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A New Emerging Consensus

After years of an active revolving door between banks and their government regulators, their friends in high places are deserting them. Plain talk and sharp criticism are replacing what The New York Times referred to as “a general willingness to assume that everything was fine.”

Christine Lagarde, the managing director of the International Monetary Fund, noted that “The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.” Ms. Lagarde added that “the true role of the financial sector is to serve, not to rule, the economy. Its real job is to benefit people, especially by financing investment and thus helping with the creation of jobs and growth.”

At the heart of the new critical spirit by the regulators is a belief that banks are not, in and of themselves, necessarily good things. “In the run-up to the crisis,” Mark Carney, the governor of the Bank of England, said, “banking became about banks not businesses; transactions not relations; counterparties not clients. New instruments originally designed to meet the credit and hedging needs of businesses quickly morphed into ways to amplify bets on financial outcomes.”

These are not new or even original thoughts. But it is highly unusual to hear top government and banking officials speaking them. Mr. Carney spent 13 years at Goldman Sachs before entering public service, while Ms. Lagarde is a former corporate lawyer who served as the French Minister of Finance.

According to Floyd Norris, the chief business reporter for The Times: “An international survey of the public conducted in 27 countries late last year . . . found widespread doubt about whether either business or political leaders could be trusted to act ethically. There was general agreement that there was still not enough regulation of financial institutions.”

What the banks delivered, Ms. Lagarde said, was “excess, in risk-taking, leverage, opacity, complexity and compensation.” And that “led to massive destruction of value.”

The big banks still have powerful friends in Washington, at least in Congress, legislators they have helped to elect, and who have supported them in their efforts to evade regulation. But public opinion is deserting them. In the United States, 45 percent said there was not enough regulation, compared with 24 percent who thought there was too much, and just 18 percent who thought there was just enough, according to the survey conducted for . . . a public relations firm. (See, “After Crisis, A New Spirit of Reining in the Banks.”)

The Times made a slight effort at rebalancing the picture by publishing an account of a mid-level bank executive over the weekend who appears to have had a gratifying career, actually doing useful things without being lavishly compensated. (See, “There’s Nothing Wrong With Being a Banker.”) Then he left banking.

Is that supposed to reassure us that not all bankers are “vampire squids” or irremediably corrupt? Or to remind us that much of banking still serves a useful function? Perhaps the point was that bankers don’t need to make an obscene amount of money to be motivated to do a decent job?

Perhaps The Times thought we needed to be reminded that not all banks and bankers are big or bad — because it certainly is coming to seem so.

“Better Wrong than Boring”

The secret is to trick yourself into ignoring what you know so well. Half closing your eyes, for example, blotting out the familiar to “see” something new. Turning an image upside down. Being playful or humorous.

Andre Geim and his colleague Konstantin Novoselov won the 2010 Nobel Prize in physics for their experiments involving the single-atom-thick material called grapheme. Slate interviewed him recently and found that those experiments came from what Geim calls the “Friday Night Experiments.”

“On these occasions, Geim’s lab works on the “crazy things that probably won’t pan out at all, but if they do, it would be really surprising.” From the start of Geim’s career, he has devoted 10 percent of his lab time to this kind of research.

“The biggest adventure is to move into an area in which you are not an expert,” Geim said. “Sometimes I joke that I am not interested in doing re-search, only search.” His overall career philosophy is to “graze shallow.”

The FNEs are, unsurprisingly, unfunded—due to their nature, they have to be. They are times when “we’re entering into someone else’s territory, to be frank, and questioning things people who work in that area never bother to ask,” Geim said. In other words, these are ways for Geim and his team to acquire the advantage of the nonexpert—the deliberate amateur. Part of that is his belief: “better to be wrong than be boring.”

According to Slate: the innovative choreographer Twyla Tharp once said “Experience is what gets you through the door. But experience also closes the door . . . . You tend to rely on that memory and stick with what has worked before. You don’t try anything anew.” (See Slate, “How outlandish experimentation and “grazing shallow” led to a Nobel Prize win.”)

That is consistent with what evolutionary biologists suspect was the origin of consciousness, to check out that there were no surprising dangers in the environment.
On the other hand, not pleasing your peers has its risks: according to Geim, one referee said his work did “not constitute a sufficient scientific advance.” He had the pleasure of reporting that remark in his Nobel Prize acceptance speech.

What Do Congressmen Really Think
-– Or Do They Really Think?

The chief financial reporter of The New York Times seemed incredulous when he heard what some congressmen were saying about our markets not needing financial regulation: “Representative Jeb Hensarling, the chairman of the committee, proclaimed ‘it is almost inconceivable that an asset manager’s failure could cause systemic risk.’ He also saw no danger to the system from insurance companies, which are ‘heavily regulated at the state level.’

Floyd Norris’s request for an interview with Hensarling was turned down. “I would have asked him about Long-Term Capital Management and the American International Group. The first, a money manager, caused a crisis when it failed in 1998; the other, an insurance company, had to be bailed out in 2008.”

But it was unlikely that it was simply a failure of memory that caused the congressmen to say what he did. It was either outright denial of facts he knew but didn’t want to recall, or it was obfuscation of something he wanted us all to forget. Those events were too important and big to be simply forgotten.

In his account of the matter, Norris went on to quote Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation who now heads the Systemic Risk Council.

“It’s just like Brooksley Born and the derivatives industry,” she told me. Ms. Born, as chairwoman of the Commodities Futures Trading Commission in the Clinton administration, had the temerity to suggest that the C.F.T.C. should look into regulating over-the-counter derivatives. The industry went crazy, and she received no support from the White House or from fellow regulators at the Treasury, the Fed or the S.E.C. Congress responded by passing legislation to bar the C.F.T.C. — or any other regulator — from doing anything about derivatives.

“At the time, the argument was that there was no need to regulate the derivatives markets because the main players in them — banks and brokerage firms — were already regulated.

“We don’t know, of course, [what would have happened had derivatives been regulated] but what we do know . . . that Wall Street felt free to invent and exploit any product it wished. If financial engineers called a product a swap, that made it a derivative and exempted it from regulation.”

Floyd Norris concluded: “Ms. Bair says she thinks the attacks on FSOC are intended to intimidate it.” Now, amnesia, or perhaps we should call it, as Ms. Bair does, “revisionist history,” has persuaded some people that there is no threat of anything similar happening.” (See, “Financial Crisis, Over and Already Forgotten.”)

As Edmund Burke, the British statesman, once said: “Those who don’t know history are doomed to repeat it.” The philosopher George Santayana said much the same thing, as did others. But there seems to be no way of preventing us from making the same mistakes again and again, especially when money is involved.

Owning Up to Difficult Truths

There is a growing consensus that our economy has become hostage to short-term thinking, the demand of investors for immediate returns on their investments. The Harvard Business Review focused on this in this month’s feature: “Are Investors Bad For Business?”

“The financial sector’s influence on management has become so powerful that a recent survey of chief financial officers showed that 78% would ‘give up economic value’ and 55% would cancel a project with a positive net present value—that is, willingly harm their companies—to meet Wall Street’s targets and fulfill its desire for ‘smooth’ earnings.”

Several things are truly shocking about this. First of all, the reality of Wall Street’s coercive power to harm our productivity for short-term gains. That is not something easily acknowledged in our society. But almost equally shocking is the fact that so many CFOs own up to the irrationality of the system. And then, there is the fact that HBR would feature the problem.

Something profound is changing in our national dialogue. Up until now our leaders have trumpeted the virtues of free markets, and Wall Street has successfully beat back most efforts to impose restrictions and oversight. The banks that proved “too big to fail” are proving to be “too big to jail,” despite criminal charges of malfeasance.

But a space has been created for critical thinking, and that in itself is a sign of hope.

And Not Many Jobs

That’s what a career counselor commented to The New York Times, in a story about rising fears of unemployment. “Job security is maintaining cutting-edge skills and establishing a far-reaching network.” In other words it is about continually preparing to be fired.

The new myth about the job market used to be that there is a new psychological contract between workers and employers, based on constantly changing demands of the market. Workers needed to be adaptive, or as The Times put it “the newest generation of workers, those in their 20s and 30s, [are] prepared to hop from job to job over their lifetime.”

“Data collected from 1997 to 2011 of nearly 4,000 employees in 40 organizations,” however, “does not back up [that] general belief. . . . Rather, it appears to be a significant stressor.” Says Tahira M. Probst, a professor of psychology at Washington State University.

And there are a lot of people in that position. A Gallup poll found that in August 2013 almost one-third of workers feared being laid off, compared with about half that number in August 2008.
“Job security,” said the counselor, “– it’s an oxymoron.”

Faced with this new reality, human resource experts are now advising more and better communication. On the company level, managers need to learn to communicate honestly, frequently and realistically, one professor said, and the communication needs to address the real worries of the workers.

In other words, “if there are changes, how will this affect my job?” she said. “They also need to say what is known and what is not known. When employees don’t trust management, rumors will start, and then it is very hard to convince people they are not true.” Firms should do this because it is better for workers, another professor said, but it also is better for the bottom line.

“From a business perspective,” he said. “Insecure workers are not happy workers and not productive workers.” (See, “Uncertainty About Jobs Has a Ripple Effect.”)

But communication skills do not address the underlying fact that the supply of jobs is shrinking. Faced with that decline, more and more workers are “choosing” to leave the job market.

The myth of the new psychological contract in the workplace was short-lived. And even in the days of its greater plausibility, it did not address the fact that it was always far more true for industries that required complex skills. Unskilled workers were far more vulnerable to economic downturns.

There are also more vulnerable to anxiety and, according to a professor of psychology at Washington State University, the risk of accidents. They “pay less attention to safety and subsequently experience more injuries and accidents at work.” Moreover, “employees who were more worried about losing their jobs or having their benefits or hours cut were also less likely to use any support programs than those who felt more secure.”

As one professor put it: “when a worker fears job loss, the last thing you want your supervisor to think is that you’re not putting in 150 percent. You want to seem indispensable.”