Turner’s speech: pity it was so populist
THERE was plenty of meat in what Adair Turner, the FSA’s chairman, had to say last night at the Lord Mayor’s Banquet. But Turner is a great showman, a canny political operator – so no sooner had we finished making toasts to the Queen and to the health of the financial services industry that he kicked-off with a populist tirade, tapping into the public’s virulently anti-City mood. All the economy’s problems were “cooked up in trading rooms” by dealers on massive bonuses, he argued, implicitly (and incorrectly) exonerating cheap money, global imbalances, general intellectual error, regulators, accounting rules and everything else.
Yet Turner is well-aware that there was more to the bubble than CDOs-squared and bonus-maximising speculators. Minutes later, he admitted as much, contradicting his previous claim. “It is possible to overstate the importance of bonus structures in the origins of the crisis: they were, I believe, much less important than huge failures in capital adequacy and liquidity regulation.” Common sense at last; Turner should point this out to Gordon Brown.
Perhaps the most enjoyable section was when Turner rejected mainstream economic theory. He said the FSA’s new approach involved rejecting “an intellectually elegant but also profoundly mistaken faith in ever perfect and self-equilibrating markets, ever rational human behaviour”. The problem, of course, is that no real supporter of the free-market economy ever believed that all markets are self-equilibrating or that investors are rational. Many of the greatest supporters of capitalism were the most vocal in warning of the bubble in the past three years. It is good to see the FSA reject the flawed mathematical constructs that have been misleading economists for decades; but they musn’t adopt an even worse framework.
Turner also clarified several important points of policy. The FSA will impose higher capital requirements against riskier trading activities (though what these are remain to be seen) while recognising that market making in many “core markets” – such as foreign exchange, government bonds or equities is relatively low risk and “an essential lubricant of a complex market economy”. There will be a bias to conservatism in capital requirements for trading in “complex and potentially risky products where the benefit to the economy is unclear”. The onus will be on showing how a new product is “socially useful”, whatever that means. The trouble is that CDOs and CDO-squared products would probably have passed the test three or four years ago, when they seemed sound to the financial and regulatory establishment.
Turner’s defence of his infamous claim that parts of the City had been shown to be “socially useless” and overblown missed the point. By definition, in a bubble, bits of the economy grow unsustainably large and turn out useless; that doesn’t mean a regulator can know what adds value and what doesn’t in advance. To his credit, Turner did acknowledge some of this: “That does not mean we can define precisely how large the financial system should be. It doesn’t mean that we know how much trading and liquidity creation is optimal, nor that we can easily define some products as beneficial and others as harmful”.
It is a shame the sensible stuff was drowned out by the populist nonsense.