Last week the Worshipful Company of Marketors, of which I am the Junior Warden, held its annual dinner to celebrate both its foundation as a guild in 1975 and its receiving of its Royal Charter in 2010. The Master Sally Muggeridge had arranged for Dr Vince Cable, Secretary of State for Business, Innovation & Skills to be the speaker. When I heard that I advised her to also arrange a backup speaker as politicians are notorious for cancelling their appearances at short notice. She took my advice and arranged for her friend Dr Gillian Tett, Assistant Editor of the Financial Times
to be there in case. In the event Dr Cable did cancel the day before and sent his junior minister, the Viscount Younger of Leckie. He is responsible for Intellectual Property in which I have a strong interest. The Minister gave us a solid speech but with few insights to share with readers of this blog. However, we had also decided that Gillian would speak as well so Viscount Younger gave us his address before dinner and Gillan Tett after dinner. Hers was one of the most remarkable I have ever heard.
Dr Gillian Tett joined the Financial Times
in 1993 as a correspondent from the former Soviet Union and Europe. In 1997, she was posted to Tokyo where she later became bureau chief. In 2003, she became deputy head of the influential Lex column. She was then made US managing editor at the FT, before taking her current post. In 2006, she predicted the financial crisis. In 2009, she published Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed
which won the Spear’s Book Award for the financial book of that year. She has won a string of awards including a President’s Medal by the British Academy (2011), Journalist of the Year (2009) and Business Journalist of the Year (2008). in 2010 she even had the accolade of the Daily Beast
asking “Is Gillian Tett The Most Powerful Woman In Newspapers?”
She began her speech by saying that she had trained as an anthropologist, not the most obvious experience for someone who has gone on to be one of our foremost financial commentators. Two years before at the Aspen Institute Ideas Festival she had bumped into Alan Greenspan, the former chairman of the US Federal Reserve. He amazed her by asking her advice on which books to read on social anthropology. He had always struck her as an ultra-orthodox, free-market economist who had been close to Ayn Rand, the radical libertarian novelist. Greenspan was known best for his firm belief that the best way to run an economy was to rely on rational actors competing in open markets.
Mr Greenspan has just published a new book The Map and the Territory
which gave Gillian an excuse to reacquaint herself with him and interview him for the Financial Times
. The interview was due to be published in the following weekend but Gillian gave us a preview of her main findings. As chair of the Fed Alan Greenspan relied on mathematical models and paid no account to social models. This worked well for a time when the economy generally expanded at a reasonable rate. Even when there were asset bubbles Greenspan saw no reason to control what he called excessive exuberance. He was confident that markets would always self-correct and indeed they did more or less with the stock market bubble in the late 1980s and the tech bubble of the late 1990s. When these bubbles burst there were of course losses to individuals and corporations but no secondary consequences. The difference with the Lehman shock was that this bubble was based on excessive leverage as well as exuberance and the consequences were profound.
The models had stopped working. Greenspan had confidence in his Fed model which was cleverly constructed but he now sees that it cannot forecast human behaviour. The anthropologist Gillian Tett understands this very well. The human factor is what always gets in the way in economics. In fact I would go to say economics is closer to anthropology than to physics or mathematics. All the models had stopped working. JP Morgan’s model had the American economy accelerating just three days before the Lehman crash. The Goldman Sachs model failed. The Fed model failed. The IMF model failed. The ratings agencies failed. The financial services regulation failed.
It is clear now that the use of excessive debt to finance growth was compounded by the complexity and opacity of the markets. Although Greenspan is an outstanding mathematician and understands the concept of derivatives, while at the Fed he would say “Does anyone know what is going on?”
and the answer came back from his team of 250 brilliant PhDs in economics “Only in part.”
Critics of Greenspan blame him for the easy money that created the debt bubble. But he replies that he was raising interest rates from 2003 but that long-term rates went down as excess Chinese capital washed into US bonds. In such circumstances classic economic theory could not forecast how finance would behave. The algorithms might tell you what is happening to inventories or other physical assets but finance is different. Money is different. Physical assets are fixed in quantity but issuance of new debt is issuance of new money.
This has led us to profound uncertainty. We can now see that a stable moderately growing, non-inflationary environment will create a bubble 100% of the time. Gillian is concerned that a world marked by profound uncertainty is also a deeply disconcerting and humbling place. Today there are no easy answers or straightforward heroes or villains, be that among economists, anthropologists or anyone else. In a shifting landscape we all need to keep challenging our assumptions and prejudices.
But despite such a grim view Gillian found an uplifting message for us Marketors. For she saw that the key was to re-establish trust in institutions. The word credit for example derives from the Latin credere
, to believe or to trust. To do this we needed to reach out and connect with people and institutions. That was the way we built brands and that was how we could help to rebuild trust. We are not machines and the models cannot predict how we will behave or react to events. We are not always rational in our behaviour. (See my blog Simplicity
October, 2013 in which I refer to the work by Dr Steve Peters on understanding the irrational, impulsive, seemingly impossible part of our mind that often holds us back.)
In yesterday’s Financial Times
Gillian wrote of her experience speaking to us at our dinner in an article called This Guilded Life.[i]
She first observed of the quaint habits of a Livery Company with ceremonies dating back to Saxon times. But then she reasoned that this was in fact an antidote to the remorseless quest for profit in modern business. She didn’t say but I will tell her that the Livery Companies of the City of London when taken together are the largest philanthropic movement in Europe. She may not have found that out yet but I think she worked out what we’re all about. And I also think she may be the next editor of the Financial Times.