Tag Archives: Gresham

“Are Bankers Good or Bad for Society?”

Last week, Chris Skinner spoke at Gresham College, asking “Are Bankers Good or Bad for Society?”. (He was talking on the eve of the eightieth anniversary of the Wall Street crash…) Then today there is the news that the Government are considering splitting up RBS, Lloyds Banking Group and Northern Rock by selling off some old high street banking brands – Williams & Glyn from RBS, and TSB and Cheltenham & Gloucester from Lloyds. If not more bankers – it would seem this is more a sale-and-rebranding exercise – at least more banks. So we’d better get used to it.

Chris’ talk was interesting, though he seemed to conflate bankers, banks and money. His answer to his rhetorical question was generally “yes”, but within a moral, societal context. Regulation and competition have a role here, introducing a moral dimension – though Chris was sceptical of the effect of regulation (he thought regulators would always be trying to catch up with bankers, rather than leading the way).

Banks – and hence bankers – do perform some very useful roles for society, such as:

  • facilitating financial planning and management
  • enabling individuals and organisations to borrow and lend
  • spread the risk of lendinging
  • allocating capital within the economy
  • thereby enabling trade and projects that would otherwise not be undertaken
  • thereby promoting innovation

They do others things too, of course; at the moment they seem to provide society at large – and media and politicians in particular – with hate figures to mock and pillory. Of course, bankers are just a reflection of society: there are a few selfish, greedy bankers out there just as there as selfish, greedy people in all professions. It is just that the riches available to those working in banks can seem so wildly excessive and the people receiving can seem remote from the society they serve.

Over the past decade or so, they have also completely misjudged the risk of the business they were in. Chris quoted David Vinar of Goldman Sachs from 2007:

We are seeing things that were 25-standard deviation events, several days in a row

As Chris explained, a 25-standard deviation event should be expected once every 100,000 years – that is, they are pretty rare! – not several times in a week. That is a pretty big error to make, and resulted in severely flawed, highly complex business models based around derivatives – and the economic crisis we find ourselves in.

Chris then went on to talk about the future of banking and the role of competition to make bankers behave well. He could have been talking about the suggested split up of RBS, Lloyds and Northern Rock. I doubt this will introduce any more bank branches – we won’t have greater access to banks – rather, existing branches of these institutions will be relabelled with the revived banks’ brands. This probably won’t be too hard – I remember meeting an RBS bank manager in a branch in north west England that proudly proclaimed that it was a former “Willy Glyns” branch rather than RBS. It might be harder for customers – will customers be given a choice which bank they will go with? Customers are famously more likely to get divorced than change their banks, so will they really benefit from being moved wholescale from one bank to another, new one?

On the other hand, increasing the choice of high street (retail) banks for customers should provide them with more choice, and competition could lead to innovation of products and reduced costs.

Then again, it will lead to the loss of the economies of scale that lead to the banking mergers in the first place – so some costs may increase instead.

I guess we’ll just have to wait to find out!

Edit: John’s comment reminded me that Chris was concerned by the increase in moral hazard resulting from the nationalisation of banks. Mervyn King recently identified this as a critical issue. If banks believe that the Government will step in if things go wrong, they essentially become a one way bet: heads they win, tails the taxpayers lose.

Niall Ferguson on an evolutionary approach to financial history

Niall Ferguson gave the Gresham annual special lecture yesterday in the grand surroundings of the Guildhall, which marked the publication in paperback of his latest book, “The Ascent of Money”. (It was also the title of a Channel4 series earlier in the year.)

This was the title of his talk, too; it was subtitled “an evolutionary approach to financial history”, which means it covered two of my interests – evolution, and finance and economics. Indeed, I have just finished reading a comparison of the evolutionary ideas of Richard Dawkins and Stephen Jay Gould – both of whom Ferguson name-checked in the first couple of minutes. This year is the 200th anniversary of Darwin’s birth, and the 150th anniversary of the publication of The Origin of Species, so it was an apposite subject.

Ferguson said that he took a Darwinian view of economics, and he admitted this wasn’t necessarily an original stance: US Assistant Secretary for Financial Markets Tony Ryan said to the Congress in September 2007 “Just as some species become extinct in nature, some new financing techniques may prove to be less successful than others”; the Economist recently described the “Darwinian world” of hedge funds and business start ups.

Ferguson described how Darwin was influenced by the economists of the industrial revolution, notably Malthus, whose ideas of resource constraints lead Darwin to develop his ideas on natural selection through competition. (Competition remains a constant metaphor in business.) Darwin in turn influenced economists. Thorstein Veblen asked “Why Is Economics Not An Evolutionary Science?” in 1898; Joseph Schumpeter envisaged an evolutionary quality to economic life [PDF], using the term “industrial mutation” to describe innovation; and Nelson and Winter wrote An Evolutionary Theory of Economic Change in 1982. More recently, Andrew Lo of MIT published “ The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective [PDF]” in 2004.

Evolution through natural selection is of course only an analogy for the changes in the economy, industry and finance; but it is one that fits quite well. Ferguson was able to identify

  • mutation, as financial companies innovate and create new products and business processes
  • competition for customers and staff – the innovators – in a crowded market place
  • selection of financial companies, and their products, as they merge or fail, producing differential survival
  • speciation, as new business models are created (such as internet banks)
  • extinction, as other business models disappear disappear.

Ferguson went further, suggesting that the employees of financial firms acts as the genes or (in Dawkin’s definition) memes, the agents of cultural inheritance in organisation.

Whilst he didn’t use the phrase, he also described one of the drivers of Gould’s theories, mass extinction: the number of hedge funds has been greatly reduced in the past couple of years, as a result of the credit crunch – Reuters anticipates a reduction of 50% in the number of funds this year alone.

I think one can take the metaphor too far though. Companies are neither species or organisms, but institutions comprised of individuals. Ferguson accepted that innovation isn’t mutation – it is a directed process. The ideas that come out of innovation can be copied freely, without sex between institutions (copyright allowing). The intervention by governments, regulators and central bankers can stop businesses going bust (RBS, HBoS and Northern Rock in the UK) and force others into the arms of competitors (Bradford & Bingley, Alliance & Leicester, Dunfermline BS, and others) – Ferguson thought this was akin to very un-Darwinian intelligent design (although he questioned its intelligence!).

He was sceptical about sense of keeping ailing institutions going, worrying about the trouble that keeping these dinosaurs going would lock into the financial system. Better, he thought, to allow them to go bust, opening up new niches for more competitive institutions – more diverse, smaller, more nimble, and perhaps more innovative. We won’t know if he’s right until the credit crunch, and its long term effects as a result of the vast sums spent throughout the world on fiscal stimulus and capital injected into banks, insurance companies and other institutions, have worked their way through the economy and the business cycle: more boom and bust, perhaps.

Christophopher Dye lecturing on “Are Humans Still Evolving?”

For me, evolution is a given. I see the evidence for evolution all around – in plants and birds and domestic animals; in life-threatening diseases and the limited ways in which we treat them. But I have also believed that Homo sapiens had probably stopped evolving: we have developed the ability to change our environment rather than be changed by it.

I was therefore very interested to see a lecture by Christopher Dye at Gresham College entitled “Are Human Beings Still Evolving?

Dye too accepted evolution – the change in species through heritable adaptation in response to natural selection – as a given: he gave lots of examples and observations to support Darwin’s theory. But he also gave lots of evidence to prove my supposition that man had stopped evolving was wrong.

I wasn’t alone in my belief. Dye quoted Stephen Jay Gould, who believed there had been no biological change in humans in 40,000 years, and Steve Jones, who reckoned that with medicine reducing deaths before reproductive age and the modern reduction in human fertility – both necessary for differential reproduction through which evolving can occur – that humans were outside the process of evolution. (A fascinating corollary is that many of the diseases that plague modern life – those of old age – can never be eradicated through evolution: by the time they are active, humans have stopped reproducing: resistance to most cancers or Alzheimer’s disease can convey no reproductive advantage.)

In a fascinating discourse, Dye presented much evidence indicating the contrary: that in much of the world, the death rates of children and the evidence of differential reproduction demonstrate that indeed the survival of the fitter – natural selection – is still active: worldwide, ten million children die before the age of five years every year (often from illness which it is in our power to stop); it is just that most evolutionary scientists are in the privileged position of working in developed nations, where childhood mortality is greatly reduced and fertility is generally below or at the replacement rate. Similarly, some individuals in the developing world produce many more children than others.

But it is not entirely a process limited to the developing world. Different parts of England have significantly different childhood mortality rates, which have been stable in terms of the relative pattern since the 1860s.

Dye presented much data to support his view that there had been extensive selection pressure in the last 80,000 years – and that the rate of change – the rate of evolution – had increased in the last 40,000 years, and particularly in the last 10,000 years: modern man is still evolving, probably as a result of increased population growth in recent times.

I was going to go into a lot more detail, but you can read Dye’s lecture notes for yourself: I would just be regurgitating his thoughts. (You can also read some of what he said in the Independent; but they seem to have posted only some of his lecture, and messed that up, too.) But he definitely convinced me that man is still evolving.

Instead, I want to say what an excellent institution I think Gresham’s is. In the last month, I have been to two events they have organised, and both have been fascinating. They seem to attract an eclectic and interested audience – and a large one, too. I anticipate I shall go frequently to their lectures when I can.