RBA Annual Conference – 1991 Some Principles of Financial Regulation: Lessons from the United States Al Wojnilower[1]

This is an effort to explain, in injudiciously straightforward fashion, some root principles of financial modernisation that I believe to be universal. They have lately been much questioned and violated in the United States with sad consequences for our financial system. One may offer in extenuation that, in so huge and diverse a nation as the United States with its peculiar history, these principles are much harder to obey than in other OECD countries.

1. What We Expect from Our Financial System

There are three major collective objectives that modern polities expect their financial systems to accomplish. First and foremost, I believe, is an essentially unquestioned integrity of the payments process. The division of labour which is the essence of modem economic life depends critically on our knowing that when we are paid, whether it is by paper or electronic order, the payments transfer is, with only the most minor of exceptions, final and irrevocable.

In the advanced countries, we have become accustomed to accepting cheques and other forms of payment orders on banks, even in vast amounts, with no concern as to the identity of the bank. Although this is a recent accomplishment, a landmark of progress, it is already completely taken for granted (like the availability on demand of water or electricity). Only when we travel to places where such confidence does not prevail, or when our own system suffers a glitch, are we reminded of its importance.

A second undertaking to which all advanced countries subscribe is the prevention of gross inflation or deflation of the price level. This commitment, as will be explained shortly, has profound implications for the nature of financial institutions.

The third undertaking, closely linked to the second, is the maintenance of a degree of stability in economic activity, that is, the damping of business cycles. The financial system is the source of many business cycle disturbances (or, to give unjust due to the current “real business cycle” fad, is at least an agent that transmits and amplifies non-financial disturbances). The existence of a social compact for economic stabilisation implies constraints on financial activities.

It might be argued that deposit insurance and other forms of protection for asset holders represent a fourth dimension of “safety net” that advanced countries have embraced. While the distinction may be unimportant, it seems to me that depositor protection and the like is needed and has been adopted mainly to effectuate the other three objectives, rather than for its own sake.

2. Why Constraints are Required

It is proper to ask whether the objectives of payments integrity and price level and business stability might not be achievable without collective measures, or whether these measures are worth the price. Is the game worth the candle? Personally, I believe in a special need for societal control in the financial sector because of the inborn optimistic bias and proneness to gambling addiction shared to some extent by all human beings. These tendencies can be kept in check only by collective restraints, much as we set speed or alcohol limits. Whatever the justification, all major countries in fact have elected to establish separate monetary authorities, insulated to greater or lesser extent from immediate political pressures, and operated by a special priesthood (defined by its relatively limited personal income) that serves as our collective financial conscience.

It is just as proper to ask whether our financial system might not run better as an exclusively governmental monopoly. Perhaps our three key objectives could be achieved more effectively without a private financial sector. The response, of course, is obvious: no human priesthood could withstand the temptations of such power nor make efficiently the myriad decisions such responsibility would entail. However, the management of a co-existing governmental monetary monopoly and a competitive private sector also is no simple matter, as the frequency of conferences like this one attests.

Avoidance of public monopoly does not imply free private access to the financial sector. Quite the contrary, to accomplish our objectives, private access must be carefully monitored (analogous to the way in which the electricity or water supply must be safeguarded). As regards the payments process, for example, we cannot and do not allow anyone except the government to print money. Violators are punished severely. Similarly, in today's deposit-based monetary system, we cannot nor do we allow claims on any but authorised members to be cleared through the central payments machinery. The essence of that machinery is that it provides a safety net in the event one or more of the participants were to become suspect or fail. Thus, membership has to be restricted and behaviour monitored by the governmental lender of last resort (or deposit insurer) – whose own credibility rests on its monopoly access to the printing press.

Similar considerations apply as regards the maintenance of price stability. One does not have to be a slavish adherent of some particular quantity theory of money to recognise that orderly behaviour of the price level depends on orderly monetary behaviour. But in the modern world, defining what is money is not easy. Various financial institutions vie with one another to invent instruments that the public will regard as money. This presents the authorities charged with controlling the money stock with never-ending problems as to which aggregates to target, with every decision likely to have a profound influence on the growth of particular financial institutions.

This is especially significant because stabilisation of the price level requires that the growth of whatever is defined as money be curbed. This means that the growth rate, and hence the earnings, of the financial sector are capped as a matter of national policy. In the United States at present, the officially declared monetary growth target is an annual real growth rate not much different from zero. This puts financial firms at a disadvantage in raising capital in a world in which investors seek above-average growth and, even more eagerly, the potential for happy surprises. Since financial firms compete with one another, they cannot even offer the promise of safe and stable returns that attracts capital to public utility monopolies. Protecting its profitability is another reason, however ugly, why entry to the financial sector must be restricted.

3. The Constraints Limit Profits and Invite Circumvention

To escape the profit ceiling imposed by limits on monetary growth, financial institutions have shown great ingenuity in inventing new instruments and mechanisms that enhance earnings by accelerating the turnover of official money. That is what banking enterprise is all about. On occasion, as has already been indicated, the innovations are so successful as to force themselves within the official monetary definition. From the original coin, the money stock has expanded to include banknotes, demand deposits, time deposits, and so on – and the Ms of modern central banking continue to proliferate.

Given that there is an underlying monetary monopoly, of course private firms will try to get a free ride by developing instruments that mimic the official money and will be accepted as substitutes by the public. To the extent they succeed, they probably also will be able, with the help of the political process, to wrap the official safety net around the innovations as well as themselves. Inclusion in an official M, it may be noted, is tantamount to such success, since Ms stable growth of the M's is a national policy.

Innovations that make their mark gradually can be absorbed in orderly fashion. But those that surge, especially when invented by outsiders to the existing framework, are threats to economic stability, the third socially agreed objective that I listed. Changes in what central bankers and economists blandly label “velocity” are often (possibly always) caused by the ebb and flow of the financial sector's efforts to overcome the not-quite-zero-sum game to which it is condemned. To slow the economy when it is overheating, the authorities need to be able to inhibit innovations that increase velocity – but without endangering the payments system or risking serious deflation. Conversely, to revive the economy when it is slow, they need to be able to encourage innovation while retaining the means to keep it under control. All this necessitates permanent regulatory powers.

If those who are sheltered by the safety net are made to pay for some or all of the implied subsidy (as, for example, are insured depositories in the United States), outsiders who can reap the benefits without incurring the costs are at an advantage. Everyone benefits from financial and economic stability whether we pay for it or not. Everyone enjoys the lower interest rates and transactions costs that result from the reliability of the financial and economic system. All financial institutions owe a significant part of their returns to the safety net, which guarantees that a sizeable section of the credit pyramid will remain standing even in the worst of storms. This puts the core institutions, the members of the club who have to obey the rules and pay the dues, at a further inherent disadvantage. It becomes even harder for them to make a profit within the limits that are set to their aggregate growth.

Unless their profitability is somehow put substantially beyond doubt, the members thus have both stick and carrot motivating them to seek additional revenue. To survive, each must try to accelerate the growth of its assets, or of fee-producing turnover, beyond the aggregate national standard for money and income.

This has difficult consequences. Many innovations, by displacing some predecessor instrument, threaten the survival of existing institutions bound up with more traditional assets or liabilities. Expensive resort to the safety net may have to be invoked. Complex issues will arise as to whether the new institutions and instruments should be admitted to (or required to join) the central payments system with all its obligations and privileges. Many, perhaps most, innovations will be efforts to circumvent or take advantage of the existing set of rules and regulations, written and unwritten, making it hard to determine their true utility. Since rules can't be written in advance to cover techniques that haven't been invented yet, the rules themselves must be subject to change. In turn, every firm takes for granted that seeking to have the rules altered in its favour (or preserved, as the case may be) must be an important part of its business strategy.

If we want a central bank able to maintain the integrity of payments, prevent inflation and deflation, and contain the business cycle, while private firms make the micro-economic credit decisions, we must expect the private sector continually to be developing techniques that undermine the effectiveness of the central bank. In practice, therefore, we must accept the continual burden of having to choose between forbidding use of certain innovations or broadening the monetary standard so as to incorporate them in the regulatory structure. Since every candidate is apt to be associated with a different set of sponsors, these choices cannot avoid a political dimension. Meanwhile, we have somehow to assure the profitability of what we regard as the core institutions, while recognising that providing them such assurance is itself a dangerous source of moral hazard.

To top off these complications, a reminder that the underlying national monetary monopoly is itself not and probably never will be absolute. One source of competition is, of course, that individual countries operate their own monetary systems. If one country's citizens decide to switch willy-nilly to another country's currency, deposits or securities (the term “dollarisation” was coined to describe this) or even to gold or cigarettes, they can destroy their own system. This discipline constrains, usually but perhaps not always in wholesome fashion, the flexibility of the central bank.

A more subtle and insufficiently appreciated threat is posed by the prevalence of large quantities of central government securities whose shiftability and servicing is even more strongly guaranteed than that of deposits and other financial claims. In the OECD countries, a default on government obligations seems even more remote than a banking panic. Treasury bills and the like are a perpetual threat to usurp the monetary function.

The part of the public that wants to put safety first always can and will move from claims on domestic private parties into government paper, whenever the security of private claims is in any doubt whatsoever. We may debate whether the fraction of safety-oriented funds is large or small (I believe it to be great), but there is little question that shifts from “unsafe” to “safe” claims in the event of genuine turbulence would be huge and highly disruptive. We have no choice but to face up to the need for regulatory machinery that can prevent this from happening.

In the United States, the clear and present danger exists that limiting the scope (de jure or de facto) of deposit insurance would trigger a wholesale shift into government securities. Should that happen, the interest premium charged private borrowers relative to the government would soar. The outcome would be the further governmentalisation of investment. Monumental political battles would be fought as to which forms of private investment should be salvaged by selective government guarantees and subsidies. All countries already experience this contest; enlarged differentials between the private and public sector interest rate would intensify it enormously. It is an illusion to believe that thorough deregulation of the private financial sector would reduce the role of government.

The combination of a central bank, charged with the missions here defined, and a private financial sector impelled by carrot and stick to innovate, decrees an endlessly swinging pendulum between regulation and deregulation. Sometimes we will want to let in fresh air to displace stale air, but when it gets too chilly or breezy we will need to close the window. In a lively economy the underlying monetary monopoly and safety net, which keep interest rates to private borrowers low and at a narrow premium over government borrowing, are always eroding and in need of shoring up or redefinition.

4. What Happened in the United States?

A country created by revolution and peopled by immigration was bound to have a healthy mistrust of centralised power in general, and financial power in particular. In a frontier society with uncertain transport and communication, banking, too, had its chaotic aspects. All the same, there was determined and strong opposition, of which significant echoes persist to this day, to any regulatory constraints that might inhibit local independence and confer control on distant or local monopolists. Whether “free” banking in those early years was good for the country (or would be today, as a few still argue) remains controversial. But the recurrent though unsuccessful attempts to organise some sort of central bank, the many failed deposit-insurance schemes, as well as the ultimate establishment of distinct thrift institutions for small savers, testify to a good deal of discomfort.

It was in effect the populist view that every locality of consequence needed its own bank for its financial independence – and that a place large enough to deserve a bank should have more than one, because local bankers were regarded with almost as much suspicion as distant ones. As the country became more settled, regulation did indeed develop, but for the protectionist purpose of enabling this over-population of local ventures to survive. Even as the spread of the telephone and automobile rendered the monopoly fears largely absurd, the political response at the local as well as national level was to erect ever higher protective barriers. Local and national law limited loan interest rates, set geographical and line-of-business boundaries, restricted branching and entry, and established prudential standards and examination procedures that, whatever their main purpose, also restrained competition in lending. But despite these strenuous efforts, hundreds of banks were still failing annually as late as the 1920s.

Reflecting the dominance of localism, it was not until 1914 that the Federal Reserve System was established, and then only with a regional division of power calculated to impede centralised decision-making. It took at least a decade (from some points of view, much longer) for the central bank to function in a co-ordinated national manner and to achieve firm control over the payments machinery. Supervision over financial institutions to this day remains divided among the fifty states and four separate federal agencies. Current internal debates in the Federal Reserve, as well as in unified Germany and in the EEC, remind us that the establishment of a genuinely super-regional central bank is a truly revolutionary act.

The catastrophe of the 1930s further inflamed hostility against big banks and produced more anti-competitive legislation to protect smaller ones. But now the barriers were raised beyond any point of doubt. Banking and the securities industry were divorced. Demand-deposit interest was prohibited and rate ceilings emplaced on time and savings accounts. Banks could no longer attract funds by offering higher interest rates. Still more drastic, federal deposit insurance was put in place for virtually all small balances. For most depositors, all banks become identical and completely secure, regardless of their balance sheets. Incentives to shift deposits, whether for advantage or out of fear, were all but eliminated.

Whatever its shortcomings in principle, this buttoned-down system functioned exceptionally well for some 35 years during which it was free of serious internal or foreign competition. Peacetime inflation and interest rates, real and nominal, were low, and the savings rate high by American standards. The system is correctly described as a well-kept and orderly zoo. Different species, such as banks, securities dealers, insurance companies, and so on, were neatly housed and fed in separate cages segregated by function and geographical scope. The bars between cages prevented the various species from preying on one another. Within each cage, to be sure, there was, as in a real zoo, competition as respects the pecking order, the best food, and so forth, but the vigilant (and correspondingly specialised) keepers made sure this never led to serious injury or death. Relations between the animals and the visitors, between the financial institutions and their clientele, were sober and sedate. By about 1950, the financial safety net had become as ubiquitous, invisible, and taken for granted as the air we breathed. The contingency that financial fragility might become a constraint on monetary policy was almost unthinkable.

The deregulation of the 1970s and 1980s destroyed this idyllic arrangement. The destruction was done piecemeal, with little appreciation for the rationale of the existing arrangements, and with no particular plan or vision for the outcome. The chief instrument of deregulation was the circumvention and eventual abolition of the restraints on deposit and lending rates, tantamount to smashing the barriers separating the animals in the zoo. The boundary between zoo and public was, however, kept intact and even reinforced. Deposit insurance and other safeguards in the event of misbehaviour or failure of financial institutions were expanded in response to the emergence of problems not experienced since the Depression.

5. The Reasons for and Results of Deregulation

The re-introduction of fierce competition proved unfortunate for many zoo inmates as well as their customers. The US financial system now is moribund with respect to its ability to support private sector risk-taking. Broadly speaking, the creditworthiness of the financial intermediaries is regarded as inferior to that of the borrowers. The whole structure suffers from an ominous undertone with respect to the credibility of the safety net. There may be fewer regulations, but governmental involvement and intervention in the specific decisions of financial institutions has become routine to an extent that would have been regarded as intolerable during the heyday of formal regulation. This is not to suggest that the old zoo could have been preserved in a changing world. Rather, I want to underline that, be it the US financial system or the Soviet economy that is to be renovated, the mere abolition of constraints will not automatically give birth to desirable new structures.

Several forces combined to make major change unavoidable. Reference has already been made to the effect of autos and telephones. Electronic advances in communication and calculation made geographical restrictions still more irrelevant. More important, they have blurred or even erased the distinctions among deposits, loans, and securities. Deposits now can be traded at fluctuating prices, like securities. Securities can be transferred and rendered cashable as efficiently as deposits. It is worth mentioning that such “securitisation”, like computers and modern aircraft, was invented in the government and, even today, is used largely for government-backed loans that enjoy safety-net status similar to that of direct government obligations.

The old boundaries that demarcated the zoo cages no longer make technological sense. It is a matter for debate whether any boundaries, including those between financial and industrial firms, are warranted any longer.

Also compelling the redrawing of the zoo was, of course, the renewal of international competition as financial strength revived outside the United States. Rules of competitive restraint that countries have laid down for their institutions to observe at home generally are not required to be observed abroad. Part of our zoo was disrupted from abroad and some of our members learned how to disorganise other people's habitats. Inevitably, in the same way that we are becoming a single industrial world, so the various financial systems are converging. The United States, having started with the most untypical system, has the longest and most difficult road to travel.

A critical ideological force conditioning deregulation was the general backlash against conventionality and constraint: the desire for more freedom and less responsibility. Such attitudes helped extravagant claims for the benefits of deregulation achieve ready credibility. Ordinary human hubris also deserves mention. The most prosperous inhabitants of the gilded cages naturally tended to attribute their well-being entirely to their own efforts and to believe they could do even better if set free to forage on others' turf. Mostly they proved mistaken. They failed to take into account that liberalisation would not be for themselves alone. The contests for new turf proved far fiercer than imagined, while the safe home base from which they visualised themselves confidently sallying forth itself came under heavy assault.

There were far too many animals in each cage, and in the zoo as a whole, to survive in open competition. Most of the animals had enjoyed a sheltered existence like that of farm animals or even house pets. Now they were freed, each to become both predator and prey in an unfamiliar jungle that offered sharply reduced nourishment, i.e. profit margins. Discovering new dietary sources – loans not made before, newly-invented securities and bets on security prices, new inducements to turnover – became a matter of survival. Initially the public was pleased. As borrower and speculator, it welcomed the new and cheaper opportunities. As depositor and investor, the public saw little reason to be concerned because of its ingrained confidence in the strength and reach of the safety net. Caught in the middle were and are the supervisory and monetary authorities as well as the politicians.

Had they been left totally unprotected, the carnage among the financial intermediaries would have been unfathomable. Even so, thousands of deaths have occurred already, thousands of other firms are being kept alive artificially, and thousands more are consuming their capital. With so many sick fish in the aquarium, the prospects of even the healthiest are put in jeopardy.

Every failure involves an immediate cost to the insurance funds and the risk of an infectious loss of confidence. But institutions that are allowed to linger on in “neither-dead-nor-alive” condition are liable to have even greater liquidation costs later, while meanwhile they reduce the survival odds for the rest. No wonder that public policy has been ambivalent.

Everyone was aware, for example, of the temptation for failing institutions to take limitless risks to save themselves. The moral hazard created by deposit insurance was of little consequence while the old anti-competitive regulations were in force, particularly the interest rate ceilings which prevented bankers from getting their hands on additional funds to put at risk. When, however, it became evident a decade or so ago that the savings-and-loan industry was doomed – the demise had in fact been foreseen and welcomed by the planners of both political parties – the policy reaction was to urge these housecats to pretend to be tigers. To forestall depletion of the federal insurance fund, they were encouraged to enter unfamiliar lending fields, the accounting rules were gutted to hide the consequences, and the teeth pulled from the inspection and supervisory process. The “too-big-to-fail” problem is similar. To postpone the immediate expense of cauterising the wounds from a major failure, the urgent consolidation of the banking as well as the insurance industries has been postponed.

The current legislative proposals suffer from the same ambivalence. They propose to widen the scope and hence the risks of banking but include no resources to deal with the so-called “exit” problem of closing unprofitable institutions while they still have capital. The public is willing, it appears, to pay the huge burial costs that will come later, but deems unacceptable much smaller (though still large) outlays to speed the exit of the not-yet-dead. (The real macro-economic costs of the bail-outs, economists know, are a small fraction of the gross dollar outlays, but the public is not persuaded.) The upshot thus far is a political stalemate that seems to be degenerating into an intra-governmental turf war over who is to supervise which part of the disaster.

6. Meanwhile, a New Financial Structure is Emerging

While the debate drones on how to liquidate or re-organise the zoo, a new parallel and parasitical financial structure is emerging. Since we are burdening the old system with higher deposit-insurance premiums, capital requirements, and so forth, opportunity beckons more than ever to free riders not afflicted with these tribulations.

These newcomers are the most prominent money market mutual funds, operating in de facto conjunction with the major “captive” finance companies, so called because they are professional lending organisations owned by industrial firms, such as General Electric, General Motors, or Sears Roebuck. These giants are not explicitly within the financial safety net, nor do they have direct access to the central payments machinery. Nevertheless, the public is justified in concluding that these firms currently are more snugly protected by the safety net than are the big banks.

In important respects, money market fund balances are more attractive and flexible than cheque accounts at banks. The price is pegged at one dollar per share. They earn a competitive or higher rate of interest. Holders are generally permitted to write cheques of $500 or over, and to transfer funds by telephone to and from other mutual funds, such as bond and stock funds, operated by the same sponsor. The moneyness of these balances is so palpable that they are included in M2, the principal monetary target. Indeed, they already comprise 11 per cent of M2, an aggregate that, one presumes, would be allowed to shrink only in extraordinary circumstances.

Money market funds were initially created to amalgamate small individual balances for investment in large bank deposits, at a time when banks were allowed to pay market interest rates only on deposits over $100,000. Now, however, owing to the low credit standing of many banks, the funds invest principally in the commercial paper (unsecured short-term obligations) of the major finance companies. Recent regulations of the Securities and Exchange Commission, which supervises mutual funds, drastically restrict investment in the paper of any issuers other than those in the two highest credit rating categories.

The finance companies have become major diversified lenders. A recent tabulation puts the assets of the ten largest at $322 billion compared with $869 billion for the ten largest banking organisations. Some industrial companies solicit money market funds directly from the public while others are attempting to acquire mutual fund organisations. This is precisely what is to be expected when innovators benefit from the safety net while avoiding the burdens.

The rapid growth of this parallel banking system seems likely to re-open the very same issues that originally prompted our financial structure to evolve in such peculiar manner. At the micro level, the multitude of banks was created to avoid monopoly domination, local or distant. Today, households no longer need such protection because the key forms of consumer borrowing have been standardised to the extent that they are easily pooled and securitised. Small businessmen, on the other hand, still must depend primarily on local lenders, chiefly banks. The role of the captive finance companies opens the door to the lively possibility that suppliers, vendors, and others closely related to the industrial owners of the finance companies may become a major credit conduit to small business, granting credit preferentially to their business connections while discriminating against the unaffiliated. Huge centralised industrial/financial combines are likely to develop that are far more powerful than the biggest banks ever were or could have been.

At the macro level, many analysts, including high government officials, appear to believe that the newly-emerging system is preferable to the old, and that banks and their ilk have become obsolete. Even these authorities, however, cannot help but be nervous at the prospect that a major part of private assets, liabilities, and payments may come to be generated by labyrinthine organisations that combine industrial, commercial, and financial roles, as well as, quite likely, multi-national management and ownership. Exercising insight and oversight would be more difficult than ever and probably necessitate governmental scrutiny and discussion at the highest levels. Moreover, the costs of phasing out the existing banking institutions that would be displaced far exceed any contemplated thus far.

My tone no doubt reveals that I would prefer to salvage the existing system, although this would necessitate nipping the newcomers in the bud. The important message is, however, that we in the United States face a choice between the devil we know and the devil we don't – but in any case, a devil.

7. Profitability is the Essential for Success

The basic lesson of our experience is that to have a mainly private financial system compatible with our societal goals, these firms must be profitable. This points up, by the way, that the issue of capitalisation is a tangent. Institutions that are reliably profitable, and have access to a safety net, need little capital and can easily raise more. Firms that are not profitable will lose whatever capital they can raise, if any. If intrinsically unprofitable operations wish to become profitable, or are required to increase their capital, they have no choice but to take on more risk. This is a treacherous process, even when euphoniously labelled “innovation”.

The financial sector cannot be consistently profitable, while obeying the monetary policy limits on its aggregate growth and covering the costs of the safety net, unless it is protected from excessive competition, especially by outsiders who have no such obligations. Any arrangement that assures profitability will, however, set up a moral hazard – heads I win; tails the government loses. Thus even the innovations spawned by profitable firms are suspect as to whether they are genuine improvements or merely devices to exploit the moral hazard. Making this evaluation is what prudential regulation is all about.

Only for profitable institutions do capital requirements make any sense. Capital requirements can be assessed on the core of a strong financial sector to reduce incentive and opportunity for risky ventures that exploit its privileged position. Imposed on weak firms, on the other hand, higher capital requirements are a death sentence on many firms and may exterminate the whole industry if those who are sentenced cannot in fact be executed and thereby removed from competition. That is the problem the Basle bank capital accord has created for the United States, with thus far disastrous consequences.

As the travails of the erstwhile Communist bloc make starkly evident, organising the non-violent co-existence of co-operation and competition is no simple matter. It takes much more than an appropriate set of laws, lawyers, judges, and police. Over-simplifying the matter, as between two teams equal in individual talent, the team that co-operates better, whose players play more unselfishly, will win consistently. That requires the players to have a certain confidence that occasional errors will be forgiven. All the same, players must understand that if they become too smug or set in their ways, or too old, or if a clearly superior player becomes available, they will be replaced.

The competition among the teams and the nature of the game also is governed by a consensual process that sets the rules. The rules as such, actual practice, and enforcement are all subject to change. Glib talk notwithstanding, there never was nor will be such a thing as a level playing field – not until such time as all human beings are each others' clones born with identical endowments. In business as in sports, individuals and teams compete for prizes but depend on co-operation from team mates and other teams (suppliers and vendors, for example) for success. In business as in sports, competition (and teamwork, too, for that matter, when motivated by hatred for outsiders) can bring out the worst as well as the best in people.

Reconciling team and individual objectives is never easy. Pecuniary as well as non-pecuniary motives are at work. We allow markets to make some of the decisions, subject to rules and constraints. But many decisions are left to a deeper sociopolitical process, including the continual renegotiation of the rules and constraints on markets. Because the field of finance features a widely-recognised collective interest, as well as rapid technological change that overtakes previously agreed codes, its rules are especially subject to debate and revision. But without the rules and the underlying co-operative culture that observes rules, there would be no game.


Senior Advisor, First Boston Asset Management Corporation, New York. [1]