Some further thoughts on financial reform

We’re fooling ourselves if we blame the recent crisis on character defects unique to our time, be it unusually lax regulators, particularly shortsighted politicians, or financial market participants avaricious beyond the norm.

Truth is, each of these qualities fluctuates with the prevailing social mood: they’re inherently pro-cyclical. When it would be ideal from society’s point of view for them to zig, they tend to zag. Nor is there much reason to think this is going to change anytime soon. We’re human, all too human, and so would be well advised to insulate critical social systems from our long-term shifts in sentiment.

Easier said than done, though. Not only because designing foolproof (or, more accurately, resilient) systems isn’t easy, but also because even assuming we do there’s every chance our progeny will find a way to undo them during the next great wave of optimism.

Still, we can but try.

Adair Turner (chairman of the UK Financial Services Authority) and Mervyn King (Governor of the Bank of England) are both acutely aware of this dilemma. Far more than any other senior financial markets officials, they try to get at the deeper underlying causes.

On Monday, October 25th, King gave a talk in New York entitled “Banking: From Bagehot to Basel, and Back Again”. Read the rest of this entry »