The Doom Loop in the Financial Sector by William Leiss University of Ottawa Press, Ottawa, 2010. Reviewed by Liam Patterson
Sociologist Ulrich Beck did a historical analysis of the sources and management of risks, and concluded that “natural” risks have subsided in modern society, only to be replaced by ³social² risks (Risk Society, 1992). Two of these new social risks are (a) health risks created by lifestyle choices, and (b) environmental risks caused by pollution and eco-system degradation. A third social risk and one that has received much media coverage recently, is financial risk.
There are two types of financial risks, both brought on by hazardous behaviour. One type is at the particular level, whether individual, family, group, or company. In each case the hazardous behaviour results from either lack of or poor quality financial planning. These risks can all be mitigated with proper financial planning. The other type of financial risk is systemic financial risk, caused by reckless speculation and manipulation of financial services and products. The sub-prime mortgage collapse was an example of this type of risk, and there are many other global financial problems of a similar type that have arisen over the past decades. This type of financial risk can ONLY be mitigated by the combination of a societal AND an international regulatory framework designed by financial experts and enforced by willing governments.
William Leiss has undertaken a historical and comparative analysis of systemic financial risk, and he rates the consequences of systemic financial collapse as catastrophic. The problem is, that to date, there is neither an adequate understanding of the sequence of events that could lead to such a collapse, nor are there any effective coping mechanisms to mitigate that type of financial risk. In an irrational euphoria of optimism, governments were persuaded to remove regulations so as to “promote business” during expansion, any shortcomings in this strategy were overlooked, but during contraction (i.e., recession or depression) the financial losses can be, and have been devastating.
What is even more unsettling than this hazardous situation is that the people responsible for creating it (members of the Financial Services industry) are far more interested in the opportunities to make extravagant profits than in the consequences of any possible financial collapse that their speculation and manipulation might cause. Even during the recent sequence of financial collapse, near-depression, bail-out, and slow recovery, those in the Financial Services industry strenuously resisted any imposition of controls on or accountability for their behaviours.
It might seem that, from a financial perspective, such behaviours were “suicidal.” But actually they are not rather they are “homicidal” to the remaining participants in the financial system (which is the rest of us!). Since they are (so far) allowed to keep their gains and bonuses, they are in a position to weather any financial storm that their actions create. The only way to stop this kind of thing is through the re-imposition of government watch-dogs and sanctions. Leiss recommends such controls, but doubts that they will be forthcoming. However, if anything more serious than the previous episode occurs, it could lead to the collapse of the entire global financial system, and subsequent regression to a considerably more primitive state of society. That is the risk humanity faces if we do not mitigate systemic financial risk.
Liam Patterson is a consultant who combines the practice of Business Analysis with Systems Analysis.