Working to make government more effective

Comment

Masters of the universe

Two Tory MPs offers analysis of the banking crisis in a book confronting the need for bankers and policymakers to change their incentives.

Two Tory MPs offer an unexpected analysis of the banking crisis in a book which confronts the need for bankers and policymakers to change their behavioural incentives as much as rules.

Most politicians’ books on policy tend to be predictable - particularly when written by ambitious young MPs with an eye on office like Tories’ Matthew Hancock and Nadhim Zahawi. Yet their account of the financial crisis, ‘Masters of Nothing: How the Crash Will Happen Again Unless We Understand Human Nature’, has many unexpected insights and recommendations. Launched at 11 Downing Street at an event jointly sponsored by the Institute for Government, the book has mainly attracted attention for its, fully justified, assault on the macho male culture of the City which has encouraged excessive risk-taking, and which could be redressed by promoting more women, especially at senior levels. But their message is both much broader and more original. The authors stress the importance of culture in shaping behaviour and highlight the fallibility of many economists’ rational expectation models. Their criticisms of economists could equally apply to the heavily mathematical approach of many politician scientists which ignore the vagaries of individual behaviour.

The Masters of Nothing book launch

The book is eloquent about how most of those who warned about problems to come were ignored. The fault lay not just with over-confident bankers with no memories, but also with regulators and politicians. Rarely has a reputation fallen as rapidly as Alan Greenspan’s, while Gordon Brown will rightly not be allowed to forget his hubristic claims about the end of ‘boom and bust’. The book also underlines the importance of lessons learnt exercises. It has been too easy to say we must get on with current business, and try and ignore awkward questions about the recent past. The Treasury Committee of the Commons has, under both John (now Lord) McFall and Andrew Tyrie, done a good job in questioning the key players. But this is no substitute for rigorous inquiries going beyond what a parliamentary committee can do. While, under Adair Turner’s lead, the Financial Services Authority did undertake a good review of the banking crisis, the Bank of England has never publicly looked at what it got right and wrong - and the Treasury has only just got around to an internal review. One of the central arguments of the book is the need for those responsible for the banking crisis to be held properly accountable and, crucially, to be seen to have paid a price. The authors vividly highlight the blinkered viewpoint of many of the previously acclaimed bank chief executives, and suggest changes to bonus and payment systems to encourage more responsible behaviour. Yet, more fundamentally, the sense that many of the bankers have got away with their mistakes is one of the most potent causes of public anger now. The protest that ordinary people are paying with their jobs and living standards for the catastrophic, and unpunished, errors of a few may be an over-simplification in view of the deteriorating underlying fiscal position, but there is enough in the charge to make it  politically powerful. This is not a matter of banker bashing but of ensuring executives, regulators and politicians take responsibility for their actions. It links to the broader question of how we reconcile a highly successful financial services sector - which is a big employer and contributor to national income - with national and social cohesion. However important financial services are, they cannot be seen as apart from the rest of the country. It was appropriate that George Osborne was listening to these arguments at the launch. Ensuring that capitalism - and particularly finance capitalism - operates by the same norms of behaviour, and mixture of rewards and punishments, as the rest of us is a key political challenge for him and the coalition.

Keywords
Economy
Political party
Conservative
Publisher
Institute for Government

Related content