Some praise at the morning what they blame at night; but always think the last opinion right.
Alexander Pope, Essay on Criticism, 1. 430.
Recently, following a presentation I had given on my research, I received a question on a statement that I made. The statement was made on purpose with the hope of inducing a comment so I could show how clever I think I am. Thankfully, (for my own ego) the hoped for question was asked and I delivered my reply with aplomb and felt pretty good about myself at proving just how clever I was and how much reading I had completed on the subject. It was the following question that made me review my motive and write this blog.
The statement and follow-up question.
The statement I made was “…and the banks were incorrectly blamed for causing the financial crisis in 2008”. I hoped that a member of the audience would ask me “..what proof do you have of this and why would you say this”?
Luckily for me, an economist asked me this question and I was able to deliver my reply demonstrating my reading and comprehension of this subject from a financial, economic and legal aspect that would settle the conversation in my favour and show that I was becoming an ‘expert’ in this subject. Ohh, I felt pretty good about myself.
Then I was asked “Do you really believe there is any point whatsoever in apportioning blame to one party or the other, or should we just find solutions to the challenges we face”?
I struggled to answer this question as it was of the type that I had not prepared for. I muttered some reply but I was conscious that I had not answered it in a similar fashion to the previous one. This question taught me two things. First, I must take my ego out of my research. The behaviour I exhibited that day really does not sit well with me. I am not a show off and looking back on this event, I have nothing to be proud of. Second, I knew that blaming the correct party was important to my research but I had not thought it through enough. Below is the answer I should have given.
Why identifying the true cause is important to my research.
The person who asked me the question above is a very special person. She is doing research in a very difficult subject and she faces challenges from many different sides both academically and personally. I respect her thoughts and opinions and the fact it was her who asked me, made me take a step back and give this some thought.
I have come up with 3 reasons of why I believe that apportioning blame to the correct entity is important to the research topic I am concentrating on. First, a part of my research will be to suggest a different system of regulation for commercial private debt. I will be using the Viable System Model as developed by Staffor Beer. This is within the branch of Cybernetics and applies to complex systems of which the financial sector can be considered as such. Within Cybernetics, it is nearly impossible to point to one part of a complex system and blame the failings of that system on that one part.
Second, if one part of this complex system (A) is the root cause of the problem, it will benefit them to deflect the blame onto another part of the system (B) especially if that part relies on A for permission to exist, licensing etc. In this case, the narrative needed to be controlled by A. To do so, A utilised its power and blamed B by using a third-party (C).
Within the Clinton administration was a department known as The Department for Housing and Urban Development (HUD). HUD wanted to make home ownership effective for all Americans not just those who could afford it. Therefore, they continually introduced regulations that lowered the 3 factors that made the American housing market so strong. These were what is today called the FICO (credit) score. To obtain a house, the prospective homeowner required a score of 660 or above. Their debt to service ratio and deposit were also around the 35% mark, making ownership for minorities and people on the lower end of the economic scale almost impossible.
HUD continued to lower the standards until toxic subprime mortgages numbered tens of millions. This was the root cause of the 2008 financial crisis, but the flames of disaster were fanned by the behaviours of politicians, banks, mortgage companies, ratings agencies and borrowers themselves.
So why did the banks get the blame? One reason may have been to push more onerous regulation upon the banking sectoring an attempt to lower their influence in society. There are other theories surrounding this but this post is not the place for this discussion.
Third, when poor regulation is introduced for the wrong reasons, it will cause unintended consequences. Jung wrote “The regulatory shift from micro-regulation to macro-regulation following the GFC was “merely complementary and not a ‘fundamental shift in the regulatory paradigm because it did not change the core ontological assumption of the existing micro-prudential approach” (Jung, 2024).* This is why there are still bank failures occurring.
The unintended consequence of this poor regulation displays itself in the extraordinary growth of the commercial private debt sector. It is estimated that the private debt market could be more than $2.8 trillion in three years.** There are calls for this sector to come under the same type of regulation as the banks. This is a bad idea advocated by people who have not thought this through.
Lessons learnt thinking about this question.
Due to taking the time to consider the perspective that the lady holds who asked the question, has allowed me to develop an argument that I can continue to use to support my thesis is why a different model is required so that we get the correct regulation. I am not advocating, as I have been accused, of clamouring for less or even no regulation, I am hoping to produce a different system which will allow the commercial debt sector to continue in a manner where it cannot be accused of being a systemic danger.
By analysing why I was motivated in making the original statement I have discovered an area of self-improvement that I did not think would apply to me. It also allowed me to make the statement robust and defendable for all the correct reasons and did not offer an opinion but a well defined argument that I am confident in that is supported by the research I have undertaken.
I stand by the comment I originally made but now I know the basis for this is built upon a solid foundation. I have learnt to listen to people who have no experience in my particular subject because you never know what you might learn. More than anything, I have learnt a lesson in developing my arguments in a manner which I am now confident can stand up to academic scrutiny.
* Jaehwan Jung, ‘The Ontology of Financial Markets and the Policy Paradigm of Financial Regulation’ (2024) 21 Globalizations 740, 742
** ‘Outlook: Private Credit’ (Morgan Stanley) <https://www.morganstanley.com/ideas/private-credit-outlook-considerations> accessed 21 January 2025.