by From Peter Radford What is about technology? It’s either a panacea for all our ills, or it’s the cause of all the aforesaid ills. Why can’t we make up our minds? This morning’s Financial Times is, sort of, a good demonstration of the confusion we are in. On the one hand there’s any article about cryptocurrencies. On the other there’s a rather less techno-centric article about bank culture. In both cases technology looms large. In neither is technology really mentioned in detail. It just forms a context and provides the framing for the problem being discussed. After all cryptocurrencies are the archetypical modern techno fad and banks were early adopters of hi-tech bookkeeping and analytical tools. It’s all about ledgers. Which means, in my mind at least, that it’s all about
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from Peter Radford
What is about technology? It’s either a panacea for all our ills, or it’s the cause of all the aforesaid ills. Why can’t we make up our minds?
This morning’s Financial Times is, sort of, a good demonstration of the confusion we are in.
On the one hand there’s any article about cryptocurrencies. On the other there’s a rather less techno-centric article about bank culture. In both cases technology looms large. In neither is technology really mentioned in detail. It just forms a context and provides the framing for the problem being discussed. After all cryptocurrencies are the archetypical modern techno fad and banks were early adopters of hi-tech bookkeeping and analytical tools. It’s all about ledgers. Which means, in my mind at least, that it’s all about information.
The entire crypto-craze is a fascinating example of how technology is seen as a solution to a problem. No matter that the problem doesn’t really exist. It is also roiling the financial world which is how the two articles intertwine.
First: Brook Masters gets into the weeds of cryptocurrency regulation. She is prompted by the recent UK Financial Conduct Authority decision vis Binance. The techno-folk who are deeply into cryptocurrencies seem to confuse the various so-called “coins” for actual currencies. Up until now they are speculative assets. Not that currencies are immune to speculation. Of course not. But, so far, the main purpose of cryptocurrencies appears to have been to create a digital asset that can be bought and sold on exchanges in the same manner as gold or silver. Binance is one such exchange. It is one of the largest. The FCA has taken the position, quite rightly from the public protection perspective, that exchanges doing business in the UK need to show proof of their anti-money laundering activities.
Since criminal activity is commonplace behind the shrouds of cryptocurrency exchanges — this is hardly disputable — it is not unreasonable for national authorities to seek to rein such illegal activity in. I can speak from experience when I say that it is devilishly difficult for an intermediary like an exchange or a bank to tell what’s legal and what’s not. The volume of daily transactions is immense, the payment system has to function in the public interest, and it’s quite easy for criminal activity to slipstream through along that river of activity. Which is why the banks invest so much time and effort into detection. They would prefer to avoid the cost, but the regulators insist. Correctly. So why should the crypto-world be any different? It shouldn’t.
The problem for the techno-folk and enthusiasts in the crypto world is that the very basis of their technology, especially the distributed ledger and the anonymity is seeks to confer, attracts nefarious players. Combine this attraction with the recent rapid expansion of the crypto-world and, naturally, the authorities want to crack down. It is the secrecy feature of crypto that fascinates its fans the most, they abhor “government” which they view as irretrievably corrupt, but then they build something that is almost exactly what the criminal class would have built had they planned it. So the first age of crypto is ending. The free-wheeling days are past. We are entering the next stage which will be dominated by regulation and the entry of more traditional players like the big banks.
Second: this gets us to the second article that caught my eye. Simon Samuels, a consultant to banks, talks about the value of institutional memory in banking. He uses the commercial real estate cycle as an example of how important it is for banks to remember their losses in prior cycles so that they can avoid pitfalls in future. This, surely, is blatantly obvious. But, like the detection of money laundering, it is devilishly difficult to do. Banks, as we all know, are thinly capitalized. That’s the nature of banking. Some of you think it ought not to be, but before you argue for change, think through the ramifications for credit creation. Balancing between making credit available and ensuring bank safety and soundness always attracts advice from outsiders. Everyone, it seems, is an expert on how to run a bank. Only Minsky is worth reading. And public provision of finance does nothing to alter the essential dynamics of risk taking. Banks exist to assess and take risks. That’s their function in the economy. This will, inevitably lead to mistakes. We can question how to mop up after those mistakes. And we can question who ought to benefit from the profit generated by risk taking. But, in a world of endemic uncertainty, risk taking is inevitable. It cannot be eradicated. Let’s not confuse uncertainty with risk — that’s a different conversation. Meanwhile, educated guesswork, what banks call credit analysis, is the order of the day.
Which gets us back to that second article. The gist of which is that banks ought not exploit modern technology and adopt a hybrid work environment post pandemic. No, they need to get back to the office so that those awful memories of the losses of yore can be passed along in person. Apparently they cannot be passed along in any other way. So, this reasoning suggests, technology is totally inadequate as a form of transmitting memory in an institutional setting. This is not true. What’s lacking is not the capacity of people to communicate across a technological context. It is the cultural and imaginative capacity to do so. Let’s face it: the record of the banks is not spectacular when it comes to institutionalizing risk aversion. There will always be too strong an impulse towards risk taking. Someone will devise new and attractive methods of taking risks. They will, most likely, drape these new methods as risk-mitigating. Which is exactly how the derivative driven Great Recession began. None of the banks now so keen to get their people back into the office and to learn from past mistakes has done a very good job of such learning. The profit motive clouds their various memories too much.
That’s all fine of course.
But what I wonder about is how the banks really learn from their past mistakes. Is it true that such learning cannot be done on a technologically enabled distributed basis? Is our technology that bad? Are we? Are the banks so inept that a process that appears to have worked so well for the past year or so, has to be chucked over for a return to the “old ways”? I think not. I imagine that there a a few AI developers who could institutionalize the right learning for the banks were they asked. The urge to get back to the office is not an indictment of the technology, it is an expression of fear. The profit-induced pressure to take risks in banking has created an environment of fear: management needs to patrol not educate. It needs to control in order to check the rogue behavior before it accumulates into existential danger.
To end with an example:
The first article talks about the allure of cryptocurrencies. The “big players” we are told are beginning to dabble in the market. Some notable names are building their own crypto platforms. This is why the regulators are getting nervous. Why? Because those big names are exactly the same folk who got into derivatives. Dabbling in the new technologies and the new ideas is something that institutional memories cannot evaluate or warn against. Which is why they have the allure they do. They are new frontiers for profit, they are new horizons to explore. No amount of personal interaction can overcome the difficulty of assessing the risks of something that is completely uncertain. Indeed collecting a bunch of eager young, bonus driven, and over-educated people into a small space is precisely the atmosphere in which speculative crazes take root.
As I said, our attitude toward technology is confused. It gives us new frontiers to explore. And it creates new risks. It allows us to communicate. And it is no good, apparently, for the adequate communication of institutional memory. It opens up the space of problems to solve. And it provides the solution. It adds complexity. And it simplifies. It empowers. And it limits. It enables both decentralization and centralization. It adds a veil of secrecy. And it encourages universal surveillance. It both opens up and forecloses on opportunity. It augments labor. It replaces labor. It does work and is that basis of modern leisure. It is indispensable, but sometimes we need to get rid of it and meet face-to-face.
Ever since the first great machines allows us to solve the ancient economic problem we have looked at technology as our long term savior. Somehow, we imagine, technology will provide the answer.
Sometimes I wonder though: do we ask the right question?