to implement ‘best practice’. These ideas have taken root in most organisations and particularly in the public sector, where there is an assumption that staff in organisations produce work optimally when they are guided by pre-reflected targets and standards. The organisation, or even a whole domain of organisations, can be thought of as a system which can be moved towards equilibrium if the right measures are prescribed. The letter to the Queen seems to be an implicit admission that targets and performance measures, particularly ones which favoured short term gains, or maximising shareholder value at the expense of other values, are likely to have contributed to the crisis. If financial brokers were being rewarded for the speed and number of deals that they are making rather than for the nature and quality of those deals, then this would have encouraged them in what they are doing. This does not, of course, excuse them from the ethical implications of what they were doing, but it does say something about the nature of the game being played.
Secondly, there is an implicit assumption in the letter from the LSE professors, however, that had the necessary intelligent people sat in a room together, then they might have foreseen what would play out. This is a familiar idea from systems thinking that it might be possible to prevent something similar happening in future, if only one could get ‘the whole system’ in the room. Or perhaps there is an implication that it needs a different set of standards and targets, but more social ones in order to bring the system to a different equilibrium state.
Thirdly, what the professors’ letter leaves out is the account of power, greed, dishonesty and affect which also contributed to the collapse. This is not to imply that all investment bankers are greedy and dishonest: in the proliferating accounts of the banking crisis there are also stories of courage, honesty and principled behaviour which took the interests of the broader reputation of the bank into account over short-term gain. However, what is intriguing is the way in which the Big Bang, the deregulation of the City of London affected day-to-day relationships between people and their daily lives. It produced conditions which would have made it virtually impossible for participants competitively immersed in the game to gain any detachment from it.
The historian Robert Kynaston gives an extended account of this in the fourth and final volume history of the City of London entitled A Club No More and describes the time just prior to the development of the complex financial instruments which caused the financial collapse. The transition that Kynaston charts from pre- to post-Big bang when the City was deregulated, is from a relatively small, stuffy, rigid, class-ridden and patriarchal community, where the City had the feel of being closed and very traditional, to a complex, international free-for-all. Previously, reputations were founded on a gentleman’s word: the City was patrician and stolid. Post-Big bang the number of people employed in the square mile increased dramatically, the were a large number of foreign takeovers so that London banks became subsidiaries of companies based overseas, and the game became much more complex and competitive. Salaries leap-frogged, employees were poached from one bank to another, and the working day extended to all hours. The dynamic of competition made relationships difficult between companies, as one might expect, but also within companies between colleagues. There was no longer a premium placed on honesty. Kynaston quotes from Michael Lewis’ Liar’s Poker, the latter’s reflections on being a trader for Salomon Brothers, and the mixed delight he experienced for offloading $86 million dollars worth of unwanted bonds onto a too-trusting client. Guilt at tricking a client was mixed with the delight he felt at being heralded a scruple-free hero within his firm.
Kynaston’s portrait of the City of London seems to depict the opposite of what Norbert Elias described in The Civilising Process, where longer and longer chains of interdependent people have produced more civilised behaviour over many centuries. According to Elias, by exercising foresight and hindsight, individuals have exercised greater detachment from, and control over their affects to gain social advantage among the interdependent groups competing for power. Shame is one of the blindly operating mechanisms of social control. However, in the City it seems as though, in many cases, behaviour was entirely shameless, and far from gaining detachment from the social processes they were part of, many traders became more and more addicted to destructive competitive games to which they were contributing, even if this meant betraying trusting clients or colleagues. Elias was also clear that the civilising process could also go into reverse, however. What is clear is that during the boom years City traders did create, in Elias’ terms, a ‘heroic we-identity’, which made it very difficult to criticise practices from within the community, and increasingly, as we have seen, from without.
Returning to the letter to the Queen from the professors at the LSE then, we might say that they are still looking for rational explanations when rationality would take us only part way in understanding what has been going on. Their account leaves out as much as it includes. The deregulation of the City of London was a shift in power relations between different groups in society which manifested itself every day in relationships between people. For a while the City was a place of at least two cultures, as old ways of working came up abruptly against the new. As interesting as the accounts of the highly complex derivatives that were invented by people, are the narratives of how people behaved with one another and what this tells us about the things which were valued. From the perspective of a body of ideas we are calling complex responsive processes, there is no system to bring into equilibrium and no amount of measures that could have been designed to bring about exactly the result we intended. This is not to imply that no measures were needed, however. It is not just a case of identifying the ‘risks to the system as a whole’, but of developing a greater understanding of the genuine uncertainty that results from the interplay of many, many intentions and what we can learn from what is going on from the things that people are doing in their every day practice.