Management and the Next Crash

The Chancellor of the Exchequer is generally pictured as commander of the economy, driving it through a dangerous jungle at the edge of Armageddon, threatened by mortal danger on all sides. Whether he is conceived of as a hugely intelligent and skilful driver, or an ill-informed purveyor of omnishambolic damage, is a matter of political belief. The fundamental error is in the estimation of his power to drive the economy. At most it extends to steering round relatively gentle corners and having some influence over speed. The effectiveness of these limited powers depends on the ability to see dangers far ahead and to make adjustments accordingly. The currently dominant economic ideology is a particular handicap to achieving such foresight. As Chicago Nobel laureate Professor Robert Lucas told the Queen, the best economic theory can do is predict that such events as the 2007-8 crash are unpredictable.

Lots of lessons have been relearned since Lehman’s bust, yet few substantive changes have been made. So it is predictable, and widely predicted, that there will in due course be another, most probably bigger crash than 2007-8. And after that, if no preventive actions are taken, there will be another. And another. Till the changes are made.
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Lehman Brothers’ Bankruptcy Celebrations

Though celebrations have been a little muted, the fifth anniversary of Lehman’s demise should not be allowed to pass without remark. The imponderables of Armageddon, financial melt-down and economic catastrophe seem to have been avoided for the time being at least. The masses may continue in poverty, with huge numbers unemployed, but the Bob Diamonds are OK, and some valuable lessons have been learned.

The banks should obviously not be allowed to sell sub-prime mortgages or other derivative securities whose risk is deliberately obscured. Government agencies should not be allowed to support the loans for such purchases. Banks should clearly be reduced in size to less than too big to fail and be required to carry sufficient capital to make them safe to carry the risks they incur. They should not be allowed to trade on their own behalf with other people’s money. The fundamental ingredients of financial derivative assets must be clearly stated so their riskiness can be assessed, or their sale made illegal. Financial transactions should be subject at least to a nominal tax to reduce automated ultra-fast transactions, and help rebalance the economy from the derivative to the real. Ratings agencies, auditors and regulators must be legally liable for the reasonable truth of their various statements of approval.
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