Run on East Side Bank, N.Y. 1912 February 16. Bain News Service via Library of Congress.

Keynes on Why Bankers Can’t Self-Regulate

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I asked Warren Kinston about something I had recently written regarding Imaginist thinking and Obama’s success. (He points out that Imaginist isn’t appropriate at societal level; I was wrong and should study more.) But that got me thinking about the values in play, and I returned to his Working With Values to look at Ethical Choice. Warren is describing the Conventionalist approach but quotes Keynes. Oddly, this explains why today’s bankers — who almost all knew that the financial world was going to implode and possibly destroy the world’s financial markets — didn’t do anything:

Conventionalist choices are dominant in all societies and social groups. Despite the value which is assigned to enterprise and achievement in the West, failure is often preferable to success if that means violating convention. Keynes once noted that ‘a sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way with his fellows, so that no-one can really blame him.’

The quotation comes from “The Consequences to the Banks of the Collapse of Money Values”, an popular-press essay Keynes wrote in 1931, before the collapse of banking across the world and the complete collapse of the markets. Keynes’s essay is interesting to look at because it discusses how what Kinston calls ethical choice comes into play in even something so supposedly “rational” as banking. As Kinston points out, “rational” is an approach of ethical choice.

Here’s the Keynes quotation in context.

[p. 176-177] It is for this reason that a decline in money values so severe as that which we are now experiencing threatens the solidity of the whole financial structure. Banks and bankers are by nature blind. They have not seen what was coming…. A ‘sound’ banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.

But to-day they are beginning at last to take notice. In many countries bankers are becoming unpleasantly aware of the fact that, when their customers’ margin have run off, they are themselves ‘on margin.’


[p. 178] It is necessarily part of the business of a banker to maintain appearances and to profess a conventional respectability which is more than human. Lifelong practices of this kind make them the most romantic and the least realistic of mean. It is so much their stock-in-trade that their position should not be questioned, that they do not even question it themselves until it is too late. Like the honest citizens they are, they feel a proper indignation at the perils of the wicked world in which they live, — when the perils mature; but they do not foresee them. A Bankers’ Conspiracy! The idea is absurd! I only wish there were one! So, if they are saved, it will be, I expect, in their own despite.

[Keynes, John Maynard. 1931/1991. “The Consequences to the Banks of the Collapse of Money Values”, in Essays in Persuasion. New York: W. W. Norton & Company]

Bankers indeed failed to prevent their collapse in 1932. In our current collapse, financial experts all knew that something bad was likely to occur but felt that they could not do anything and remain either (a) employed or (b) respected. Better to fail conventionally with everyone else than to be branded an extremist, even if that saves your livelihood.

People are not completely rational in their market choices and will often do what appears to be counter to their survival. As in our financial markets today.

(A quick aside: it may well be that time-horizons played a large part in our present collapse, where something that should have been managed at a longer time-horizon was run by those without them. There’s also the sociopath problem, of course, but the sociopaths you shall have with you always, until the end of the age.)

This led me to looking at some more current conversations about Keynes. His ideas are not those of the current leadership at the Federal Reserve or the Treasury. I was raised on Friedman, so finding James K. Galbraith’s 25th Annual Milton Friedman Distinguished Lecture at Marietta College may seem more related than it actually is. Galbraith argues that Friedman was simply wrong about how reality works in his monetary theories.

Finally Hyman Minsky taught that economic stability itself breeds instability. The logic is quite simple: apparently stable times encourage banks and others to take exceptional risks. Soon the internal instability they generate threatens the entire system. Hedge finance becomes speculative, then Ponzi. The system crumbles and must be rebuilt. Governments are not the only source of instability. Markets, typically, are much more unstable, much more destabilizing. This fact that is clear, in history, from the fundamental fact that market instability long predates the growth of government in the New Deal years and after, or even the existence of central banking. We had the crash of 1907 before, not after, we got the Federal Reserve Act. [James K. Galbraith. March 31, 2008. The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus [PDF]

It is perhaps that Internet-time, that bane of marketers everywhere, has simply increased the speed at which we can destroy ourselves.

Run on East Side Bank, N.Y. 1912 February 16. Bain News Service via Library of Congress.

Comments 0

  1. This is not only an issue of capability, but also of personality and organizational culture.

    Quite a number of studies describe managers and management team as being “convergent”, views and facts that do not fit in are discarded along the way, which impedes self-regulation. Banks and financial institutions have units in place for risk management. Their purpose is to have systems in place to catch rogue traders, exposure to bad risk etc.

    What banks and companies do not have is a department for preparing for the next spectacular downturn. Shell’s successful work with scenario planning in the early seventies made the scenario method popular, but not to much great managerial effect elsewhere. Units that work with business intelligence and planning seem to be completely focused on the “converged” view of where the business will go. Had I been at the head of a major company I would hire a group of great analysts and spend time with them figuring out how and when the business will turn down and have plans in place.

    But I also doubt that I would have so relentlessly pursued market share chasing short term profits. In my early career I spent 11 years in the automotive industry experiencing it’s busts and booms. After every bust I have heard top managers say “never again”, but they do, and I believe that the losses in the busts eat up the profits in the booms. Which is probably what Collins wrote about in “Good to Great” and Raynor in “the Strategy Paradox”.

  2. Post

    Keynes point was that in order to be a good banker, you needed to NOT do the things to prepare for the next collapse but instead follow the herd. It’s a weird truth that I have run up against with my clients. If you are going to be an X, you had best do what all the other X do.

    I was once listening to a lawyer bemoan how other lawyers would bill for this that he was doing but he just couldn’t do it. And that was his problem in the local market (he is shortlisted for a position at The Hague right now): he doesn’t do what we expect lawyers to do, so we don’t think that he’s a good lawyer. You have to bill just like all the rest of the lawyers. And you have to think like they do.

    I know that many heads of the financial firms were privately moaning that this couldn’t be working, that it was all smoke and mirrors. But the hedge funds are run by “geniuses” and the lesser leaders accepted by faith that they knew what they were doing. They couldn’t get out of these markets without disturbing shareholders, or without losing prestige and reputation.

    As it turned out, firms that tried to avoid the mortgages were also brought down through this massive derivatives market in risk that ignores that people are greedy and will game any system.

    I’m not sure that you would have lasted long as a financier. You had to play this game to be seen as a smart player. Some of it is the Emperor’s New Clothes: no one was willing to point out that giving money to people who even in the best of times couldn’t pay it back was monumentally dumb.

    The banking market (or any market) can’t “self-regulate” because of this tendency of their essence becoming their destruction. If my industry is built on Empiricist thinking, we will never want to be limited by Dialectic (Political) thinking. You need all Algie & Kinston’s achievement languages. Sometimes those need to be embodied in an external balancing force.

    If any of that makes any sense. I’m just beginning to think about this, but it seems like saying that one can fix the financial world without including externals who are not financiers won’t work because to be a respected [insert any profession] blinds one to what will destroy the profession.

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