Australia’s ‘economic miracle’ off the back of what might be called the ‘reform period’ which can be dated fairly neatly from late 1983 and the floating of the dollar to mid 2001 (which, IIRC was the date the ANTS tax reform package was introduced). It came about because people in the opinionosphere – initially led by academics with the torch being taken up by bureaucratic entrepreneurs like Alf Rattigan and political entrepreneurs like Burt Kelly from the late 60s, broadening to journalists most senior bureaucrats by the early 1980s. This growing movement forged a consensus about what was wrong with our economic policies and, by implication, what to do about it. As it grew into orthodoxy, ‘reform’ took on a sadly reductionist turn – with the big ideological slogan being deregulation – letting the market work.
Not only is the idea that you can reduce reform to a slogan, or even use the slogan to get your bearings a misfortune. To get the slogan wrong looks like carelessness. All social activity of any sophistication involves a rich ecology of the public and the private. The disastrousness of this turn was concealed for some time by the fact that there was quite a lot of detritus hanging round after around a century of ad hoc protectionism and in such circumstances deregulation works with the stroke of a pen – at least for a while.
The thing is, the public sector has immense resources. It’s tragic that it’s not a hotbed of ideas. Politicians are busy people and can’t figure this stuff out for themselves. Of course line departments still need to deliver services, but I would argue that those aspiring to high office in the public service should have achieved and demonstrated some degree of sustained thoughtfulness – as they might do for instance with ‘sabbaticals’ during which they did, or participated with others in, worthwhile research and/or ‘think tank’ work. And that’s quite apart from the many hundreds of funded research and ‘think tank’ positions in government in research agencies within various portfolios. Pretty much every major department has a research agency – some of them are considerable. And there are government funded ‘think tanks’ like the PC.
Sadly these possibilities are barely realised. The enthusiasm and broad-mindedness with which many public servants begin their careers stands barely a chance amid the pervasive careerism of the public service, and the fetters of conformity and groupthink.
Yet we’ve actually granted some of these agencies high degrees of independence – one would have thought precisely to enable such independence of mind. The Reserve Bank probably has more independence than any other government agency and it has a substantial research department. I’m no expert on its output and I know there’s lots of good work done there. But I doubt it would be a career enhancing move to offer a fairly thoroughgoing critique of the structure of banking from the Reserve’s research department or anywhere else in the bank.
But elsewhere such independence has been used inject far more edge into the public debate. In an unsympathetic review on Oct 28th 2010 entitled “King plays God” the Economist reported:
In a speech on October 25th … in New York, Mervyn King 1 savaged big banks and criticised the new Basel 3 rules as too soft. Then he said what he really thought, arguing that “of all the many ways of organising banking, the worst is the one we have today.” Possible remedies included not just breaking up banks, but also “eliminating fractional reserve banking”— the centuries-old practice of banks taking in deposits and lending most of them out in riskier and longer-term loans. Having ignored finance for a decade the Bank of England now seems to want to reinvent it.
That is, admittedly, more fun than shifting base rates by 25 basis points once in a while. But since the Bank will take over bank supervision in Britain from the Financial Services Authority (FSA), Mr King’s stance is deeply controversial. At the Bank there seems to be a lack of unanimity. Mr King and Andy Haldane, the author of some imaginative papers on finance, are radicals. Paul Tucker, a deputy governor who helped negotiate the new Basel 3 rules, is thought to be more pragmatic, as is Adair Turner, the chairman of the FSA.
In the meantime Adair Turner seems to have joined the radicals. His conversion seemed to be underway while he chaired the Financial Services Authority in the UK, but has matured since his departure. Here’s a great summary (pdf) of his big new(ish) book arguing, amongst other things that “bank capital requirements should be four or five times their current levels”!
Meanwhile Andy Haldane (my favourite public servant in the whole world) hasn’t just been imaginative (here’s Haldane‘s recent talk about the benefits of a digital currency), as well as masterful in his various discussions of the state banking is in and what might be done about it. He’s also turned his mind to measuring and publishing things that I expect bankers would rather he didn’t. Like the implicit subsidy ‘too-big-to-fail’ banks receive from creditors who discount the rate at which they lend them money on account of their confidence that they’ll be bailed out if things go wrong. The figures are not pretty. In this 2012 speech he suggests that the implicit subsidy to the systemically significant large banks in the global financial system is a cool $300 billion though it was much higher during the crisis. The same methodology was then applied to calculate the implicit subsidy to each British Bank. In 2014 at someone else’s suggestion, the Bank of England had me in while I was in London to discuss my paper Central banking for all: a modest proposal for radical reform indicating that it was relevant to things they were thinking about.
As an aside I note that all this is backed up by at least two very senior economic journalists who are either first class professors of economics or who could be if they wished – John Kay and Martin Wolf. Both speak with great authority and thoughtfulness about some of the most important issues – particularly the inadequacy of current institutional arrangements for banking. (One could add Samuel Brittan, though at 82 he’s getting on a bit!). Both have books out on what’s wrong with finance and what to do about it. I’ve reviewed Wolf’s latest book here on Troppo. And here’s Kay on finance:
The declared purposes of the new regulatory institutions in Britain are to promote stability and maintain confidence. This approach is not surprising, since the institutions of financial services regulation are mostly captured by the industry. In some cases they are directly controlled by it; more often, they are manned by people who see the industry through its own eyes because they have no other perspective. The regulatory goal is the health of the industry, which is in turn interpreted as the health of the particular firms from which it is today composed. The purpose is the achievement, not of financial stability, but of industry stability, as if these were the same thing: but since the sources of instability are to be found in the structure of the industry, accomplishment of this goal is in fact a guarantee of further, and potentially more damaging, crises.
I guess this kind of independence of ‘independent’ government agencies and the weightiness of the best commentators from the fourth estate remains much more the exception than the rule in most countries. But we should appreciate it where it occurs. It’s something that can only improve the quality of debate and so the ultimate institutional choices made.
The interview of the blog-post.
- then Governor of the bank of England
- if lt IE 9