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Initial thoughts on Financial Crisis — #FCIC — Report

Re the recent release of the Financial Crisis Inquiry Commission report:

Like other investigations into disasters and crises, inquiries into our recent financial system collapse are intended to uncover causes and culprits. The problem is that there is rarely (as in this instance) either a “smoking gun” to be found or a particular shooter. With so many factors and players coming into play in shaping and determining the crisis, it is no surprise that the report emerges without a consensus among members of the investigation panel.

One consequence of this situation is the temptation to declare the crisis as “systemic” and thereby declare a universal “no fault” that permits all those who played central roles (through decisions or actions) to escape any blame or responsibility. By doing so, however, these “best and brightest” of the financial world admit to being either dupes or dopes. Furthermore, they inadvertently give support to those who critics of the financial services industry would radically alter the arrangements that proved to be so “systemically” vulnerable.

Alternatively, one can blame the lack of accountability. For most commentators, this shifts the blame to failures in the regulatory system, which in turn is generalized as a failure of government rather than a failure of the financial services market. The “system” would have worked just fine, thank you, had only the government monitors and overseers been more attentive to what was taking place right under their noses. Adopting this view not only shifts attention aways from the banking community, but also implies that any changes or reforms should be limited to relatively minor adjustments in the regulatory system rather than in the financial market itself. This is the approach that has won the day among advocates for change. Unfortunately, it does little more than kick the can down the road. Regulatory accountability has proven to be easily circumvented or undermined over time, and minor tweaks in the regulatory system are not likely to be more than a temporary fix.

I have been arguing in some recent writing that the likely long term “solution” lies elsewhere. Underlying both the “systemic” and “regulatory” approaches ignore a primary factor at work in the financial services market: the absence of a sense of moral responsibility. Neither radical changes in the market nor reform of the regulatory system will work unless there are some fundamental changes in how key actors assume that they have a “moral” (one can also use the term “professional” or “social”) responsibility to the communities they serve. The calls for greater accountability make for fine rhetoric, but unless steps are taken to change the moral culture of the financial services community, no change to either the structure or oversight of that industry will suffice for very long.

January 28th, 2011 Posted by | accountabilitybloke | no comments