Christmas reading

After a series of excellent op-eds on finance and ethics, here is the best FT summary so far:

Faith and finance: Of greed and creed, By Patrick Jenkins, Published: December 23 2009 20:02

And a link to the others, see the videos especially
http://www.ft.com/indepth/money-and-morals

Bonuses and Anglo-Saxons

Anglo-Saxons are under attack again. Apparently every meeting of the European Parliament these days opens with a ritual denunciation of Anglo-Saxon capitalism. France’s appointment of Michel Barnier as internal market Commissioner has sparked talk of a conspiracy to seize control of finance away from London. The Basel Committee wants to prevent undercapitalised banks from paying bonuses.

Meanwhile on the home front,

Banking crisis simply explained

Young Paddy bought a donkey from a farmer for £100. The farmer agreed to deliver the donkey the next day.

The next day he drove up and said, 'Sorry son, but I have some bad news. The donkey's died.'

Paddy replied, 'Well then just give me my money back.' The farmer said, 'Can't do that. I've already spent it.'

Paddy said, 'OK, then, just bring me the dead donkey.' The farmer asked, 'What are you going to do with him?'

Paddy said, 'I'm going to raffle him off.' The farmer said, 'You can't raffle a dead donkey!'

Paddy said, 'Sure I can. Watch me.. I just won't tell anybody he's dead.'

A month later, the farmer met up with Paddy and asked, 'What happened with that dead donkey?'

Paddy said, 'I raffled him off. I sold 500 tickets at two pounds a piece and made a profit of £898'

The farmer said, 'Didn't anyone complain?' Paddy said, 'Just the guy who won. So I gave him his two pounds back.'

Paddy now works for the Royal Bank of Scotland

Better ration carbon than babies

Copenhagen is a great excuse to indulge in Armageddon fantasies. From Hollywood's trashy "2012" to the Maldivian underwater cabinet meeting, the end-of-the-world has never seemed as nigh. 

One particular doomsday scenario that Copenhagen raises is the possibility of a huge reduction of farmable land surface leaving the earth too small to support its human population. Sci-fi or not, the implications are far more alarming than boring old carbon reduction.

Reds versus blues

(with apologies to Michael Skapinker)

In the blue shirts are Team Markets. The players are Eamonn Butler, Phillip Booth, Marcus Agius, Peter Sands, John Varley and Lloyd Blankfein.

In the red shirts are Team Ethics; Ken Costa, Stephen Green, Adair Turner, Mervyn King, Will Hutton, John Kay, Nick Anstee, John Plender and Gordon Brown.

They are preparing for a match to decide if free financial markets will save or destroy themselves, like a celebrity student seminar on Marx, but with real policy implications.

The day before, angry protesters started targeting bank offices with placards, which should focus the contest nicely on the question of how well today's financial markets fit with common ideas about markets and social justice.

The market ideas are familiar from Adam Smith and David Ricardo. Their application to finance was questioned by Alan Greenspan and will soon be the subject of a TV documentary with Luke Johnson, called “The Flaw”.

The social justice ideas include Rawls notion of equal access to opportunity and a floor under the poorest; Mill's laissez-faire without harming others; and Bentham's greatest good for the greatest number.

So far so theoretical, how does it compare with reality? 

Round-up from the last few days

Here's a quick round-up of developments in the last few days:

Goldman Sachs apologised after protesters bearing squid placards and too-big-to-exist signs converged on its Washington DC office and the home of Lloyd Blankfein. Blankfein had earlier caused uproar when said the bank does god's work. He later made things worse when he said he had been joking. The pressure had some effect as GS then pledged USD 500m to help small businesses.

Fitness for purpose

Problem: parts of the financial architecture have evolved without regard to their general economic function, spreading dysfunction, cost and instability.

Solution: extend the “fitness for purpose” concept from consumer to financial law. Link financial licenses to a statement of economic purpose (such as to provide payment systems, capital allocation, risk dispersal, liquidity, trade facilitation etc) and use this to develop industry structure, taxation and regulations concerning pay, risk, capital, governance and any other areas of regulatory oversight.

Function and ethics

“In every civilised nation the soldier’s profession is to defend it, the pastor’s to teach it, the physician’s to keep it healthy, the lawyer’s to enforce justice in it, the merchant’s to provide for it,” wrote John Ruskin in 1860.

What would the 19th century social thinker, subject of a thought-provoking  video by the FT's Andrew Hill, have said about banks?

Climate finance

Today’s G20 communiqué reminds finance ministers of another reason to take financial reform seriously – climate finance.

A paragraph at the end of the two-page document mentions the need “to increase significantly and urgently” the scale of finance to secure an ambitious climate agreement at Copenhagen next month.

Banks have been taking up a lot of public attention and money but they will soon have to compete with energy reform, which could make financial reform look easy by comparison.

Turner conference

There’s a consensus coming, slowly but surely. Based on the presentations at Monday's FSA Conference on reform, bankers and regulators agree that banks should be more resilient, better behaved and easier to clean up after a bust. The discussion also threw up some new opportunities

George Osborne on bonuses

George Osborne on Monday called for retail banks to use bonus cash to boost lending in the real economy. Unlike Boris’s attack on bonuses last week, which was based on justice, Osborne is pitching it as a practical way to get lending going again.

Idealogy for regulators

In today’s FT supplement on the Future of Finance, John Authors describes two ideologically different approaches to regulation, each requiring a different response to the financial crisis.

First, there are Minsky-ists, who believe governments should intervene to stabilise inherently flawed markets, he writes. Then there are Mises-ites, who believe government should never intervene because they always distorts things.

Followers of both economists correctly predicted the crunch and Authors concludes that regulatory reform can only be achieved after a nasty and ideological fight between them.

He is right that ideology is at the heart of regulatory reform, as proved by the comedy protests against Lord Turner after the FSA chairman dared to ask if the financial sector had grown too big for its boots, and the slow progress resolving the Too Big Too Fail problem.

Ideologically, whether you follow Hyman Minsky or Ludwig von Mises depends on whether you think markets can ever work properly.

Mervyn likes narrow banking, phew!

Mervyn King’s endorsement of narrow banking is a big relief. A worrying gap has been opening between politicians and economists on bank reform, so let’s hope King’s call for a structural review of the sector will sway the decision makers in the right direction.

Boris vs Botin

The bank debate went all Old Testament this week. From the responses to Boris Johnson’s “cockroach” broadside in the Telegraph, it looks like there’s a growing desire to see bonus recipients receive a mighty smiting, or at least a windfall tax.

Ditch the campaign

The Mayor’s report on the competitiveness of London as a financial centre is out today. Among the threats it lists is this: “London’s reputation could be tarnished due to its close association with the financial services industry”.

That’s a bit awkward. And how do you reconcile it with the report’s other view, that London’s role as the world’s financial centre is threatened by new regulation?

Perhaps there’s too much hysteria about this, especially as some of the proposed legislation comes from Brussels, triggering a false note from the Telegraph in the form of its “Ditch the Directive” campaign.

Ethical innovation

Should banks be subject to ethical review when they invent new financial products? It sounds like a recipe for red tape, but imagine if, when collateralised debt obligations and credit default swaps were created, they had been scrutinised by an ethics committee. Perhaps the financial crisis might not have been so bad.

Ethics in finance normally relates to tobacco and arms, not finance itself. But a committee in a bank or a regulator with a brief to take an ethical look at financial innovations might study the real economic and social effects of a new product

Save the hedge funds?

What do hedge fund managers and bluefin tuna have in common? Both have recently been described by the European Commission as “emblematic”.

Officials drafting support for the endangered tuna reportedly argued for hours over which adjective to use, rejecting “beautiful” and, apparently, “delicious” (see Prospect magazine Oct Brussels diary) as inappropriate.

It seems they had the same adjective problem with hedge funds and private equity firms.

Make bank fees disclosable

The government today announced plans to make banks disclose their high bonus data, after chancellor Alistair Darling earlier refused to rule out “naming and shaming” the highest paid.

This may excite anti-capitalists with picketing plans for bankers’ Chelsea houses but it misses an important point in bonus culture: mega-payouts are merely a symptom of a greater failing in the system. That failing is that investment banks charge too much for what they do.

One of the difficulties in the bonus debate is that there is little visibility on who ultimately pays for them, beyond a vague sense that somehow we all do. Leaving aside proprietary trading and normal retail and commercial lending, much of the “extra” income funding the rise in banker bonuses is from high transaction and trading fees. These are normally signed off by finance officers and traders, acting in their capacity as agents for their own investors and shareholders. These are the real clients, in the sense that they foot the bill but would never know how much is paid in their name. It includes all of us with a pension fund.

One way of addressing this agency problem would be to make fees for corporate banking services visible in the accounts of the companies paying them.

Where should we put the FSA?

Wouldn’t it be great if the hot air about bank reform could be captured as green energy – two problems solved in one! But as the bank reform debate drags on, the possibility of using the financial crisis post-mortem to rebalance the economy in favour of more socially useful activities – such as R&D, climate research, public services or even public sector deleveraging – is fading slowly away.

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A blog for people following the financial services melt-down who hope we might - just possibly - emerge with something better than before it went wrong.