New Orleans In one of those serendipitous moments a friend in San Francisco had passed on a book for my reaction and the daily papers have been full of pictures and quotes of the author, so the first part of my flight home was easily occupied reading Adair Tuner’s Economics After the Crisis: Objectives and Means an MIT Press publication of a series of lectures Turner did before he emerged front and center of the huge Barclays and LIBOR rate fixing scandals. Turner of course is the chairman of the Financial Services Authority in Britain which investigated and imposed the nearly $500 Million fine on Barclays which brought the quickly spreading scandal to everyone’s attention. Turner and his own agency are now in the crosshairs based on what they and other bank regulators knew, when they knew it, and why they didn’t do enough to stop it both in the UK and elsewhere around the world.
Reading Turner’s book, one finds him almost a welcome middle-of-the-road voice about financial markets and some of the major issues of our day, especially from the US perspective where the voices have become so shrill that there seems no compromise in sight. Turner is for growth, but doesn’t pretend that growth is the be all and end all for our public economies. He is dismissive of arguments that there are “free markets” or that they are capable of self-regulation. Interestingly as a financial regulator he is skeptical about whether the financial services industry itself produces real value or is simply “distributive” and therefore increasing inequity. In fact I looked hard at his arguments about both relative happiness and the need for more equity because from his position they could have not simply appeal but power. Unfortunately Turner’s very middle-of-the-road stance leaves him unable to come to conclusions about some of the questions he raises, other than to clearly state in the classic two hat position of being an economist and a regulator that these are “political” and “policy” questions that society has to resolve. He just wants the fight to be conducted on solid ground, and that’s the main contribution of his book which is less advocacy of any position in particular, but a reasoned “corrective” pushing back at more outlandish claims.
He also has a tendency to buy some pigs in a poke when they are outside his area of expertise, which is a tad dangerous as well and courts bigger trouble. In talking about the real estate crisis in the US, which is obviously far afield of his study and research, he approvingly agrees with Raghuram Rajan’s Fault Lines and argues that the concern about
…increasing inequality in the United States, which in the American political culture could not be offset by a distributional response, led instead to the deliberately encouraged palliative of risky credit extension to lower income groups. This explosion of sub-prime lending was a substantial contributor to the financial crisis. Increasing inequality at the lower end of the income distribution as severe as that experienced in the United States in the last 30 years must matter a lot.
Amazingly, Turner is simply echoing the worst of the discredited right wing canards which seeks to blame the real estate collapse on community reinvestment programs and weirdly dresses up what are well documented fraudulent, unsupervised brokers at sub-prime shops where the inmates were running the financial prisons, regulators were out to lunch, good and bad loans were mashed into even riskier defaults, and so forth, almost none of which had to do with loans to lower income families, since they were broadly based in specific markets (NV, FL, CA, AZ, etc), and absolutely none of it had to do with either financial markets, governments, or anyone else using the real estate market to address inequality. I wish!
Nonetheless from Turner’s book it was easy to see how he could have found himself in the pickle where he now sits as he faces Parliamentary questioning this week. His inability to see the course of action from his analysis and move firmly to convert his analysis or at least sentiment into decision as head of the Financial Services Authority has put him in the meat grinder, probably deservedly. His Agency has had a reputation for going soft on the financial institutions and handing down wrist slaps more often than real punishments, particularly when others are now looking at real criminal charges for these rouge traders who made lies of LIBOR. The British have moved to overhaul their regulatory system and part of their fix is in fact to eliminate Turner’s Financial Services Authority completely. Other political voices like former Exchequer chancellor George Osborne quoted in today’s Times say the regulatory system “failed spectacularly in its mission to maintain stability.”
None of this is pretty and Turner certainly was not alone in fully recognizing that banking and finance have become virtually criminal enterprises without strong and effective regulation. Unfortunately despite his critique and his interest in great equity and fair distributions, the real story and lessons of “economics after the crisis” is that the crisis is not over until it is fixed, and there the job has hardly started and financial institutions have learned so little that Turner and others who believe that they understand the situation still seem so trapped in the overall system that they have not broken loose enough to rebuild something that truly protects national economies and all citizens.