Is it just me?

In the past couple of months I've gotten up and spoken in front of a few industry and business groups, and done a webcast with 150+ people listening. I've spoken on topics ranging from changes in operational risk and compliance business environments and what that means for the people in those jobs, to the differences between the narratives evolving about the financial crisis between Europe, the UK, the US, and the Pacific Rim. (Actually, think I lumped the UK into the Europe bucket on that one. Clearly unfair to each. The UK should definitely be in their own bucket.)

Last week I was at a conference where I "hosted" a round table discussion, the topic being "Data and Systemic Risk." Hosting the discussion meant that I committed to show up at the table ready to talk about the topic -- it was suggested that I might even think of some questions beforehand. Conference attendees had a list of the nine tables and various topics to be discussed at each, and chose the topic/table in which they were interested. Then, 25 minutes into a somewhat stilted dialogue with complete strangers (and perhaps some well known colleagues), the conference manager signaled everyone to switch tables. My task of stimulating discussion was much simplified in the 2nd round when one of the senior-most industry kahunas joined my table; from then on we all mostly listened to him and asked questions.

But after a day of listening to speakers, and trying to get people to speak, I'm still wondering if we'll ever catch up. Usually, I get pretty energized at these industry conferences. I dread going because it makes me get out of my rut and get out and be sociable. Not that I mind being sociable, but I rarely am overly so when working ... I'm much more likely to be heads down on something. Even when managing a lot of people, I want some time to 'do some work' myself. But I digress.

One of the things about a social gathering like the industry conference I attended is that it is an essential part of the mechanism by which we get to some state of consensus about the description of a problem that we collectively need to address. In much the same way that friends of mine who were in on and excited by the founding of the internet have been dismayed by the way in which it seems to be making it ever simpler to create echo chambers and both increase noise while making communication more complex and difficult, I fear that the complex and constant barrage of technology and related expertise will make the process of communicating and achieving consensus much more complex and challenging. At this point, I'm starting to think that we're observably losing ground -- if you're watching for it, you can see the collective "we" completely ignoring reality in multiple places.

Let me start again. The current attempts to address the multiple breakdowns that occurred during the financial crisis of 2008 appear bogged down by our own efforts to achieve a rational and effective solution to the myriad issues of that crisis. We're looking at lots of trees, and only pieces of the forest are getting even a brief once over. There are some signs of life in terms of "big picture" stuff, but mostly we're getting lots of little things lumped together. To put it bluntly: we won't reduce the likelihood of another systemic break in the financial system unless we make some fundamental changes to the way the industry is structured an what the rules for the players are. Some points that are not in the current discussion, but that should be:

• Global regulatory cooperation/coordination is not required. Start with the US, the UK, the EU, and Japan -- pretty much done. Everyone else will play because it won't make sense not to. And getting three, or even two, of these four to work together shouldn't be that difficult.
• Central clearing and settlement is a "good thing." Centralized clearing will concentrate risk in a systemically critical way. It is probably a good idea for some of the derivatives markets, but it is not a panacea. It shouldn't truly be considered a reform.
• It's time to clean up the data. Absent a concentrated effort to clean up and rationalize the industry's information supply chain, any talk of regulatory reform is just hot air. As it currently stands, regulators cannot do their job. Staff them with the brightest lights pulled from the industry; it won't help a bit. The information is such a mess, we make so much of it, and the systems for exchanging it are so far behind, that no matter what the regulatory goals, it's not going help. It isn't possible for the regulators to absorb the amount of information required in a time frame that enables them to act in anything but a very "post mortem" way -- by the time they can stitch together the information to figure out what is going on, the barn door has long been open and the horse(s) have disappeared.
• While not a magical cure-all, incentives and compensation must be re-structured. Period. It means less pay for people in the industry, especially in the front office. That's the way it has to be or we'll always have the riskiest behavior driving the train.
• Financial industry reform is not a question of saying something will work if we can only figure out a good set of rules. It is, at bottom, a question of social utility -- one for which there is no academic research or economic theory that gives us useful guidance. It is first a question of values -- what do we as a society value? If it is making a fast buck without caring about the consequences for others, then we have a pretty good framework. If it's other things, like our children or the general health and well being of our citizens, then we need to look at some changes.
• There is a tension between the regulator and the regulated that is necessary. We go through waves of it as different parts of the system/society spar for dominance over 20 and 30 year periods. We've just been through a really bad lesson in what happens when one side wins ... and there are still a lot of people out there who think it's about winning a game or a contest -- we are, after all, bred to survive and spread our genes -- but, if one point needs be accepted as a basic fact by all participants in the discussion, it's this: The Invisible Hand takes vacations ... and we don't know if it's coming back or not. The idea that a "free market outcome" is "the best", or even "the best possible" outcome in all circumstances is demonstrably false.

Doesn't seem to me that there's really anything new or especially trenchant in the above. But pieces of it, at least, seem to keep getting me in trouble over cocktails and in meetings. ...If we're going to actually get a handle on what's going on, we need to start doing so. Tracking and measuring -- what else have we got?

Oh yeah ... spreadsheets ;)