by Mark Goyder
The Conference on the future of the corporation opened with a brilliant account of the causes of the crisis from economist Robert Johnson.
It’s worth recounting – see below – because of where it leaves us in our search for solutions. Johnson is a distinguished economist and his key insight, rather like Steve Lydenberg in his paper for the conference is that we have allowed clever technicians and their theories to lull us into a false sense of security that has disabled us from exercising due prudence.
But – and here is the key thing for Tomorrow’s Company – people like Johnson do not have the answer at the micro level. They end up saying that we need better corporate governance. Which is where my own contribution came in later in the morning. The macro-economists need some micro-thinking about the change we need at the level of individual firms!
Hence the interest in the stewardship agenda, and my paper on this theme that is now available.
Get the bankers to believe in the afterlife!
Mark Goyder’s First Letter from the conference on the Future of the Corporation.
Boston was bright and warm yesterday. Today it has turned grey going on drizzly. The Corporation 2020 conference was the same. It was off to an intellectually sparkling start with a talk by Robert Johnson, distinguished economist and colleague on Joseph Stiglitz on the modestly named UN Commission of Experts on International Monetary Reform. But it soon felt grey and damp in the room.
It’s worth recounting – see below – because of where it leaves us in our search for solutions. Johnson is a distinguished economists and his key insight, rather like Steve Lydenberg in his paper for the conference (which will shortly be accessible on this link) is that we have allowed clever technicians and their theories to lull us into a false sense of security that has disabled us from exercising due prudence.
But – and here is the key thing for tomorrow’s Company – people like Johnson do not have the answer at the micro level. They end up saying that we need better corporate governance. Which is where my own contribution came in later in the morning. The macro-economists need some micro-thinking about the change we need at the level of individual firms!
Robert Johnson’s account of the causes of the crisis
He started by contrasting two historic perspectives on economic history. The human nature pessimists over the century had seen the market as a device for channelling human greed. The optimists had believed in the perfectibility of man through education. Smith was a pessimist – and saw social restraints on marketplace behaviour as essential.
JK Galbraith wrote in his book on euphorias in economics had warned about the predictable cycle of bubble, where human emotion seized control, the moneymaking accelerated to a frenzy, those who warned of danger were marginalised and then the whole thing crashed.
And yet in 2006-7 we forgot all over again. Why?
There had been the efficient Markets Hypothesis (EMH) and Modern Portfolio Theory to lull us into a false sense of security. This led to complacency. The market was seen as “homing pigeon” and not rollercoaster. . Its signals led us back to equilibrium. Risk could be managed by ever better technicians.
The market actually started to dysfunction n the late 90s. There was accumulation of reserves in those economies that had been bitten by the experience of going on bended knee to the IMF.
Never again. These countries in Africa and Asia and elsewhere would self insure by building up reserves which of course they held in dollars. The US deficit increased. The US cut interest rates. Spending on housing started to increase and so on.
His fear was that the politicians were not addressing the really big problem – which is of big banks that dwarf nation states and are too big to fail. And he was worried by the way this led politicians to bail out the Wall Street bankers who got us into this mess without making them pay a price. The bank bailout represented a transfer of resources from the averagely well off to the rich. There had been an anaesthetic administered to the top 5% .So not surprisingly, we w ere not going to see the behaviour of our bankers change. Was Obama in any kind of position to take them on? Wall St made 45 % of all profits in 2007. It will by the time the sums are done have cost the world $4.3 tr this year and $15 tr over 3 years. But they were crucial in financing Obama’s election and Johnson doubts whether he will really take them on.
The leaders in Central and eastern Europe were not saying “thank goodness we have capitalism”. They were saying communism was a bad dream. Capitalism is every bit as bad.
There is huge anger – but also huge sophistication in the USA. Even the truck drivers are angry.
The need now is to channel this anger into something constructive.
One colleague said to Johnson – “The answer is to get the bankers to believe in the after-life”. That’s the only way they will ever feel accountable”