Vivid account fails to dig for real causes

Last week’s BBC programme on Britain’s banks and the economic crisis was genuinely important. It provided the public with the opportunity to hear many of the key players involved including bankers, regulators and expert commentators.

The programme was also a vivid illustration of the strengths and weaknesses of contemporary economics. It gave an account of the inner working of the financial system but ultimately failed because of its superficiality.

Perhaps the best parts of the programme came at the start and at the end. It showed clearly that despite all the hype and fury about Britain’s bankers little has changed in the way the City operates.

”It showed clearly that despite all the hype and fury about Britain’s bankers little has changed in the way the City operates”

Although the run on Northern Rock was back in September 2007 the government did not even launch its banking commission until June 2010 and its final report is not due until September 2011 – four years after the crisis broke.

It will no doubt then take politicians time to decide how to act on the report. Therefore, despite all the bluster about “greedy bankers”, it will have taken several years to pursue any meaningful reform. This is in contrast to the Dodd-Frank bill in America which, whatever its limitations, came into law in July 2010. (article continues below)

The main change to occur is the Bank of England’s impending takeover of the Financial Services Authority. Therefore one of the organisations widely regarded as most responsible for the crisis will see its powers strengthened as a result of subsequent reforms.

Of the programme’s weaknesses the most striking was its banal acceptance of the tired assumption that flawed banks caused the crisis. There was no attempt by Robert Peston, the BBC’s business editor, to probe any deeper.

A useful analogy to explain why such a view is superficial could be careless campers who accidentally start a forest fire. The explanation could exist on many levels. Perhaps the campers failed to put out their fire properly. Or maybe the surrounding trees were dry. Or it could be that the area had experienced a hot summer with no rain.

Each of these explanations could be true in their own terms. But any comprehensive account would need to trace back the cause to include the most fundamental level.

Conventional explanations of the crisis are like those, in this analogy, who stop at blaming careless campers. There is little attempt to understand the relationship between the financial sector and the real economy. Their accounts may be vivid but they fail to go beyond a superficial interpretation of events.

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Ferraris For All, Daniel’s book defending economic progress, was published last year. His personal website can be found at www.danielbenami.com.