Twofish's Blog

May 30, 2009

More notes on Gillam Tett’s book

Filed under: academia, finance — twofish @ 8:05 pm

I’m rather surprised that people haven’t asked her more about her fieldwork in Tajikistan.  Googling around, I found a lot of interesting and relevant things about Tajikstan that is very relevant to world affairs. You have the interaction between Soviet/post-Soviet ideology and Islam.  You have some very interesting gender issues.  Men in Tajik society were suppose to be “modern” since they had to go out and work in a Soviet system, and women “traditional” and this caused a interesting interactions when the Soviet Union fell.  You had a major and very tragic Civil War, which has some relevance to my life.

Also the fact that she was a goat herder was treated as a point of humor, but I found it interesting that no one seemed to take that seriously.  Being in banking, my first reaction was “how do people in Tajikistan make money herding goats” since that hits the second question which is “how can I make money off the people in Tajikistan herding goats.”  The only google reference that I can find is that goats are being used for cashmere, which makes me interested in the economics and social structure of goat herding.  It seemed from some of the pages that Tajiks are considered to have some special ethnic affinity to goat herding.

The other reason I was pleasant surprised by Tett’s book is that she didn’t do the standard reporter thing.  I’m afraid to talk to reporters since I often get the impression that reporters feel that their job is to make you look bad.  Reporters seem to assume that life is a battle between good and evil, and heaven help you if a reporter thinks that you are evil.

However besides some nit-picking, I think that it is useful because it addresses a big problem in that most of the public really has no idea what bankers do and how banks work.  It’s because no one really has the incentive to explain it to them.  It’s not that bankers are intrinstically evil or are hiding something out of shame or fear.  The problem is that the risks of being a public figure outweigh the benefits of public knowledge.  If there is a one in a million chance that I will be fired or publicly humiliated by something I say, then why should I take the risk, since I personally don’t get any benefit out of greater public knowledge.  And the fact that there is no shortage of people that are “out to get you” just increases those risks.

So here is some nitpicking…..

* one thing that I think Tett seems to imply from the interview is that people don’t talk about the “shadow banking system” because they are ashamed or fearful about it.  Actually bankers don’t talk about the “shadow banking system” for the same reason that people don’t talk about the clouds or the air they breath.  It’s such a nature part of the system, that people don’t think about it.  The other thing is that it’s not a matter of the banks hiding things from the regulators.  Most of the regulators in 1990-2008, where actively encouraging the development of the new banking system.  It’s also not that the regulators were hiding anything from the public, after all it was the public that voted in a series of administrations that believed in loose regulation.  It’s not also that bankers had this nasty conspiracy to defraud the public.  Most people in banking believed what they were doing was a good thing, and personally I still believe that if you properly regulate derivatives trading that you will end up with a better financial system.

* Something else that Tett also doesn’t make clear is that when she says the banks were able to use CDS to reduce their capital levels.  She is referring specifically to European (particularly German) banks.  American commercial banks aren’t allowed to do this.  This does bring up a problem in that in a global economy, you just can’t fix one countries regulations, since you can side step them.  Also, you have to view regulation as a system.  In England they drive on the left side of the road.  In the US, they drive on the right side.  What happens at the intersection.  A lot of English regulation is based on what are basically informal “gentleman agreements,” but Americans are suspicious of that sort of system and prefer impersonal rule based systems. These systems work in isolation, but you end up with Frankensteins like AIG-FP when you aren’t careful.  One thing that caused problem is that insurance in the US is primarily a state regulated system, and US states normally don’t talk directly with people in other countries, so no one ever thought of getting the New York insurance regulators and the UK FSA in the same room.

And if you have this much trouble making the US and UK financial systems compatible, just wait until you try to bring in China and Saudi Arabia.  In the case of China, this turns out to be a lot easier because of Hong Kong.

* Not that it would have helped much.  The way that derivatives were used help cause the problem, but the underlying problem was bad loans, and in that area derivatives didn’t play a huge role.  For example, Washington Mutual didn’t have much in the way of derivatives, and if you look at the dozens of banks that are failing on the FDIC website, derivatives didn’t play much of a role in their failure.


1 Comment »

  1. I generally enjoy the thoughts and thinking of people that have living in a third world, or at least, unfamiliar country, the comments are usually very insightful.

    Goat herding isn’t a necessity, scrape metal trading, wholesaling of rice, the profession is usually irrelevant, the process of being involved, from the ground up, in a business or profession that is completely unfamiliar seems to me to lead to a deep level of analytical thinking when approaching any problem (at least, from those I’ve met – maybe there’s some self selection at play too).

    Comment by Alex — June 22, 2009 @ 5:06 am

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