This has just been broadcast on the BBC in the UK, and will be soon on the BBC World Service.
Every year, the BBC holds the “Reith lecture” which is a major set-piece speech by some public figure on an issue of the day. Niall Ferguson this year gave a series of talks on “The Rule of Law”. He and I had a bit of a contretemps at the recording of the lecture a few weeks ago, in New York City.
His lecture is in any case well worth reading or listening to. His analysis that Dodd Frank will not work is I think correct. But his solution is inadequate. Interestingly, later in the Q & A, he endorses the idea of small, democratic banks – which is precisely what we are seeking to build in the Occupy Bank working group: as I shouted at him!
SUE LAWLEY: I’m going to take a question from over on our left.
CARNE ROSS: My name is Carne Ross. Amongst other things, I’m a former British diplomat and a member of the Occupy Wall Street Working Group on Alternative Banking here in New York City. Do we have any reason to believe that a central bank would be any less vulnerable to the enormous political power of the banking industry? If one’s answer to that is the scepticism that I feel about your solution, surely we should take much more radical steps to re-appropriate what is essentially a public good – namely the means of exchange – that has in fact been appropriated by a viciously aggressive and greedy industry. In other words, change the nature of banking, make it completely different from our current conception, make it democratic, make it transparent, build cooperative banks that are owned by its customers, completely change our model.
SUE LAWLEY: (over)… Okay. Niall Ferguson?
NIALL FERGUSON: Well, the interesting thing is that we’ve actually tried that in the past. One of the great ambitions of the revolutionaries of the post-First World War period was to take over and entirely control the financial institutions of Russia – and indeed of any other country where these revolutions occurred. And the result was a disaster because what happened when the banking system was brought under the control of the revolution was usually, first, hyperinflation and then financial repression. I think it’s extremely important to recognise that there are two threats at least to the independence of the monetary authority of the sort that I’m describing.
One we’ve already discussed, which is the threat from the vested interests that are supposed to be regulated, but the other I’m afraid is from the populist politicians who, some of whom at least, have endorsed the Occupy Movement.
I mean populist solutions to financial crises have been tried and have failed disastrously. That was one of the stories of the mid-20th Century. We need to learn from that history. Unfortunately I see very little evidence of knowledge of financial history in the Occupy Movement. It’s exactly the same ignorance I encounter in much of the financial world alas.
SUE LAWLEY: You’d better come back on that…
CARNE ROSS: Well being patronised aside …
NIALL FERGUSON: (over)… well British diplomats… British diplomats are very experienced at that sort of thing. (Audience laughter)
CARNE ROSS: We can take this outside if you wish. (Audience laughter) I don’t think you’re right, of course. I think that actually there is scope in the 21st Century to build new kinds of banks. I think your analysis that banking is a complex system is exactly right, but you don’t take it far enough. Complex systems don’t respond to any kind of top down authority or management at all, as you would know if you’d studied complexity science – as perhaps you have. In fact, complex systems require agent-driven approaches, to be managed. What that means in the banking sector is that we must all ourselves adopt normative behaviours to produce better banking – look at our banks, build our own banks, make them democratic, make them transparent. This is radically different.
And later…
NIALL FERGUSON: There is no question that the time horizon in the financial world has shortened to the point of being measurable in microseconds and that this is a dangerous thing, and the more the automation proceeds, I think the more fragile this complex system becomes whether it’s high frequency trading or just the rampant short-termism of people who measure their results on a daily if not hourly basis.
What can we do? There is actually an alternative model. I wrote a history of the Rothschild Bank – a bank that’s history stretches over two hundred years. Private banking has been characterised by a radically different approach to capitalisation and to time frame for centuries now and one way of thinking about this is that we need to see new banks with the old style. One of the things that worries me about the financial crisis is that there are so few new banks being created, but the kinds of banks that should be created are relatively small, have their owners running them, are well capitalised and are not engaged in the kind of high risk activities that we’re describing. Why do these banks not get created? Because the “too big to fail” institutions compete them out of existence before they’ve even got started. That’s what we need: new banks run rather in the way that Walter Bagehot would have approved of.
SUE LAWLEY: And that’s the answer, is it, to where … how the common man should disengage from the system?
NIALL FERGUSON: (over) There are ways, of course there are, luckily – and this is particularly true in the United States. There are lots of small banks that still engage – I have my mortgage with one of them – that still engage in relatively straightforward, uncomplicated finance based on the things that Bagehot talked about: trust, a personal relationship. And that, it seems to me, remains the heart of sustainable finance. You can call it ecological or you can simply call it human, but there’s no question that in the wake of this crisis – which, as I said early on in the lecture is not over and may yet have fresh shocks in store for us – there is an urgent need for us to go back to smaller financial institutions, to vote with our feet and with our dollars.
CARNE ROSS: (over/off mic.) Neil, that’s what we’re trying to do in the Occupy Group. You should join us. (Audience Laughter)
SUE LAWLEY: A quick off-mic call for Niall Ferguson to join the Occupy Group. It may never happen. (Audience Laughter). Time to call a halt. Next week we’ll be back in London where, having first targeted our political system and today our financial regulatory system, Professor Ferguson will have his sight on the law itself. He’ll be asking how far we’re experiencing, on both sides of the Atlantic, a subtle degeneration in the rule of law. Until then, Niall Ferguson, BBC Reith Lecturer 2012 thank you very much indeed. And from the New-York Historical Society goodbye.