The financial double-think that needs to be eliminated
By Gillian Tett 2009-08-26

A decade ago, it was fashionable for western consultants, bankers and business people to decry Japan’s domestic service industry. For Japanese business sectors, ranging from milk production to financial broking, have long been plagued by complex distribution chains and numerous middlemen.

So, Anglo-Saxon consultants – such as McKinsey – would regularly urge the Japanese to reform their distribution chains, and flourish data showing how much more “efficient” the US was than Japan in sectors such as retailing.

Back then, I was working in Tokyo as a reporter. So I dutifully reported those studies-cum-sermons on the evils of middlemen.

However, amid all that debate about American efficiency,one point that western commentators almost never discussed was the proliferation of middlemen in America’s financial world.

If you were to sketch a map of how credit has been sliced and diced in 21st century banking, there would be so many stages and commission- hungry middlemen in that process, that the Japanese dairy industry might seem positively rational. Yet, for many years the apparent contradiction went almost entirely unnoticed, by western politicians, bankers, and consultants alike. Middlemen were regarded as bad in Japan, but they were somehow overlooked in America’s financial world.

Why? The obvious answer is that the banking sector has been very powerful. Three decades ago, Pierre Bourdieu, a French sociologist, observed that elites in a society typically maintain their power not simply by controlling the means of production (ie money), but by dominating the cultural discourse too (that is, a society’s intellectual map). And what is most important in relation to that cognitive map is not what is overtly stated and discussed – but what is left unstated, or ignored. Or as he wrote: “The most successful ideological effects are those which have no need of words, and ask no more than a complicitous silence.”

The western financial system is a powerful case in point. For the first seven years of this decade, most politicians, voters (and journalists) in effect, ignored the extraordinary revolution brewing in the debt and derivatives world, because these areas of finance were widely (and wrongly) believed to be very boring, or so complex they could only be understood by a tiny technocratic elite.

That essentially left bankers free to operate with minimal external scrutiny. It also meant there was little discussion about the inconsistencies that plagued the free-market rhetoric – or intellectual map – that ruled the day. And these paradoxes were numerous.

One of the founding principles of free market theory, for example, is the idea that markets work best when there is a free flow of information.

Yet, some of those bankers who have been promoting free market rhetoric in recent years have also been preventing the widespread dissemination of detailed data on, say, credit derivatives prices. Similarly, while bankers have taken the idea of creative destruction as an article of faith, in terms of how markets are supposed to work, they have been operating on the assumption that their own industry would never suffer too violent a wave of creative destruction.

And securitisation has produced a particularly curious – or absurd – paradox. A few years ago, it was widely assumed that the process of slicing and dicing credit would create a more “complete”, free-market financial system. But by 2005, credit products had become so complex and bespoke, that most never traded at all. Thus they had to be valued according to models, since they could not even be priced in a market – in a supposed free-market system.

These days such paradoxes look so extraordinary that it is hard to believe they went unnoticed for so long. But the really interesting question about all this “complicitous silence”, as Bourdieu says, is not simply why it arose in the past – but what it implies about the future. After all, one reason why this double-think persisted for so long is that bankers and policy makers alike have all been trained in recent years to take economic theories at their face value, shorn from social context, or power structures.

But if regulators and politicians are to have any hope of building a more effective financial system, it is crucial that they start thinking more about power structures, vested interests – and social silence. That might sound like an irritatingly abstract or pious plea. However, it has some very practical implications about how policy is formulated. I will seek to flesh out some of those in next week’s column, in relation to some striking ideas being quietly developed by a few financial officials, such as Adair Turner, chairman of the UK’s Financial Services Authority.