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Niall Ferguson: Reith Lecture pt.2 - The Dawinian Economy

Tuesday 26 June 2012, 09:30

Richard Fenton-Smith Richard Fenton-Smith

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Editor's note: In the Reith Lecture this week, Niall Ferguson talked about The Darwinian Economy. The programme is available to listen to online or to download and keep - PMcD

niall ferguson

There will always be greedy people around banks," says Niall Ferguson "after all they are where the money is - or should be."

"But greedy people will only commit fraud or negligence if they feel their misdemeanour is unlikely to be noticed or severely punished."

In the second Reith Lecture in his series The Rule Of Law And Its Enemies economic historian Prof Niall Ferguson tackles the subject of financial regulation - and the need to drastically prune it.

Prof Ferguson argues that the financial crisis that began in 2007 had its origins in over-complex regulation.

Many economists - and members of the public - disagree and believe lax regulation was a major cause of the financial crisis. They blame President Clinton's repeal of the restrictive Glass-Steagall Act in particular.

But they have misunderstood the problem, says Ferguson. He says the major events of the crisis would still have happened even with Glass-Steagall in place. Instead, he says, misconceived regulation was a large part of problem.

Because de-regulation is not bad. It is bad regulation that is bad. Banks were key to the financial crisis - and banks were regulated, he observes.

The more serious failing, Ferguson continues, is the feeling of impunity within the banking industry. This is not an issue of deregulation, but non-punishment. There was a failure to apply the law. The list of people jailed for their role in the USA's sub-prime crisis is "laughably short," says Prof Ferguson.

Extra compliance is not the solution, he says, because adding rules upon rules upon rules removes the need for banks to simply ask themselves "are we doing the right thing?"

Plus, the principal beneficiary of tighter regulation will not be the economy - but the legal profession. Lawyers, he says, will gain lucrative business explaining to financial institutions what the increasingly dense rules mean.

Simplicity is the best defence for taxpayers and citizens, says Niall Ferguson, as it is the only way to ensure a complex financial industry becomes less fragile. Discretion should replace compliance. Combined with this should be strong central banks, run by people of wisdom and experience - and proper punishment for those who break the rules.

  • Do you believe we should have more - or less - financial regulation?
  • Is enforcement of regulation a problem?
  • How do you prove an investment bank was knowingly irresponsible - versus making a bad investment decision?
  • Is it just too late to simplify the banking sector?

Listen to Niall Ferguson's Reith Lectures

Download Niall Ferguson's 2012 Reith Lectures

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Niall Ferguson's second lecture, The Darwinian Economy, will be repeated on Radio 4 on Saturday, 30 June at 22:15 BST.

The third lecture in the series, titled The Landscape of the Law, will explore the rule of law in comparative terms - and its role in the development of countries such as China. This will broadcast on Radio 4 on Tuesday, 3 July at 09:00 BST.

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    Comment number 1.

    Niall Ferguson's central thesis is that deregulation of banks did not cause the crash. However, he needs to establish this thesis in face of the work of David Moss at Harvard Business School. http://www.nytimes.com/2010/08/22/weekinreview/22story.html?_r=3&src=twt&twt=nytimesweek
    Moss' key finding is expressed in a graph here: http://www.tobinproject.org/sites/tobinproject.org/files/assets/BankFailures_ChartwithComments_Moss.pdf

    It relates income inequality measured as share of income held by the top 10% of the pile compared to bank failures going back to 1917. There is a very clear correlation between income inequality and bank failures. It is strong backing evidence for the position of the Equality Trust - that greater equality is better for social cohesion. http://www.equalitytrust.org.uk/why

    Of course, correlation is not causation, though causation must always be accompanied by correlation.

    Naturally Niall Ferguson will wish in to deny causation, because it negates his free market assumptions. He has an easy task, because it is always impossible to "prove" causation, because it is not a matter of irrefutable positive logical deduction, but rather a matter of inference, of pattern recognition. This recognition is very much related to our basic assumptions, as well as a mounting body of evidence. Neo-liberals will be far slower to recognise causation in David Moss' observation than someone who understand the scientific truth that man is a social animal.

    One of the elements necessary for recognising causation is finding a plausible mechanism to relate cause and effect. So the question is, how could income inequality cause bank crashes?

    There is a possible mechanism in the capacity of humans to suffer from biolar illness - manic depression as was. If we look at the financial markets through the lens of a psychiatrist, it is very easy to see the parity between the individual mood swings of the bipolar sufferer, and the boom-bust mood swings of the society of market traders.

    This idea is developed here: http://greenerblog.blogspot.co.uk/2012/06/how-could-income-inequality-causes-bank.html

    The root problem with Niall Ferguson's reasoning is trying to isolate the banking sector from the real economy, which is, or rather, ought to be, founded on ecology. He, as a free market fundamentalist, has come unstuck from reality, just as a bipolar sufferer comes unstuck from reality.

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    Comment number 2.

    First of all Niall Ferguson does not mention that salaries in the US have not gone up since 1973 and that for the past decades Americans have been dependent on ever cheaper Chinese imports and on the rise of property prices which allowed them to remortgage their houses annually. In fact it is estimated that the remortgaging of their homes pumped in 4 trillion dollars annually into their economy. So when the property crash happened suddenly many of the American's income were dramatically reduced.

    Now take Germany in the nineties and the reunion, and see how Germany coped with this challenge. See how it managed to be an world economic leader with I believe has no deficit, but with a great welfare system. Look at Finland that was in dire straits in 1992 and today also has an excellent welfare system and a AAA credit rating. Sweden is the fastest growing economy in Europe. Now, each one can draw their own conclusions.

    Countries usually grow out of debt, although cuts need be made, growth should always be the main objective, and the Tea Party folks never argue about fair pay, it seems they want the boss to get all the money because: "he/she is more developed according to Darwinian law , and therefore deserves so" All these Darwinian hypotheses smack of racism, classism and offer some a feeling of entitlement to be greedy and exploit people's labour for very little.

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    Comment number 3.

    When I heard the headlines of today's Reith Lecture I expected that I wouldn't agree with any of the content.

    However, I find that I agreed with quite a lot of what was actually said, especially about the need for action (of Central Banks - but I also assume all of the Banks) to be based on discretion and not a fixed set of complex rules; rules so complex that no-one really understands them and which requre an army of lawyers to help you find your way through

    I have always been against fixed rules, such as x% of GDP spent on public sector acceptable but x + 0.1% bad. What is required is judgement and understanding, and this is what makes someone worth their salary not knowing the ins and outs of a set of complicate rules which are applied without thought.

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    Comment number 4.

    In the part of the talk I bothered to listen, Ferguson seemed to be making bald statements without without backing them up in any way. I switched off since I must be the only person in the world who does not know anything about Mesopotamian economics. The talk was clearly not meant for me.

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    Comment number 5.

    No other Ferguson product better illustrates how emphatic but vacuous Ferguson is: he repeats his claims ad nauseam, that the economy is "complex" without ever describing that complexity, no evidence, no analysis, no understanding of economics, just anecdotes. Thanks BBC for wasting my license fee on an academic hack for your annual Reith lecture.


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