Peter Nyberg Bank Inquiry Evidence, 17 December 2014

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peter nyberg irish bank crisis inquiry

I do not think it is fair to say people partied. People just lived a little better than they otherwise would have done because of the bubble.”
Peter Nyberg under questioning from Deputy Pearse Doherty, 17 Dec 2014.

Peter Nyberg’s appearance at the Irish bank inquiry marked the beginning of the context phase, the purpose of which is to set the scene for the causes and consequences of the bank guarantee and bailout.

The context part is going to last for a few months, and it may not be until April before the committee starts calling people actually involved in the guarantee decision and its aftermath. So, for those looking for fireworks you may have to be a little bit patient I’m afraid.

However, the context phase gives us the opportunity to do what it says – to place the guarantee within a wider framework than that of the personalities involved in the tense meetings of the night of 29 September 2008. It allows us to see the bigger picture; that is, if we want to see it. It is by no means certain that such a road is one that the various actors involved in Irish finance would choose for themselves.

Alongside this, the committee is itself working within a context where narratives around the crisis have already been formed, most notably the “asleep at the wheel/regulators/bad apples/nobody understood/auditors/collective psychology” theme. I’ll come back to this later as this is something that popped up during Nyberg’s (quite dry and uninspiring) testimony, but it is worth flagging now because in the search for the truth as to what happened we have to deal with a story that has had six years to bed itself down.

The analogy that is closest to explaining what I’m getting at here would be that of a cover story, but it is not as calculated and Machiavellian as that. We’re dealing here with an ideology – Nyberg admits as much in his testimony – and the way that the ideology of modern finance made sense of the world before the crash is the way that it made sense of the world after the crash. It couldn’t grasp the nature of the problem then, and it is incapable of making sense of it now. It knows that the problem was structural, but because it has such a vested interest in the continuation of those structures and practices, it has to find a way of addressing systemic failure without changing the architecture.

Its solution, its way of squaring the circle, is to treat the crisis as a managerial problem. Asleep at the wheel / regulators / bad apples / nobody understood / auditors / collective psychology / etc etc etc. What is needed is better managers, better regulators, better auditors.

It is a bit like if a car crashes because of faulty brakes, the solution is to find abetter driver.

There are variations on this story, and indeed outside of Ireland there has been some acknowledgement that a structural problem demands structural solutions, but within the Irish state I see little evidence of even that moderate concession. Here, the bad managers narrative is at its strongest, and has merged, Borg-like, with a morality theme.

In Ireland for the past six years the exploration and analysis of the crisis has been, for the most part, “fecking bad managers and won’t somebody please think of the morality”.

A case of, keep the brakes and get a better driver.

Irish banking inquiry

Getting back to Nyberg and his appearance before the Bank Inquiry Committee, I just want to pick up on a couple of points he made that I thought were interesting. The following quote is his response to a question by Fine Gael’s Eoghan Murphy about the efficient market hypothesis which Nyberg highlighted in his report as a causal factor in the crisis.

Nobody really reacted, not to Ireland, not to the United States, not to Spain and not to the UK, and the question is what is the common denominator there. According to the commission, one of the top common denominators would really be, if one uses the word, the philosophical underpinnings of the financial market policy at the time…

The way in which supervision was ideally provided was to be concentrated – that was true of Ireland, the United States and the UK specifically – by looking to see that the banks had the right governance structures in place. That was the idea, and the idea was that banks of course would act in such a way that they stayed solvent, that they were profitable, that they were growing and safe.” Peter Nyberg, 17 December 2014.

This is a theme that was flagged as early as October 2008 by the former head of the Federal Reserve, Alan Greenspan, in evidence he gave as part of the US Congressional Hearings into the crisis. Whereas Nyberg calls it the ‘philosophical underpinnings’ of financial policy, Congressman Henry Waxman names it for what it is: ideology.

This is from a slide I use in classes on the financial crisis which gives the quote from Greenspan and Waxman:

greenspan-waxman-2008.jpg

It is worth highlighting this conclusion drawn by both Nyberg and Greenspan because in Ireland, for the most part, the fact that markets are an ideologicalconstruct is never really pointed out – yet it forms the basis of Nyberg’s conclusion (as we’ll see later in his discussions with Sinn Féin deputy, Pearse Doherty) and seemingly kept Alan Greenspan awake at night due to the ‘distress’ of it all.

In Ireland, Markets are to be trusted, obeyed and occasionally feared. They are not to be questioned; certainly we should never ask about the power relations that lie behind them.

It kind of reminds me of this…

Irish banking inquiry

The purpose of the context phase should be to do exactly that – to ask what lies behind the curtain, behind the market pulling the strings. And it is certainly positive that Nyberg acknowledges the ideological nature of the problem, even if he does choose to neutralize his conclusion with the phrase ‘philosophical underpinnings’.

Oh well. Rome wasn’t de-constructed in a day I guess.

Further on, Nyberg makes these statements regarding economic professionals. He’s answering a question posed by Fine Gael senator Michael D’Arcy regarding the methodology used by PriceWatehouseCooper (PWC) in October 2008 regarding the solvency or otherwise of the covered banks:

If I remember correctly, there were three alternatives. There was a standard scenario, a better one and a worse one, in particular regarding the big real estate loans… That is the way one does it,because – to be frank – economic forecasts are usually wrong… If one would have taken the worst possible assumption, the banks obviously would not have been solvent, but it is only afterwards now that we know how it turned out. The method was fairly standard.”Peter Nyberg, 17 December 2014.

Economic forecasting is usually wrong, but fairly standard.

There is another reason why banks get a clean bill of health in public from auditors, apart from the report being simply wrong. Nyberg tells us this in response to a questioning from Labour senator, Susan O’Keefe and the chair of the committee, Labour deputy Ciarán Lynch:

Mr. Peter Nyberg: The problem is that an auditor really cannot provide anything but a clean audit to a bank. If the audit is anything but clean, the bank cannot function.

Senator Susan O’Keeffe: Does that mean that auditors are obliged to rework audits? How do they make audits clean if they are dirty?

Mr. Peter Nyberg: If the auditor finds problems in a bank, it implies big difficulties for the bank if these become public. The auditor must do two things – either it presents them in a non-public form, such as via a management letter or something of that nature, or if the bank is unwilling to change, the auditor can resign. The idea that the auditor gets up on the podium would just be irresponsible.” Peter Nyberg, 17 December 2014.

Unless I’m reading this wrong, Nyberg is telling us that bad reports on banks are buried and the auditors either keep quiet or resign. Good to know I suppose.

Finally, in his questions Deputy Pearse Doherty said that Nyberg’s reports states that ‘the real reason for the crisis is the spread of an ultimately irrational point of view’ and that Nyberg made this statement ‘with reference to the widespread belief in the model of efficient, self-regulating financial markets.

When asked to comment, Nyberg replied:

Speaking personally, it seems odd that one has not drawn conclusions from the fact that it seems to happen serially.”

Nyberg is not one for the heterodox economics of Hyman Minsky or John Bellamy Foster I take it then. I suppose there’s no point mentioning this guy, or evenHarvey.

Despite his criticism of the ‘philosophical underpinnings’ of financial market theory, Nyberg himself fell back on it when pressed about the causes of the crisis. Again, in answer to a question from Deputy Doherty, this time about whether the Irish crisis was home-grown or not, he said:

Yes, that is exactly the point. Nobody forced the Irish banks to grow, nobody forced Irish companies or Irish households to invest and borrow either. It was voluntary.” Nyberg, 17 December 2014.

Rational-choice theory to the rescue.

In his opening statement he also fell back on this in terms of causality, saying that the systemic nature of the crisis was due in part to the fact that:

Hundreds and hundreds of individual decisions were made by contributors who never felt they did anything wrong but which made it possible.”

I pointed out in the last post the problems with using a causal rather than a relational approach to the crisis, and I think we can see some of that here.

Nyberg is looking for causes – a direct line of cause and effect – when really what we are trying to make sense of here is more akin to an eco-system, and that can only be observed in a dynamic way, one that is lost with the thud-thud linear of causality.

There is also the use of a managerial approach for what was a systemic problem. For Nyberg, it’s about those hundreds and hundreds of individuals decisions. In other words, Let’s keep the brakes but change the driver.

Irish banking inquiry

[Full video and transcript of Nyberg’s appearance available here.]

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