Tuesday, April 14, 2009

Patience, Process and Pianos

"See it, solve it, fix it," is the modern day technocrat's translations of "veni, vidi, vici." There is a tendency to look at the mess in the financial services sector, take a look at the state of the general economy, do a down and dirty on just what that means for real estate values, credit card receivables and corporate credits, and reach the inarguable conclusion that the banks are currently insolvent, individually and collectively, that the passage of time is only going to make things worse, and that the only question is whether a few of the strongest ones will tumble into the abyss without government life support from their own stupidity or because of systemic issues of counterparty risk. But that question isn't very important from a systemic perspective--it amounts to debating the seamanship of the Somali pirates.

Having sized the situation up, then it is a simple matter of solving for 'x'--in this case a healthy prosperous private sector banking system meeting the needs of the general economy and providing plenty of post-public service enrichment opportunities to the political classes. Having seen it and solved it, fixing it comes next. This is the part most people aren't very good at. At least not the people who become consultants, venture capitalists, lawyers, professors, investment bankers, analysts, technocrats.

It should not be particularly difficult, assuming everyone involved understands on which side their bread is buttered, that the public is cut out of the process (I'm afraid that 'populist' and 'public' have the same Latin roots), and this inconvenient internet technology invented by the venture capitalist vice president Al Gore doesn't blow the lid off the sausage maker. Still, even without the internet, the sausage maker is perpetually gummed up. I guess everybody's too good and too smart to learn how to take it apart or get their hands dirty cleaning it.

I am as guilty of this as the next technocrat or policy wonk. To paraphrase T.S. Eliot, between the thought and the deed, between the word and the action, falls the shadow.

We are in the shadows now.

There is a dynamic at work that no one is commenting upon. Everyone is growing impatient. Those noted Republican populists Richard Shelby and John McCain are calling on the president to allow Citigroup and Bank of America to fail. Because he won't take decisive action, Obama's supporters to the left are muttering about regulatory capture and threatening to wash their hands of him on the grounds that he's sold out to Wall Street. As for the vaunted stress tests, some are contemptuous of them, some are confused by them, and many are bored with them.

I tend to think of the stress tests as a political fig leaf. Fig leaves can serve a purpose. Travelling through Italy last year, I saw a fair number of fig leaves. It was easy to think of them as rather silly, but they served their purpose. At least, when the choice was being made, instead of getting rid of a significant piece of sculpture and replacing it with something vapid and chaste, there was a minor debasement of a major work of art, which survived as a consequence.

Step back, and regard the current situation as an unfolding dynamic. At the end of the day, all of the major financial institutions in the country will have failed. The survivors will have been chosen by the government, capitalized by the government, and initially managed by the government. While they may continue the wear the colors of the gangs that destroyed them (the Stage Coach may well roll on, the house of Morgan may remain in the lexicon), they will be defined by and dictated to by regulatory authorities more focused on their meeting the needs of the general economy than their maximizing value for their shareholders (assuming they have any).

However, this is a result that is going to take time. Bluntly, the banks must first fail, and the financially elite utterly discredited, before the political will to reform the financial services sector will develop. Even then it will not develop unless the failure of the financial services sector has a sufficiently vicious impact on the public. No one in there right mind would wish for that latter. Unfortunately, if the current regime of technocrats (Bernacke, Paulson, Geithner, Summers, etc.) are correct, that vicious impact is inevitable if there is a systemic failure. So, they are in denial of the possibility of a systemic failure.

It is liberating to say that there is a possibility, verging on inevitability, of a systemic failure, and to start thinking about what comes next. It then becomes possible to start considering steps to ameliorate that vicious impact (recognising its inevitability), and reform the financial services sector, rather than revolutionizing our current forms of economic organization.

I am currently, in my dotage, learning to play the piano. Playing the piano, for an adult, is an interesting discipline. A piece of music has a tempo, it proceeds on a beat. A sure way to muck it up is to hurry it up. It must be allowed to unfold at its own pace. You can't go fast through the easy parts and slow down when it gets hard. And, as you master the piece, you discover that it has a dynamic. To interpret the music, you have to be able to express the dynamic.

That's where we are in the reformation of the financial services sector.

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