Mike Harris's Blog
You don't know what you've got till it's gone
Sunday, September 21, 2008
As the world flirted with financial meltdown last week a song popped into my head. For once it wasn't a Dylan song although he did make a cover version. It was a Joni Mitchell song from 1970 , called Big Yellow Taxi. She wrote it in Hawaii where she had seen a newly constructed parking lot diminish the iconic view of the distant green mountains. Hence the lyrics:
Don't it always seem to go That you don't know what you've got Till it's gone They paved paradise And put up a parking lot:
What struck me when I first heard that song and still strikes me now is the universal truth of the sentiment:
Don't it always seem to go That you don't know what you've got Till it's gone
The relevance to the credit crunch may not be immediately apparent but stay with me and I'll try and make the link.
Whatever diagnoses of the causes of the great panic of 2008 eventually emerge when we have some perspective, the whole series of events must raise some questions about bank regulation.
The primary purpose of bank regulation is to avoid systemic risk - that is risks to the entire financial system. Exactly the sort of risks we have been living through. It is clear that regulators neither anticipated nor took action to avoid such risks. Until eventually the US government came to the rescue (I hope!) with a massive bail out - about time guys but better late than never!
I'm not intending to criticise regulators at all but instead just to make one observation. I thought Banking regulation in the UK was fantastic when it was the responsibility of the Bank of England.
(It was moved to the FSA in 1997 by Gordon Brown, and the then Governor of the Bank of England Eddie George came close to resigning as a result).
It used to be based on cosy fireside chats between senior Bank of England officials and Bank CEOs with many a nod and a wink.
What worked was the Bank of England official knew both banking and the institution he or she was supervising backwards and those chats stopped being cosy the second the Bank CEO couldn't explain exactly what was going on at the Bank or worse still wasn't totally open and honest about everything. There was a sense of shared responsibility for the well being of both the institution and the banking system. If there was trouble they were both in trouble.
The FSA system was far more professional and apparently rigourous but the context of the reviews shifted from "we are both in this together and these meeting are really useful to both of us" to a box ticking type of risk review that could easily miss the big picture and which certainly wasn't welcomed by the Bank as something valuable.
So there you go - I don't know whether the old Bank of England regulatory approach would have shielded British banks from a global crisis which was born in sub prime America but I bet it would have dealt with the crisis better- as of everything else in the world it is perhaps true of bank regulation :
That you don't know what you've got Till it's gone
I m currently reading 'The Black Swan - The impact of the Higly Improbable' by Taleb. His thesis ist that because of our human beings limtitation of learnings and our fragility of knowledge in a complexe modern world we always will experience a black swan - an unexpected event. After we find explanations for its occurrence that gives us a false security for predictability - next time.
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