On 30 April 2009 Ms Gillian Tett of the FT gave a lecture, titled "Fool's Gold" at the London School of Economics. It was an interesting story telling with attractive words and acronyms making an impression that somehow it was a complex subject. Ms Tett performed a balancing act of blaming on one side the financial world’s innovation but on the other generally admitting that innovation was good.
To her credit, Ms Tett realised very early, some years ago, that there was something wrong with the way credit was handled. However, as social anthropologist, she did not realise the obvious. That it was a classic way of turning the financial system into a pyramid. So rather than making a complaint to the public prosecutor (as creating financial pyramids is a criminal offence), she was writing stories considering all these as may be unwise, complex, non-transparent, etc but still legal. Ironically the rule of thumb is that, in the financial world, non-transparency is very often a cover-up of crimes. Do you still remember "innovative" "Cap'n Bob"? Social anthropologists should know more about it.
Not surprisingly for a social anthropologist, Ms Tett was trying to take a holistic approach. But she could not see the wood for the trees as she did not seem to be able to distinguish between the root cause of the crisis and the mechanisms that made this root cause propagate. She did not even directly touch upon it, as talking about too much credit is vastly imprecise. She missed the point that all these “complex”, as she called them, financial products were merely tools used for lending with systemic loan to deposit ratio above 100%. This is the root cause of the current crisis. This was a classic pyramid building: it led to financial overliquidity on the markets (pumping money out of the banks reserves), inflation of value of the assets and then a collapse (i.e. classic pyramid collapse), once there was no more money to be pumped out of the banks.
It is not surprising then, but still quite disturbing, that Ms Tett did not see a cause of legal action against the bankers (and, I guess, regulators and government officials either). She stated that somehow the use of financial products was broadly effective in circumventing the law as it was written. It does not stand the test of fact: the law as it is currently written makes creating financial pyramids illegal. It does not matter how a pyramid is created. Whether it was created using “complex” financial products or even more sophisticated Albanian pyramid structures (as it happened there in 1996 – 1997) it was still a crime. In a holistic approach you look at the action of the bankers (action with approval of regulators and government officials): they created a financial pyramid, i.e. committed a criminal offence for which they must be prosecuted and their wealth confiscated. This is based on the law as it is written. “Complex” financial products were merely the tools of this crime. It would be perverse to imply that since the tools, i.e. "complex" financial instruments, were legal then a criminal act committed using them, i.e. creating a financial pyramid, was legal too.
Basically, even with her social anthropologist’s background, Ms Tett’s holistic approach appears not to be holistic after all. She also does not understand that if the law (as it was) that prohibits financial pyramid schemes was observed and Basel regulations were complied with the current crisis would not have happened. It is not the failure of the law and regulations. It is the problem of criminals who were allowed to breach them and even now they are not prosecuted but are still benefiting from their crime. Therefore it seems that all Ms Tett’s criticism of the financial establishment is yet another attempt of saving the perpetrators of the current crisis (i.e. financial pyramid peddlers) from criminal responsibility and assets seizure by venting social outrage. But is the FT not a part of financial establishment after all?