Wednesday, November 14, 2012

Dr Andrew Hilton on banks like cement makers

The Parliamentary Commission on Banking Standards (lead by Mark Garnier MP), taking evidence this morning has brought some gems from Dr Andrew Hilton, Director of the Centre for Study of Financial Innovation.

He likened the banking industry to a cement works: banks treat money like a cement manufacturer treats cement and concrete - they just keep pouring it through. Their attitude to glitches and risk is rather as the cement maker: So what if a little bit drops off the system?   He said that the trouble is the huge quantity of money passing through banks. Maybe the risk is only 0.001% but the total handled is so huge but even that tiny part is huge.  

What does reputation mean for banks? He said Goldman Sachs, although having endured a thoroughly bad press for a decade are still rated as top bankers. Would you as a client prefer to have them defend you in a tight deal; or might the reputation of say the Co-op bank, noted for donating to ethical causes, mean more? 

On trying to sort out risk and forming procedures to reduce it, he warned about the working of  'Goodhart's Law' in that however many levels of defence you formulate in a quantitative manner the real concern is qualitative assessment.  As Baroness Kramer said, the official lines of defence become 'gameable'. After failure, people justify their actions which cleverly avoided the letter of the rule.  

Whilst a Parliamentary Committee tries to sort out what has gone wrong with banking, will they examine the money creation aspect that Dr Hilton alluded to in his 'cement works' analogy? In examining important things such as risk and internal audit and whistleblowing, etc, will they give a forensic examination of the money creation process? Otherwise they will be in danger of missing the main point: that the unavoidable risk /the elephant in the room / the-baby-not-the-bathwater, is that the commercial banking process allows private firms to create our money supply and do what they will with it. See Prof Richard Werner's short YouTube explanation of this. As Dr Hilton said, many people will still able to make a personal fortune by the age of 35 if they go into investment banking. Is anyone seriously asking why the public privilege of money creation should facilitate this and inevitably expose the financial system to blow-up, again and again in years to come? 

Positive Money are leaders in promoting money creation alternatives. 
posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom     

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