In response to an FT Blog by Larry Summers on 22nd May 2017, entitled ‘Five suggestions for avoiding another banking collapse’
Professor Summers makes five points, none of which go the core of why the financial system collapsed in 2008, or how to fix it moving forward; and then finishes with the following:
“…it is high time we move beyond a sterile debate over more or less regulation. No reasonable person can doubt that inadequate regulation contributed to what happened in 2008 or suppose that market discipline is sufficient to contain excessive risk-taking in the financial industry. At the same time, not all regulatory expansions are desirable and in some contexts tougher regulation can be counterproductive for financial stability if it reduces profitability without offsetting benefit, if it interferes with bank diversification or if it causes regulators to become overly identified within regulated institutions.
Neither the approach that holds that all increases in measured capital and other regulation are attractive, nor the one that holds that capital and other regulations should be completely scaled back is likely to prevent or contain the next financial crisis” – Larry Summers
The last crisis was caused by a number of factors, most of which are not mentioned here, for reasons that become clear when you look at what they were, and who wrote this article:
1. Governments from the nineties onwards ‘leaned’ on the banks to provide mortgages to anyone with a pulse. The Clinton administration was particularly keen on this, aided and abetted by the appointment of a series of Wall Street bagmen and pet academics
2. The acceleration of the transition from ‘relationship banking’ to ‘transactional banking’. This was helped along by a number of factors: demographic changes, reduction of competition in the banking industry, the abolition of Glass-Steagall (encouraged by the author), and the strategies adopted by the banks to take advantage of point number one – e.g. the hiring of droves of ‘quants’ incentivised to come up with cleverer and cleverer ways of packaging up ‘crap’ and selling it to people who didn’t know what it was
3. The scrapping of regulation to cover such activities (again encouraged by the author)
4. The pathetic reaction of the ratings agencies who clearly did not know what they were doing when they gave out ‘triple A’; who effectively ‘sold their souls’ to avoid the banks going down the road to a competing group of invertebrates
5. The socialisation of risk that had proceeded throughout the disastrous ‘reign’ of Alan Greenspan– ‘heads I win, tails you lose’ only makes sense if you are a politician, a banker, a moron, or a government economist
None of this has been fixed. But it has been exacerbated by trillions of dollars of bonds that are marked to fantasy, not to market.
The next crisis will be ‘caused’ by the same 'fundamentals' as the last one: because the system itself, and the people running it, lack the same two essential qualities as they did in 2008 – honesty and personal accountability - two qualities that Professor Summers has not demonstrated, despite many opportunities to do so.