The origin of failure of the banking system

Complexity to the extreme: can anthropology help?

That can’t be true      Last week I was intrigued by the publication of Joris Luyendijk‘s latest book “That can’t be true” (in Dutch only; original Dutch title: Dat kan niet waar zijn) about the banking world in the City of London and the role of bankers in the banking crisis of 2008-2009. The book is based on a blog he kept at the Guardian in which he kept note of his investigations: The Joris Luyendijk banking blog. Yesterday (22 February 2015) he was interviewed by Wim Brands in the television programme ‘VPRO Boeken’ (See ‘uitzending gemist‘/’missed broadcast’ ). I made some notes during the broadcast and produced a little concept map (see below), which I will describe and discuss here.

2008-2009 banking crisis in a concept map

Essence of the crisis         …. is of course system failure, deep system failure. As is typically the case when dealing with wicked problems, the causes of failure are distributed through the system and the system boundaries are in need ofdefining, especially if we want to improve it. One vertical axe stands out in the concept map: governments failed to foresee (2) the need for better regulation of financial products, since these apparently risky & complex products caused the banking crisis of 2008-2009 that came to the brink of totally shutting down interbank lending, which could have precipitated very serious societal disruption, including total economic standstill and widespread rioting. In the words of the first President of the European Council, Herman van Rompuy, we were only millimetres away from ‘economic implosion’. This explains the title of Luyendijk’s book. Another key aspect is the fact that full oversight of what the bank is doing is lacking in banks, which turns them into airplanes with ’empty cockpits’: a very scary thought considering what a single failing bank can do (Lehman Brothers).

Housing bubble        The crisis started with the bursting of the US housing bubble (1). This had increased mortgages. Extremely intelligent employees of banks had devised financial products that were based on these mortgages. The purpose of the products was to spread risk, which in turn could increase leverage to take on new risks and make more money in the process. It appeared that these products were much better at spreading the risk than ever conceived possible (due to ‘complexity’, or so it is claimed), so the whole banking world ended up getting infected, far beyond what banks could support: losses simply started to exceed buffers (7), leading to bank failure in some case, and near-failure in a great many more cases. This increased risk to such an extent that interbank lending came to a near standstill, which could cause the (Western/global) economy to grind to a halt.

Why are banks stupid?        Being an anthropologist, Luyendijk tried to come to a better understanding of the bankers’ motives: are they greedy monsters? He found that banks are composed of divisions that maintain an ecology (4) of bankers of different types. The divisions are constantly at war with each other. E.g. according to the theoretical physicists employed by the Fusions & Takeover divisions the people dealing with Markets are no more than ‘screen monkeys’. Many bankers stay in the system against their will, the ‘nilly-willies’, others take a more neutral poise (the ‘neutrals’) trying to abstain from ‘bad’ stuff and saying that many colleagues are infinitely more vicious. Then there are the ‘masters of the universe’, the extremely clever guys, who think it is a game they can win, and they often do. The next two categories are the ‘bubble bankers’ and the ‘addicts’: they simply go with the flow or can’t do otherwise. They are important, because they are the ones that will enthusiastically sell any product (5), risky or not, that is invented by the ‘masters of the universe’. Finally there are the cool top dogs (in Dutch: the ‘koele kikkers’), who believe in all the tenets of neoliberalism (3) and who will lobby government never to change the system, all for the ‘good’ of society (6). And, what’s more, they actually own the government, especially in Britain, but also in the Netherlands and other, more or less successful, Western economies. Globalization means they cannot be controlled: they can always take their business elsewhere. According to Luyendijk, none of them are really bad people. [SH: But quite a few are unscrupulous].

What else is there?          It is often said that the bonus system (11) is what corrupts the system. But banks compete for the best in their competitive struggle to survive, so who can blame them. It has also been said by some that there is a problem with liability (8). Bankers can take excessive risk with impunity, because somebody else will pay for the damage if things go haywire. We could also say that the people are ill-informed (9) and therefore elect the wrong parties into government (10). Or the system is so complex, that democratic failure cannot be avoided. For instance, central banks have multiple tasks that may be conflicting (12). Much depends also on government policies, especially those of bigger nations like the US, not to mention the policies of a big block like the EU.

So where does that leave us?     It would appear that the incentive system is still very much intact and perhaps even continuing to spiral out of control, due to a combination of competition and greed. There is some regulation on buffer sizes and the separation of risk between investment banks and other banks, such as commercial banks and so on. Care is taken that none of these regulations could force banks to seek greener pastures abroad. Looking at the concept map there are some more options left, e.g.: a. keeping check on new products; b. restore lost liability; c. demand better oversight; d. demand better sectorial self-regulation, neoliberalism doesn’t absolve completely!); e. ensure more ethical ways of product pushing, esp. by bubble bankers and addicts (demand that risks are well-explained, make (international) regulation that clarifies when caveat emptor doesn’t apply). Ultimate success should be measured by the self-governing control of the formerly spiralling incentives system. There Is a kind of prisoners’ dilemma where it comes to hiring people.

What do I suggest?      The work done by Luyendijk seems useful, but it is far from finished. It is good to know more about what motivates the people in the system and how they (don’t) collobarate. But we should take the banking world for what it is: a system. Its failure has caused great havoc at tremendous cost to a billion tax payers, stock owners and the global economy: the total cost may well amount to over 10 or 20 TRILLION US$ (up to twice the gross national product of the United Kingdom, France, and Germany, combined). Since it is a system, its failure doesn’t have a few simple causes, let alone a single cause (most people are stubbornly attached to linear causal thinking, see Grotzer et al., 2014, or my discussion of non-linear management). Instead, causes are distributed throughout the system in a web of inter-relationships that need to be reviewed to prevent new failure. Since it is a system, this review must be done systemically. Critical heuristics, a kind of systems approach, could be used to look specifically at the regulatory changes that have been put in place in the various countries and whether they are any good, systemically speaking (Ulrich, 1983, 1996). Instead of scaremongering about an ’empty cockpit’ (which is in fact another way of saying that we are dealing with systems, here), we could also go checking whether the automatic pilot is fully operational and reliable again. The key problem with distributed causality is: how to organize distributed responsibility? Interesting, interesting! Perhaps a ‘Wicked Solution’  is in place (Williams & Van  ’t Hof, 2014)?

P.S. The idea of using anthropology isn’t so bad: quite a few of the early systems thinkers, like the great Gregory Bateson, were in fact anthropologists.

Grotzer, T. A., Solis, S. L., & Derbiszewska, K. (2014). Leveraging Fourth and Sixth graders’ Experiences to Reveal Understanding of the Forms and Features of Distributed Causality. In National Association for Research in Science Teaching (NARST) (p. 30). Pittsburgh, PA. Retrieved from http://isites.harvard.edu/fs/docs/icb.topic1117424.files/DistCausality_NARST3.29.14.pdf

Ulrich, W. (1983). Health systems planning: the case of the 1976 areawide health systems plan for Central Puget Sound. In Critical Heuristics of Social Planning: a new approach to practical philosophy (pp. 372–417). Stuttgart (Chichester): Haupt (John Wiley – paperback version).

Ulrich, W. (1996). A primer to critical systems heuristics for action researchers. Hull, UK: University of Hull, Centre for Systems Studies. Retrieved from http://wulrich.com/downloads/ulrich_1996a.pdf

Williams, B., & van ’t Hof, S. (2014). Wicked Solutions: a systems approach to complex problems (v. 1.03., p. p. 97). [Lower Hutt]: Bob Williams. Retrieved from http://gum.co/wicked

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About Sjon van ’t Hof

Development professional who worked in rural development, tropical agriculture, and irrigation development in Chad, Zambia, Mali, Ghana, Mauritania, Israel, Burkina Faso, Niger, and the Netherlands in capacities ranging from project design and management to information management. Conducted missions to India, China, Kenya, and Bangladesh. Experience in the development and delivery of trainings in irrigation equipment selection, information literacy, Internet searching and database searching. Explores systems thinking in relation to international development, education, and management, with an ever stronger focus on the systems approach of C. West Churchman. Knowledgeable in tropical agriculture, project design and development economics, agricultural mechanization, irrigation, plant pathology, environmental degradation and protection, rural development. Co-authored "Wicked Solutions: a systems approach to complex problems", a book written by Bob Williams and Sjon van 't Hof. It was published in June 2014 and provides a practical way of dealing with wicked problems. Wicked problems are complex, ill-structured, human problem situations. This book will help you design an inquiry and intervention in such messy, wicked situations. It does so by guiding you through the steps and stages of a systemic process that addresses your own wicked problem. For more information, see https://csl4d.wordpress.com/ or http://www.bobwilliams.co.nz/Systems_Resources.html
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