Friday, June 25, 2010

Gillian Tett from the Financial Times

After work I accompanied Terry (my ultimate boss) to an economics seminar delivered by Gillian Tett from the Financial Times.

By taxi to a side road off St James, and then into one of the clubs. Up the stairs two at a time as we were so late. We took our glasses of Chilian white wine into the meeting and sat down right at the back just as the introduction was ending.

Gillian Tett walked to the podium. Dull blonde hair, soberly dressed, her neck swathed in seed pearls. Her background - she trained as a social anthropologist in Tajikistan, then wrote the Lex column for the Financial Times, then headed the Capital Markets team at the FT.

She described her efforts to understand the financial markets over the last seven or eight years, looking at financial structures from the point of view of a social anthropologist. As an anthropologist she was able to identify "cognitive capture" – the way elites hang onto power. She developed a sketch map of how the City of London worked, from the point of view of a social anthropologist ("It's symbolic that Canary Wharf is an island. They speak a language few people understand. Bankers have retreated into a private world like philosophers in Plato's cave").

She discovered that the concept of risk dispersion via hedge portfolios, although claimed to be a safer system was in fact a "bunkum" creed ("because of the slicing and dicing people couldn't see along the chain"). She began to dig around into the concept of "Market Completion" ("a private financial ideology few outside the City has heard of"). Market Completion aimed at spreading risk perfectly all over the financial system, but in fact this was all nonsense ("but no-one was able to see this because of greed - Market Completion had the function of keeping the elites in power").

There was also the problem of fragmentation. Within banks departments were extremely competitive, with the risk departments usually having little power. Senior management had little idea of what CDOs were doing and very small groups of people were taking decisions.

She was very critical about the disconnect between the City and the rest of society ("we need to have a good hard look at the cultural translators in society - these should be politicians, media and academics, but they are not doing their job"). The City is two miles from Westminster, but there is no interaction between the two ("the geeks don't understand the political context, and the politicians and lawyers don't understand the geeky stuff").

Financial regulation had become separated from monetary policy. Most banks have become too big to manage and need breaking up. The idea that the crisis is all the fault of America is not valid ("it's like saying the drugs problem is the fault of Colombia whereas in fact it is the fault of drug policy enforcement in Britain").

Her finishing comments included: "Slowing down the pace of financial innovation might be a solution, otherwise we could be looking at these crises every fifteen years".

"You have just seen a future Editor of the FT" Terry said to me on the way out.

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