Friday, 4 November 2011

It’s Only Taken Three Years...

The 2008 Lehman Brothers bankruptcy was the watershed moment of the current financial crisis. And three years later, we’ve finally got around to protesting the right people for the tsunami of subsequent consequences. The Occupy movement quite properly began in Wall Street, but it has rapidly spread around the world, as the public have latched onto the opportunity to put the culprits in the stocks. Sure, the regulators and politicians were asleep at the wheel / complicit / paid off (delete as applicable, but watch Inside Job first), but this debacle started and finished with the avarice of some (not all) of our banks.

This is what happens if you put Defectors in charge of the money.

Defectors and their converse, Cooperators are central to a Games Theory puzzle called The Prisoner’s Dilemma. Read my own description in the foreword to The Defector, a suspense thriller in which it features as a central plot device. Or take a look at the Stanford Encyclopaedia of Philosophy (SEP) entry. The interpretations described by the SEP have a common theme: this is about self- versus group-interest; about getting rational, selfish agents to cooperate for the common good; about altruism versus selfishness.

In the on-going debacle that led up to the crisis of 2008, key players in some of the major banks found ever more imaginative ways to take ever greater risks with other people’s money, so they could pay themselves massive bonuses and salaries, knowing full well that when the music stopped and the money ran out, they ran no personal risk at all – but that others would lose everything.

Their behaviour was selfish to a degree that you might find difficult to imagine. But we have to imagine it, and we have to imagine it happening again. Right now, three years after the crisis boiled over, and as global protest belatedly kicks off, the selfish are still way ahead of the game. Anyone see the rules change? Anyone see those bankers handing the money back? Nope? So, what to do?

The only way for Governments to make the debt go away is to inflate it out of existence. So don’t put any cash under the bed to keep it out of the hands of the financial services industry. Buy the kind of stuff that has real long-term value in any kind of economic system - land perhaps, at least you’ll be able to feed yourself when the apocalypse comes. Although you’ll probably need a machine gun and barbed wire to keep it out of the hands of the starving, marauding hordes.

Ok, that’s a pretty dark view - let’s hope it doesn’t come to that, but there are few signs of anything changing. A couple more of these financial shocks and the whole house of cards really could come tumbling down. And even if there was the political will to regulate the financial sector properly then it will fail again, for the same reasons. The bankers will always have the money to lobby and cajole the regulators and their political masters into changing the rules in their favour.

So perhaps we need to use the power of Games Theory to persuade the bankers that a more Cooperative approach is in their interest. Here’s one idea, it may be a little impractical, but I think it starts us in the right direction.

Fundamentally, the banking system works on what is - in Prisoner’s Dilemma-terms - a group-interest, Cooperative notion: that we don’t all want to get our money back at the same time. If we did, the banks would collapse – they just don’t have the cash to pay everyone all of their deposits back simultaneously.

A run on a bank happens when this Cooperation breaks down – and we all become Defectors. If enough people suddenly believe that a bank is short on money (and remember, compared to what’s been deposited, banks are always short on actual, cash-money reserves), and then come to believe that the bank is going to crash, they will rush to get their money out - to hell with everyone else ... And lo and behold – even if the bank wasn’t previously in trouble, it is now.

So, the next time a bunch of self-satisfied bankers award themselves huge salaries and/or bonuses, the depositors organise to take the bank to the brink of bankruptcy. And you do it by removing just enough cash. Take enough of a bank’s capital reserves out as cash, and I think you’ll find that you will scare its executives and shareholders witless. Then offer to give the money back, so long as they pay themselves reasonably.

This is not a game for the faint-hearted, and it’s not a game for Defectors – it requires serious Cooperation, real belief in the project, in the collective group interest to get the right amount of money out. If too few people are prepared to do it then it doesn’t work, no one gets scared, and those who did remove their cash just lose the interest on their savings. Or, if too many people take all their money out, because they’re frightened it might all go wrong and the bank might crash - then the bank will go under. And you don’t need me to tell you that that would be bad for everyone...

Does our new, connected, social-media-powered world have the capacity to organise a bank’s depositors to take that bank right up to the limits of its reserves ... but not over? Where are the limits of the power of an internet advocacy organisation like Avaaz? We don’t know yet, but some people are all ready trying something like this – check out Bank Transfer Day – be afraid, be very afraid? We’ll see...