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Better The Devil You Know!

Jeremy Hetherington-Gore Unleashed
15 February, 2009

On an outing from the OECD's Parisian palace with its fabled wine cellar, Secretary-General Angel Gurria tells us that a 'failure of business ethics' underlies the global recession, and that 'our societies are disgusted with business practices'.

Well I'm disgusted with him. What would he know about business? He has spent thirty years in public service and not-for-profit organizations, and has received awards for his contributions as a 'global citizen'.

There is no failure of business ethics, except for those people like Mr Gurria who would like to live in a cooperative in some bucolic Central European paradise out of Fiddler On The Roof. Business is tough, indeed, and people get hurt, but a company that fails to understand its market, or to supply what its customers want, or to reward its employees on all the levels that are necessary will simply go bust.

Banks have been failing lately, and have become the especial targets of the wrath of the newly-reimpowered militant tendency, but this is not because of 'disgusting business practices', whatever that may mean, it is because they lost sight of the rules of their market-place, and specifically they failed to 'lend short and borrow long', which is surely the first rule for any banker.

Sub-prime mortgages are 'lending long', and such lending should be matched by long-term borrowing, instead of which the banks relied on the inter-bank credit market and short-term customer deposits, which is 'borrowing short'. Therefore they were caught with their trousers down when the credit-default swap market imploded. That itself was a nice game, in which bankers pretended to themselves that their liabilities were insured, with the connivance of the rating agencies, but it was hardly 'disgusting', and certainly not unethical. It was just plain stupid.

Because of the importance of the money industry to the rest of the business world, banks are highly regulated. Supposedly. They are also subject to the law of the market-place. Supposedly. In fact neither of these things is true, and that is where the problem truly lies. Apart from Lehman Brothers, no bank has been allowed to go bust, and that is ridiculously bad governance, creating a moral hazard bigger than the iceberg that sank the Titanic. What banker in future will ever bother to be prudent? It is a catastrophe of the first magnitude.

As regards regulation, governance has equally failed at its task. The BIS is a trade union, and could never have been expected to self-regulate in a way that might disbenefit its members; but what about governments? Are they too uneducated to have understood what was happening? No, they are just too short-sighted; they can see only as far as the next election. No politician ever stops a boom, because that amounts to electoral suicide. Who's left, then, to muck out the stables? Oh, it's the OECD, and the rest of its scholastic fellows, the IMF, the World Bank, the United Nations and so on. And where were they when they were needed? When Wall Street and AIG and the Masters of the Universe were sowing the seeds of their own destruction? Drinking claret, making speeches and greenifying their world, that's where they were.

It's a big failure of supervision and law-making, there's no doubt about that, but calling it 'disgusting' and looking down your nose at business is no way to cure it. There needs to be a new Bretton Woods, with an institution representing banks, governments and multilaterals which will create a global regulatory framework and supervisory body for the financial industry. It won't happen, of course. Instead we shall continue to get Mr Gurria and his ‘Fairer, Cleaner and Stronger' dream-world.

Better the devil you know than this angel!


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Jeremy Hetherington-Gore Unleashed

Jeremy tackles the difficult issues head on!

 

 

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