17 May 2008

Mediocratic banking: the ideology kicks in

The Financial Times's Gillian Tett has a prescription for how to prevent another banking crisis:

there is one simple step that might help improve matters inside the financial world: bankers should be forced to talk about their business with a wide pool of colleagues, including those outside their immediate silo, rather than just their bosses alone.
Ms Tett's remedy is inspired by an HR-style exercise conducted at a recent banking conference, which purports to show that managers are more likely to reject an obviously risky product if they have first discussed it with other managers. What does this prove? Not much, other than that something which 'obviously' (from a collective perspective) has quality X is more likely to be judged by an individual as actually having quality X if they have first discussed it with others.

Whether prior discussion makes judgement more reliable, however, depends on how often it is the case that things which are socially 'obvious' are actually true. It seems plausible, for example, that for many banking insiders pre-2007, subprime lending was 'obviously' a good thing since it brought the benefits of credit to those who would otherwise not be able to enjoy it — so this prescription is unlikely to prevent that particular type of problem.

Since the dogma seems to have been well established by now that the banking crisis was the fault of irresponsible capital markets — rather than having something to do with an ideology that promotes the idea of credit for all — I suppose it was only a matter of time before individualism (here in the form: making judgements without sufficient reference to others) began to be touted as another convenient scapegoat.

It might of course be pointed out that the same dubious mortgage-related products were being marketed by several institutions at the same time, and that these institutions could hardly have failed to be aware of what the others were up to. No doubt UBS was reassured by the fact that Citigroup was doing it, Citigroup by the fact that Merrill was doing it, and so on. So perhaps the problem was, rather, too much attention to what others seemed to be endorsing, and not enough to one's own personal misgivings. This possibility, however, fits less well with mediocratic ideology than the thesis that it was specific banking managers, behaving individualistically and without due 'consultation', who were the drivers for the dodgy products.

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À propos the banking issue, I notice that according to Bloomberg, the much-quoted LIBOR interbank lending rate has been having credibility problems.
"We have not run away or hidden from the need for reform" ... British Bankers' Association Chief Executive Officer Angela Knight said at a hearing of a parliamentary committee in London today ... The association, an unregulated London-based trade group, is under pressure to show that Libor is reliable following complaints by investors that financial institutions weren't telling the truth about their funding costs after rising mortgage defaults contaminated credit markets and drove up borrowing costs.

While the association set the one-month dollar Libor rate at 2.72 percent on April 7, the Federal Reserve said banks paid 2.82 percent for secured loans later that day ... "The Libor numbers that banks reported to the BBA were a lie," said Tim Bond, head of global asset allocation at Barclays Capital in London. "They had been all along."
There are a number of reasons why truthfulness is not considered necessary in a mediocracy.
• Mediocratic analysis casts doubt on whether concepts such as objectivity are meaningful.
• Mediocratic techniques such as blurring and boggling create the impression that reality is fuzzy.
• Appropriate social ends are assumed to justify the means.