Policy's missing ingredient: public service

The G20 communique (to whose annotation on oD I participated) was surprisingly specific for a document of its kind. But did it get the essential points right? Did it dig down deep enough into the cause of our predicament?Here’s an attempt to paraphrase the message and analysis.We believe the crash was a bad thing.We have learned that business was carried on in ways that inflated a bubble and led inevitably to the crash.  In response to the crash, we are doing what we can to stabilise the financial system and counter the recessionary forces that have come into play.  This effort needs to be international.We did not foresee the crash because businesses did not provide the right data or follow the right procedures and regulators did not keep pace with market developments.  That allowed greedy and unscrupulous people to transact unsound business for their own gain, but no one else’s.We now understand – in general terms – what data and procedures were missing.  The data is to be provided by market participants and made public; they must also comply with new procedures and be verified as doing so.We, the governments, don’t want this data or compliance information for any primary purpose.  We don’t propose to do anything with it.  The market will self-adjust once it is in possession of all this new information.For example, with this data the market would have realised the accumulating risks and institutions would not have transacted business we and they now know has incurred great losses.This is because market participants do not want to be carried away in a bubble and as soon as they see one starting, they will take steps to puncture it.They will recognise it for a bubble because with the extra data and disclosure we’re talking about they will be able to measure their position against the outside world and adjust.Comparison is possible because the data, assumptions, practices etc. that will be provided or adopted are universally valid and will not be tainted by pro-cyclical attitudes, herd mentality, wishful thinking, or speculation.This is how we will make sure the financial markets will be protected from crisis in the future."Blame the accountants"The communiqué is silent on the question that underpins the effort towards a collaborative reform of the world’s financial markets.  There is no discussion of the nature and extent of market intervention by states.  No doubt this is because governments hold different views on this subject, ranging from highly interventionist, through scepticism that mechanisms exist to avoid or mitigate booms and busts, to a belief that governments should at most warn of impending disaster.  As a result, the thrust of the document is largely procedural.  This is not to say it is content-less: on the contrary, it has many substantive recommendations.  It does, however, give the impression that the crisis was a result mainly of faulty accounting, over-generous bonus packages, or flawed risk management processes, which a few new rules will sort out.  These and other factors certainly played their part, but can they have caused the crisis?  Can future stability and growth really be assured by bureaucratic methods?  The response must have a deeper moral and political dimension, and the crisis offers an opportunity for us to re-energise the state not merely to regulate, but also to direct commercial markets in the public interest.  The bank nationalisations make this inevitable in practice and it should now be explicitly discussed.  The challenge will be to guard against misuse of this new economic power, and that will require new ideas and institutions.Bubble love and Bubble blindnessTwo assumptions underpin the approach set out in the communiqué.  The first is moral-psychological: market participants do not want bubbles.  In fact, as is well known, market participants need and create bubbles all the time.  George Soros has recently described this very clearly.  The issue is one of scale and implications.  Small bubbles redistribute wealth amongst investors and offer profit opportunities and liquidity.  A mega-bubble, as has been seen, in the end redistributes between private business and taxpayers.  But then, most taxpayers are also bubble participants, for example through pension funds or property ownership.  Governments lubricate the economy with inflation.  So whilst no one wanted the fall, most wanted the rise.  It is optimistic to expect markets always to adjust away from bull or bear trends.  Sometimes markets have to be told what to do.The second assumption is epistemological: we can form market-neutral assumptions and rules and know that these are relevant to the market in question.  How is this possible?  Even the statement that we make a given assumption or that a piece of knowledge is or is not relevant or a given action is or is not legitimate is itself market-sensitive – influenced and influencing.  Who can step outside the markets?We might ask someone who is not an active market participant and who is not immersed in the information and assumptions of the market.  Otherwise, that person’s knowledge and opinions must be partial (in both senses) and faulty.  That disqualifies governments, market traders and rating agencies.  What about regulators?  The evidence isn’t good.  Economists?  Aside from a few Cassandras, pretty terrible; probably most have consultancies in the financial sector.The return of public serviceSo what can we do?  First of all, we need better forums for all kinds of views – bring Cassandra into the council chamber and take her story seriously.  That would add rigour to policy formation.  Secondly, it means new public institutions.  Along the model of the Bank of England’s MPC, maybe the economy should be directed by an independent Economic Policy Committee.  This might be a council of trusted elders and experts, motivated only by public-spiritedness.  Other areas of public life could likewise be reinvigorated to improve outcomes.But does the flame of public service still burn in the UK, and what would be required to intensify it?  In the post-war decades some of the brightest people of their generation entered the civil service (and other public institutions such as universities) with a desire for public service, public influence, stability, intellectual freedom, and recognition.  Most of these attractions have now gone.  Their work has been bureaucratised and politicised and whilst other countries still retain respected elites, they have been marginalised here.The UK is a small, open society with allies, but no empire, and little natural wealth remaining.  We can surely only thrive on the basis of an intelligent and principled organisation of public affairs.  For that, we must restore respect for expertise, professionalism, ethical and intellectual rigour, and independence in our public servants.  It will take time, and they will need to earn it too, but let us begin with a serious commitment to re-energise public institutions and to foster the talent, idealism and good judgement without which we will not rebuild our economy or our society.This crisis may be our best chance to do that.