Thursday, October 30, 2014

Andrew G Haldane: Managing global finance as a system

Text of the Maxwell Fry Annual Global Finance Lecture, given by Mr Andrew G Haldane, Executive Director and Chief Economist of the Bank of England, at Birmingham University, Birmingham, 29 October 2014
Bank of International Settlements
Andrew G Haldane: Managing global finance as a system


Matt Franko said...

The context: No one is in control of these systems so we have to monitor them like the weather...

Tom Hickey said...

And it is lessons from the global financial crisis with which I want to begin. These are of course many and varied. But among the most important is also perhaps the simplest: to safeguard against systemic risk, the financial system needs to be managed as a system (Haldane (2009)). As put, this statement seems rather obvious, perhaps even tautological.

Yet, pre-crisis, it was far from obvious. The orthodoxy then was that safeguarding individual financial firms was a necessary and sufficient condition for system-wide stability. This was the financial stability equivalent of the English aphorism: “look after the pennies and the pounds will look after themselves”. And so it appeared during the long pre-crisis period of stable growth and stable banks – the “Great Moderation” (Bernanke (2004)).

The crisis has rewritten that orthodoxy. It revealed that the safety of individual banks was neither a necessary nor sufficient condition for systemic stability. Not necessary because, in any well-functioning system, individual banks can and should fail. Not sufficient because, in an integrated web, the chain is only as strong as its weakest link.
In focussing on individual banks, policymakers had been, to coin another English aphorism, “penny-wise but pound-foolish”. That is why Great Moderation gave way to Great Recession (Gai and Kapadia (2010)). That is why systemic risk entered the public lexicon. And that is why financial regulation has, in the period since, been fundamentally re-oriented towards the monitoring and management of systemic risk.

Interestingly, that lesson would have come as no surprise to anyone familiar with dynamic, integrated networks outside of the world of finance. Assessing the stability of almost any network known to man – whether natural, physical, social or economic – relies upon a system-wide assessment. And protection mechanisms for this system need to be calibrated to system-wide characteristics (Goldin and Mariathasan (2014)). Financial webs are no exception. The history of financial crises suggests they may be closer to the rule.

This is comparable to the assumption of methodological individualism in economics and microfoundations in macro. It's the system dynamics that counts and this is determined by relationships (institutional arrangements) rather than the elements alone.

Matt Franko said...


See Mike's latest video above on the libertarian Friedman, ie "nobody in charge"....

You could have the greatest surveillance system ever and if that system indicated that Lehman was in BIG trouble and the libertarian people in positions of authority just sit there and do nothing and just watch them go Bk it doesn't matter. ..

Ignacio said...

In a certain way no one is in control and can't be. How?

You can't control the demand for (your own) currency, specially in other monetary areas.

A lot of the 'unsolvable' problems come from building up CA imbalances over decades than then implode, because both on the upside and in the downside you can't really control the demand for (both) currencies, and then economists/politicians have to remain 'accommodative' because 'capitalism and progress'.

P.S: But that doesn't mean that we have more control than most bureaucrats and politicians acknowledge or admit.

Ignacio said...

An other reason we are not in control is because they keep the illusion that we need 'free market and competition' in the banking sector and the banks have to control about the CREDIT supply. This is just a benefit to the oligarchs, because if there is one sector that absolutely can do w/o competition and doesn't matter for anything is the business of printing money and credit.

There will never be advances in this business because you can never 'improve' money printing, is stupid. What are the benefits of competition and externalizing money printing to the private sector. Hold the total control of money printing and externalize 'equiy investment' without removing risks (ie. all banks should be funds now and only the govt can issue credits to those funds that can go bust if they go wrong).

Seriously let a Turing machine do the whole thing it will do a better job than bankers, regulators and govt officials.

Matt Franko said...


If you follow our ancestors here:

Excerpt from Aristotle's Politics (c. 350BC) :
When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use. For the various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example, iron, silver, and the like. Of this the value was at first measured simply by size and weight, but in process of time they put a stamp upon it, to save the trouble of weighing and to mark the value."

so they established nomisma based on LAW not nature (we are in charge here....struck the human imprimatir into the metal..) and then when they crossed borders they came up with this scheme:

Excerpt from Plato's Laws, c. 360 BCE, on the subject of an appropriate state currency system, repudiation of the authority of gold and silver, and an appropriate foreign exchange policy:

Further, the law enjoins that no private man shall be allowed to possess gold and silver, but only coin for daily use, which is almost necessary in dealing with artisans, and for payment of hirelings, whether slaves or immigrants, by all those persons who require the use of them.
Wherefore our citizens, as we say, should have a coin passing current among themselves, but not accepted among the rest of mankind; with a view, however, to expeditions and journeys to other lands-for embassies, or for any other occasion which may arise of sending out a herald, the state must also possess a common Hellenic currency.
If a private person is ever obliged to go abroad, let him have the consent of the magistrates and go; and if when he returns he has any foreign money remaining, let him give the surplus back to the treasury, and receive a corresponding sum in the local currency."

So they were running a non-convertible but NOT free-floating system... COMPLETELY CONTROLLABLE...

They fixed the exchange rates so that if a person (who received permission from the authority to go external in the first place...) came back with surplus foreign currency, the finance ministry would change them out at a 1:1 exchange rate...

So the real terms of trade were worked out when they did the deal (1 Spartan stater per gallon of olive oil or whatever...)

Then the Athenian olive oil exporter/importer would bring back any surplus Spartan staters and receive from the Athenian finance ministry an Athenian stater 1:1...

This would not work if morons are in positions of authority in the govts and think they are "out of money!"

So here we remain in chaos today... and Haldane thinks its like we are monitoring the weather or some shit...

Which even if they "see a hurricane coming" they are so broke dick libertarian that they wont do anything about it anyways...


Ignacio said...

Matt the system you are describing is the opposite of today IMO, they don't settle anything and don't control flows in the sightless. The motto is "free trade, no barriers, no control, just accommodate demand from wherever it comes regardless of how it is quantitatively and qualitatively". This sort of myopic policy raised conflict and war in antiquity and it still does today (the West elites living in a 'dream world' of the 'End of History' bullshit, and building up chaos in reality).

They are just accommodative to the pvte sector doings all the time, ie. not in control, because if you let pvte sector decide the demand all the time you are not in control -eg. feeding the oil/dollar junkies symbiosis, or the usd zombies in china, or the export zombies in germany/japan-.

Floating or not doesn't matter in the long run when building a large net of international liabilities and flows that can unsettle at some point, in fact 'floating' is MORE accomodative (I don't agree with MMT treatment of external sector and international monetary operations because it ignores all the previous unstable periods created exactly by the same periods of stability -Minsky applies too to international dynamics-).

Agree on your assertment that they are like 'we are controlling the weather' for human created systems, but is pointless because they do nothing anyway. - Just more dumb ass policy like QE-infinite like Japan a new round of stock & bond buyback while rising taxes: IT'S INSANE the whole situation, clueless.

Matt Franko said...


Why someone would want to go into banking in this environment is beyond me... if they understood what was really going on imo they would never do it...

They would be the ones advocating for more control imo.. IF they could get their minds around the current system...


Tom Hickey said...

Hayek states the issue in "The Use of Knowledge in Society."

Incidentally, note that he does say "society" contra Thatcher's Lib view," And, you know, there is no such thing as society. There are individual men and women, and there are families." along with her, "There is no such thing as public money; there is only taxpayers’ money."

Hayek begins, correctly, by attacking neoclassically based econometrics.

What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.

This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the "data" from which the economic calculus starts are never for the whole society "given" to a single mind which could work out the implications and can never be so given.

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics.…

It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.


Tom Hickey said...


Hayek rejects the laissez-faire POV of economic liberalism based the assumption of homo economicus, rationality, and the invisible hand of market forces as the determinative factors in economic theory.

He admits that planning is required, but rejects central planning as being beyond the reach of human knowledge in the case of complex information systems such as modern societies and their economies.

Here's where he goes of the rails.

The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about "economic planning" centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly.

Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge. And this, in turn, depends on whether we are more likely to succeed in putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to fit their plans with those of others.

Hayek sets up a false dilemma by appealing to the fallacy of the excluded middle, assumption that the alternatives are either central planning at the societal level or decentralized competition. Here he is assuming that there is no useful knowledge of complex societal systems that can be gainfully employed by network administrators. Haldane contests that view.

Hayek rejects the assumption of an invisible hand of rationality that guided market forces, by knowledge of which econometricians can formalize economic theory and make accurate predictions. Instead, Hayek introduces non-rational factors of subjectivity that vitiate the rationality assumption necessary for econometric tractability.

However, Hayek still finds the invisible hand of market forces at work through decentralized behavior.

The middle course lies in viewing modern societies and their economies in terms of complex systems in which institutions and institutional arrangement play as great if not greater role than individuals as element of the system. That is to say, a system is constructed not only of element but also of systems, and a network, of nodes. Planning is possible through affecting the subsystems and nodes by arranging their configuration for systemic efficiency and effectiveness.