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July 7, 2011 In economics, reality is often – if not usually – an illusion. For an economist, one of the most important and useful things you can do is to make yourself obsolete. Last year, Sir Howard Davies of the London School of Economics published an excellent book: The Financial Crisis:Who is to Blame? Published by Polity Press. That little book has become important, it was part of an LSE attempt to redefine the whole idea of banking. This little book was so important it lead to changes that have made the book obsolete. Congratulations, Sir Howard!! Most people like to think, the current financial crisis was caused by a gang of irresponsible, greedy, evil bankers. And the truth is, there were some irresponsible greedy (if not downright evil) bankers near the center of the trigger that caused the explosion. Sir Howard points out that the US Federal Reserve Board (ably assisted by the Bank of England) also had a finger on the trigger. Now, this might sound silly, but Sir Howard really set the cat amongst the pigeons with that claim. Central Banks are never wrong. To say that any Central Bank might have been irresponsible is something that nice people just don’t do. To say the mighty US Federal Reserve Board was irresponsible amounts to gross impertinence. To say that the Bank of England acted as if it were an American colony – now that is something that a Gentleman would never do. But what can you expect from a Knight of the LSE? They don’t have gentlemen at the LSE. But that is not all. When Sir Howard claims that Central Banks can cause ruin and unemployment, he is saying that the Gentlemen who run noble institutions like the Bank of England have to think about the consequences of what they do. As we all know, English Gentlemen don’t do that. A gentleman has responsibilities to his own social class, and that does not include people who are likely to become – or even care about becoming – unemployed. The upshot of all this is that the LSE coined a new word. MacroPrudential Policy. Essentially, MacroPrudential Policy first meant that Central Bankers should have to worry about the consequences of what they do. The word spread. Like wildfire. People started saying – if Central Bankers have to worry about consequences, why not make the Bank Regulators (FSA officials in Britain) also take responsibility. What about politicians? Everyone knows that when a financial collapse creates massive unemployment, any politician can gather up huge numbers of cheap votes by indulging in a little Bank Bashing. Bank Bashing works – it used to be called Jew Bashing – and it works every time. For the lower life politicians who want cheap votes, it works like a charm. Every time. Of course, when the Prime Minister indulges in Bank Bashing, then some ‘ordinary’ folks think it is time they did a little Paki Bashing (same thing, after all). What happens if we make politicians responsible for what they do? Hey, if we can make the Bank of England responsible, why not make politicians responsible, too? It is at this point that even an academic can take a little time out for a ‘reality check’.
MacroPrudential Policy. What a horrible word. It’s a word you are going to hear a lot in the future. It has a lot to do with responsibility.
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