Whilst many are determined to find solutions to the current financial crisis, perhaps thinking about a future that is still some way off might help us find the path to take today. To know which path to choose, we must be clear about the final destination. And I know that this contradicts some of my earlier reflections, in which we prioritised avoiding serious immediate damage over tackling the root of the problem. But rigorous analysis and reality are convincing me otherwise. The damage is already palpable and very serious. We have reached a point of no return where, as if we were on a plane, we have passed V1 and we can no longer expect everything to go back to the way it was. The damage is already very severe for financial institutions, businesses, household finances and even nations. The injection of vast sums of money is only providing relative relief, and is proving ineffective in reversing the downward spiral and financial collapse. Given that this situation is irreversible, perhaps we should focus more on our life goal collective and global. Perhaps we should give up our desperate struggle to find the miracle cure that will breathe new life into an economic model whose demise is now inevitable.
By the time we realised that something serious was happening to our financial system, in the summer of 2007, it was already too late to save it. And today, naturally, it is even later and reversing the situation is even more impossible. Therefore, Should we continue trying to inject liquidity into a system that is on the verge of collapse? My answer is yes, but not desperately. We must do so in moderation, accepting that the collapse is happening and will continue to happen, whilst keeping our eyes on the horizon. As we look to the future, we can continue to alleviate the suffering of the terminally ill as far as is prudent. However, we must ensure that these palliative measures – which we know will not reverse the financial collapse – do not divert our primary focus from rebuilding the system and establishing sound financial and business foundations.
The major banks must look to the future by moving away from the investment banking practices that we have all benefited from over the last two or three decades, and with which they had become fatally entangled. He must return to his traditional business, and in the process, in that flight to quality essential and vital, it must indeed be placed under special administration, restructured and whatever else is necessary. But only with the commitment and certainty that it will, in the near future, be the guarantor of the system’s stability. The «too big to fail» It must be redefined and expanded to include vital concepts such as soundness, transparency and ethics. And within these parameters, it must find its greatest ally in public funds today, in these most difficult of times.
The financial system we need for the future must not be thrown into turmoil by a crisis, as has happened, because crises must once again be like those we have experienced in the past: cyclical crises that entail resets sectoral crises of varying severity, but which must never again bring down the global financial system. It is therefore clear that the financial system we must create must be invulnerable, therefore different. And we must not inject liquidity just to get things back on track the same the established banking system (even if this proves to be a futile endeavour, as we have already said). We need a new playing field and new rules based on the soundness of the traditional banking business and on the the soundness of traditional corporate financing. Perhaps conceptually based on the Canadian financial model, which has proved to be less exploitative, although still excessive.
The banking sector – and, with it, all of us – committed errors, blunders, acts of recklessness and crimes that have led us to an irreversible collapse. To the rebuilding of the financial system. But we are not saying that investment banking should be banned – far from it. What we are trying to say is that that type of banking should not form part of the foundations of the banking and financial system. The major banks, which underpin the credibility of the system and the system itself, must remain uninvolved in playing with fire of the financiers and the investment speculators, which will continue to exist, even though the immediate repercussions will temporarily remove them from view. One of the most serious mistakes made by the banking sector as a whole was, for example, that over the last 20 years it dispensed with asset risk assessment departments because it relied on the credit rating agencies. Not even the investment banking arm retained its own risk assessment team. These costs were deemed dispensable if others with a better reputation were doing the work and were, moreover, publicly revered. Why bother and spend resources on it if the risk rating agencies were the Bible… We all know the outcome, and we all suffer because of it.
To round off, I’ll leave you with an anecdote recounted by Paul Volcker himself: one of his grandchildren chose to become a financial engineer, that is to say Financo. Volcker couldn’t believe that his own flesh and blood was going to fall into the hands of finance departments that rack their brains to invent new, unspeakable, marketable and polluting forms for the System. I think it hurt him as much as if he’d been told he was going to join a cult. Last year, Volcker wrote an article in which he blamed relatively the financiers for having brought down the system. His daughter (the little angel’s mother), as soon as she read it, passed it on to the grandson in question, who rang his grandfather to say: «Grandad, don’t blame us! We were simply following the orders given to us by our managers.» Paul Volcker didn’t rise to the bait, and that very afternoon he sent him an email containing just one sentence: «I will not accept the Nuremberg excuses«.
«How many times can a man turn his head,
and pretend that he simply doesn’t see?
The answer, my friend, is blowing in the wind,
»The answer is blowing in the wind.'Bob Dylan. 1963.