190. The script of financial crisis

How to account for the perverse behaviour of banks in recent financial crises?

Were the bankers irrational? Were they lacking in morality? In pursuit of high profits they

hived off the risks to society: the state is forced to save a bank when it defaults,

because it is ‘too big’ or ‘too connected’ to fail, bringing down the whole financial sector.  

 

Arthur Wassenberg[i] proposed that economics neglects social processes of interdependence

and thereby fails to understand the crises. In banking, actors are not autonomous, as assumed in

the ‘methodological individualism’ of economic science, but form systems of

interdependence, complicity, shared interests, imitation, accommodation,

lobbying, and the ‘revolving door’ through which career makers move between the industry

and the regulatory agencies of government.

 

Here also, one might use the notion of scripts. One can see a script for banks, with nodes

for their divisions and subscripts for the activities performed there, and superscripts of the

industry and political structures. Bank scripts share nodes, in shared activities, shareholders,

supervisory boards, and lobbies.

 

There are ‘nested games’, ‘prisoners dilemmas’, of workers in banks, banks in the financial

industry and capital markets, and government policy with respect to banks.

 

Individual workers might feel the appeal for morally more acceptable conduct but are willing

to adopt it only if colleagues do so as well, not to lose out in the internal competition

for positions and rewards.

 

Bank leadership may want to reform their conduct, but only if other banks do so as well, on the

pain of being fired by shareholders or taken over by financial raiders on the look-out for

businesses that leave profit opportunities unused.

 

National regulators do not dare to restrain banks unless other countries do so as well, for fear of

driving out their financial sector.

 

Here we are back at the ‘system tragedy’, discussed before. The system produces outcomes

that are neither intended nor desired. In the interconnections there is ‘loss of traceable and

attributable responsibility’.

 

What to do? A moral turnaround of bankers is necessary but will not have the desired

effect until also a break of the system is achieved.

 

The classic answer to prisoners dilemmas is government intervention to impose

the solution where everyone complies with desired conduct.

 

That happened in the tobacco industry, with a ban on a certain form of advertising. Producers had been wasting money on it, since advertising hardly increased consumption and was needed only to maintain market share. Each producer by himself could not afford to stop, for fear of losing market share. The ban om advertising broke through the dilemma, was welcomed by the industry, and profits rose.

 

But in banking, on the highest level, the PD between countries, there is no overarching authority, though in the EU attempts are made to arrive at joint regulation.

 

In terms of scripts, breaking the system entails cutting nodes loose from the script, and

allowing them to operate separately or to reconfigure them differently. Think of how

nodes in the script of a service restaurant were re-configured in the script of a self-service

restaurant.

 

One might break up banks into savings-and-loans banks and investment banks. Yet the old system tragedy seems to persist, ineradicably. Perhaps rather than trying to reform the system this is best done in the emergence of a new, outside, competing system. That is what happened in history when systems were unable to reform from inside.

 

We see signs of this. Fed up with the banks, people are developing alternative forms of finance, outside banks, in ‘crowd sourcing’ or in investors and entrepreneurs seeking each other out locally, on the basis of local reputations. These small scale local activities are no longer too big or too connected to fail.

 

To conclude, I make a connection with the preceding item in this blog. While in the old

system bankers view what workers and customers do ‘from the outside’, instrumentally, as nodes in their script, in the emerging system those components can act from their own perspective, as independent nodes, and let the resulting script emerge from that. 

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[i] Arthur Wassenberg, Capitalist discipline: On the orchestration of corporate games, Palgrave-MacMillan, 2013.