​Going undercover

In his books The Undercover Economist and The Undercover Economist Strikes Back, Tim Harford shows that economics is not a boring academic subject, but a useful tool for understanding the modern world.

A focus for quality professionals is evident from Harford’s interpretation on the banking crisis. Macroeconomists, he says, did not cause the banking crisis. It was the job of bankers, accountants, politicians and lawyers to keep things safe.

The CQI’s Competency Framework: Governance, Assurance and Improvement (GAI) is an obvious case to cite here, or at least the failure to embody GAI into the financial system. Harford writes: “When the banking crisis hit, the macroeconomic mainstream didn’t have good models of what the economic consequences might be.”

Why was there such a major failing? “I think the big failing was this point about not having good models of the financial sector,” says Harford. “Forecasting is difficult. It wasn’t that they didn’t see the crisis coming, it was more that banks were not a major part of macroeconomic models at the time.”

In this worrying scenario, too many inaccurate expectations were built into the system, one that a quality manger could have a field day with. “It was assumed that banks would take care of themselves, and all the interesting action was about consumer spending, taxation and the money supply. Banks were taken for granted,” observes Harford.

The lessons of those fundamental errors are still being played out. As well as GAI being a useful tool to rectify the errors, Deming’s quote that: “Information is not knowledge. Let’s not confuse the two,” could well be mentioned here.

Have the necessary gaps been plugged and improvements been made since the crisis? “I am sure not,” warns Harford, before adding: “Some have been learned.”

The more worrying aspect for Harford is how regulation may well have become excessively imposing in reaction to the crisis, creating a new set of problems. “There are some things that make me uncomfortable.

“For instance, I think we have seen a big expansion in the complexity of financial regulation: rulebooks have become thicker. It is not clear that more, complicated regulation will make us any safer. More complicated regulation can have more complicated loopholes and they are harder to understand. In that respect I am concerned.”

What needs to be done to eliminate a future financial crisis? “We are still trying to work out how to enable banks to fail without triggering a systematic crisis. Until we nail that, I don’t think we will really have it. Lip service has been paid to the idea that we will get rid of ‘too big to fail’ but we haven’t.”