Matthew Henty

I hope Will Hutton is right, he says of the G20 in the Observer,

It is billed to be a huge disappointment, full of banalities and merely papering over the deep cracks between Europe and the US…. I beg to differ…. My understanding is that, extraordinarily, the G20 will decide to regulate hedge funds, register credit-rating agencies and their business practices, insist that derivative trading is undertaken in regulated exchanges, set a framework for bank pay and bonuses, require transparency and disclosure of information from tax havens and organise international “colleges of regulators”…. In addition there will be an agreed common template to address the alarming depth of the global recession, release credit flows, especially for trade finance, and assist the less-developed countries who have suffered from a flight of capital…. I am also blinking at the emerging unanimity over the IMF. It is to be doubled in size to $500bn, and given new powers to monitor national economic policies. Equally important is that less-developed countries will be allowed much more access to its “Special Drawing Rights”

Though most of the commenters don’t seem to agree.

Simon Caulkin is one of my favourite columnists. I turn to the page he shares with William Keegan in the Observer Business & Media section first of a Sunday morning. They both remind me of things I know, make me think, and help me understand things I only nearly knew or understood before.

Last Sunday, Simon Caulkin addressed the Healthcare Comssion report on the Stafford Hospital, amongst other things. Now, we know that targets distort behaviour. That is the purpose of setting a target, to focus effort and enterprise in a particular direction, towards a particular aim. We also know that this focus of attention in a particular direction leads to a reduction in focus in other directions. And we know that you can only set a target for something you can measure. Such as the average waiting time in the A&E of Stafford Hospital.

We know all these things. Yet, perhaps, we didn’t know that the result of setting targets (such as, to repeat, the average waiting time in the A&E of Stafford Hospital) would be 400 excess deaths between 2005 and 2008. That too is worth repeating; 400 excess deaths between 2005 and 2008.

Now, anybody with a hint of common sense (or any training in cost benefit analysis) knows that against this tremendously high cost we must measure the benefits of setting such targets. I don’t know what they are, though I imagine they are things such as fewer very long waits in the A&E of Stafford Hospital before admission to a ward. This probably saves lives. How many? Was it worth it?

Caulkin ends his article with a health warning for targets proposed within the pages of the Academy of Management Perspectives:

Goals may cause systematic problems in organisations due to narrowed focus, increased risk-taking, unethical behaviour, inhibited learning, decreased co-operation, and decreased intrinsic motivation.

Simon Johnson, former Chief Economist at the IMF, has written an interesting article in the Atlantic from the point of view of the IMF, looking at the United States in the current crisis. He notes that,

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

The article doesn’t seem overblown, and some of the parallels are shocking and obvious,

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

And concludes,

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

(…)

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

In avoidance of linkrot, really appreciated this speech from Bruce Sterling.

Happy to remove if requested….

What Bruce Sterling Actually Said About Web 2.0 at Webstock 09

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