James: Hi Andy, thank you for joining me today. Starting off, I want to ask about something related to the talk you’re giving today on Finance and Institutions, and something you’ve spoken on extensively in the past, the 2008 financial crisis.
The way the crisis is often portrayed is that it was three decades of financial deregulation that caused banks to act in a risky manner, leading to the subprime mortgage crisis. Yet to what extent was it actually the close ties of the banks to the government that led to the crisis, in the knowledge the banks could do what they want given government had a history of bailing them out when things went wrong?
Andy: Hi James, great to be here, back in Warwick for me.
Looking back to 2008, the crisis that we had, which was the biggest in many generations, when I look at the root causes of that, I find it hard to just highlight one or even two possible explanations. You mention two, but I think there was a whole cocktail of sources and causes of that. You certainly can’t just point the finger to either regulation or to politicians as being the only people or factors responsible.
Now look across the piece, I think back to 07 and 08, who was talking about the possibility of a crisis then? Very few people, if any. We could argue that regulators perhaps were loosened too far. For sure you could argue that the politicians may have been egging them on. But equally culpable I say would’ve been the bankers taking risks too large, the rating agencies casting perhaps a blind eye to the risk taking that was going on, the academics including here at Warwick who were focusing too little on financial crises from the past, and their sources. I think that the roll call of those who got it wrong is very large, it’s almost everyone. I’d be hesitant towards pointing the finger to any one factor or any one party, being that it was multiple parties and multiple factors led us to the biggest crisis in several generations.
James: Following on from that, is too big to fail a failed policy itself? Should the banks have been allowed to crash, possibly for short-run loss but long-run gain (in the sense that that would curb their risky behavior in the future)?
Andy: I think there is a time and a place for those moral hazard type arguments, the moral hazard that comes from bailing out banks and therefore encouraging future risk taking. I think the time for moral hazard though is not in the 2008 crisis. I think in that situation you risk making a bad situation a terrible one. Had we not bailed out banks in 07 or 08 in the UK and globally, that would have made an awful situation, truly terrible. We would have had a second great depression, I’m confident, had we not had some combination of bailouts of the banks and a real material loosening of macro, especially monetary policies. Without both of those, we’d have had another great depression, and crucially the great depression came about because we didn’t have either of those back in the 1930s. So I think the time to take seriously those questions of the moral hazard is not at the point of crisis, but after the storm has calmed somewhat. Of course that has been what has happened, because in the 10 years since we’ve been on the case in strengthening regulations seeking to tackle too big to fail. To try and make sure that next time, if there is a next time, policy makers are over a barrel when it comes to facing down a bank. So I think in hindsight the right thing was done to bail in the depths of the crisis and then regulate stringently thereafter.
James: That touches on an important point: have the post-2008 regulations genuinely changed the financial sector, or have they just made things more complicated? Could we be on the path to another financial crisis?
Andy: Well two parts to that: one is, are the banks materially stronger? Are they materially resilient? I think along pretty much every dimension to that question, yes. They have a lot more capital, for some an order of magnitude more capital than 10 years ago. They have plentiful liquidity there to guard against runs on them. Their balance street structures are materially improved, their risk management is materially improved, their capacity to bail in debtors in the event of problems is materially improved. All these are good reasons to think the system is materially more resilient. Is it also materially more complex? Well, there are more regulatory moving parts now and in that sense is a pretty complex system, something I’ve spoken about on and off.
James: Because of course, to clarify, the regulatory bodies in the UK have since changed following the crisis, which could be interpreted as making the situation more complex?
Andy: Well in the UK we haven’t seen many more regulatory agencies. We used to have the FSA, or Financial Services Authority, which combined prudential regulation with consumer protection regulation under one roof. Now we have a system where the prudential part of that comes under the Bank of England, and we have a separate consumer protection agency. So that’s no more regulatory bodies now than back then. Certainly, we look lean and fit by comparison with the US regulatory infrastructure which has many agencies, some would say too many agencies to do that job effectively. I think in terms of institutions, the system is more complex, it is in terms of regulations, that is a necessary byproduct of a lot of things having gone wrong. Nonetheless, could we look to streamline and rationalize that regulatory framework looking forward from now, I think there might well be scope in doing that and indeed this international body called the Financial Stability Board is looking to do just that.
James: And the regulations that we have seen put in place, would they help prevent a crisis of the same nature in the future?
Andy: I think the very least you can expect from policy makers like me, and regulators, is that they at least fight the last war. Which is to say, those things that we know have gone wrong last time, you have no excuse for putting those right. And I think by and large, we have put those things right over the course of the last decade. Of course, of course, that is no protection against next time’s crisis almost inevitably showing up in a somewhat different place, a somewhat different set of assets being invested in. Nonetheless, at root most financial crises have their sources in one of two things: either financial firms building up too much leverage, or them holding too few liquid assets. Those are the two common fault lines to most financial crises, on both of those, those fault lines have been materially improved, if not closed by the regulatory effort in the last 10 years.
James: Brilliant. And changing tack to something that’s been in the news a lot recently, we’ve seen a lot of headlines regarding the negative implications of the new ‘gig economy’, characterised by the prevalence of short-term contracts or freelance work as opposed to permanent jobs. We’ve seen the death of a DPD courier who was overworked, and the decision of TfL to ban Uber in London following a series of alleged sex attacks by drivers. What are some of the problems faced by employees being labelled by such companies as “self-employed” (when in actuality this wouldn’t seem to be the case), and what role should the government play in the regulation of the gig economy?
Andy: A lot of issues there. We are, I think, reasonably clearly seeing a pretty fundamental shift in the nature of work along all its dimensions. You mention one, which is the degree of flexibility in the job contract between employee and employer. There are several others. You know, the nature of the skills needed for the future world of work is also changing very materially over time, and will continue so to do – the robots will see to that. The world of work is always on the move and it’s moving at a particularly rapid pace. Of course we tend to think of increased flexibility as being a good thing, and for many people it is. So the emergence of this gig economy, in other words, is for many people a good thing. For example, if you want to work or return to work part time, perhaps you’re a mother returning after maternity leave, then the option of flexibility, choosing your own hours, is a thoroughly good thing. And if you look at surveys of what employees say; a majority do say that this flexibility is a beneficial thing to them. Of course, that’s not the same as saying it’s a beneficial thing to everyone, because from the same surveys some say that what they feel is not flexibility so much as insecurity. Perhaps they want to work more hours and not being offered the work that they need.
I think what we need here, as the world of work is changing, that contract implicit or explicit, between employers and employees, is changing, is a rethink of what that contractual relationship ought to look like. In fact, Matthew Taylor of the RSA (Royal Society for the encouragement of Arts, Manufactures and Commerce), did a review for government six months ago looking just at this question: What was the appropriate balance between flexibility on the one hand and insecurity on the other? The government is taking forward some proposals in that review and that is the right place I think for it to be taken forward. That will not solve all the problems as the first cut, but it’s a good start to breaking into this delicate balance between flexibility good, insecurity bad.
James: Andy Haldane, thank you very much.
Andy: Thank you James.