After the financial crisis many scholars, commentators and practitioners have focused on what is seen as a culture of self-interestedness in the finance industry and a devil-may-care attitude to the consequences of its actions. At the same time, there is little sense of contrition in the industry itself; indeed, the reaction seems to be broadly defensive. A somewhat moral rhetoric has emerged, reinforced by ever greater quantities of regulation and legislation designed to coerce the recalcitrant industry into behaving properly and to ensure that it will bear the costs of its actions if it does not do so.
In my recent paper, I seek to set the cultural debate in the context of the historical record in Britain. I argue that the apparent division of views on responsibility for the crisis reflects a long-running debate between the authorities and the finance industry about responsibility for liquidity and capital crises which can be traced throughout the history of modern finance in Britain. I argue that what has changed is the ability to mediate this debate. There are many reasons for this, including the conservative nature of the pre-Big Bang market which made it easier to monitor than modern markets, and the cartel-like nature of the pre-Big Bang market which made it easier for the authorities to exercise powers of moral suasion (metaphorically represented by the raising of the Governor of the Bank of England's eyebrows). But my paper also shows how the common backgrounds of those in the industry and those in authority, and the class-based value-system of the day, enabled uneasy cooperation at times of crisis. As these barriers to entry broke down, and the market became competitive and merit-based, rather than protectionist and patronage-based, these soft controls ceased to operate so that the responsibility debate became significantly more challenging to mediate.
My paper then seeks to show how regulation and legislation cannot entirely fill the gap which is left. Indeed, it tentatively suggests that it might make the problem worse. The finance industry does not trust the authorities to protect its interests, and responds to regulation and legislation by finding loopholes and developing new methods of operation. Deviations remain difficult to detect, so that ultimately many of the reforms lack a credible enforcement mechanism. The authorities respond by ever greater efforts at coercion. An "us" and "them" narrative rapidly develops, so that real change becomes paradoxically less likely. Furthermore, we must be sceptical about the willingness of authorities to step in and restrain periods of growth, so that the regulatory and legislative toolbox is not opened until too late. And there is a real question mark about the feasibility of responding to a serious liquidity crisis without government intervention.
My paper is not a nostalgic call for a return to a past era in the mode of 1930s depression-era romanticism for an innocent, rural age. Just as that misty-eyed nostalgia ignored the harshness of life on the land, so harking back to the era of "my word is my bond" ignores much which did not serve society in the slow-changing, uncompetitive, class-conscious finance market of the time. But my paper does argue that the next stage in adaptive efficiencies for modern economies will be to discover how some of the collaborative benefits of the personal, patronage-based systems of the past can be adapted and adopted in the context of the competitive, merit-based systems of the present. This is not to say that there is no role for formal rules or formal means to compel compliance with them – anyone who has familiarised himself with the historical record cannot fail to appreciate the frauds and excesses which emerge when the finance industry is let off the regulatory leash. But it seems clear that we need to embrace some form of institutional change which goes beyond formal rules, and that we cannot hope to do so unless we establish some way to work together.
Sarah Paterson is an assistant professor of law at the London School of Economics and Political Science.