Ten years on from the first murmurings of the financial crisis

Alastair Darling was on the radio this week talking about how he got his first inkling of the financial crisis while on holiday in France. It was ten years ago and he’d walked into the local village to pick up some croissants and a copy of the FT and he read the news that BNP Paribas had frozen three funds with exposure to sub-prime mortgages. I was just looking back in my diary and it turns out I was on holiday in a French village as well — I have to admit that I didn’t read the FT and I had no suspicion of what was going to happen until many months later, but the crisis went on to have a big effect on everything around me.

I’ve just finished reading Ben Bernanke’s autobiography The Courage to Act and learned a huge amount about what happened and how central banking and financial regulation work. It’s not a short book and it does have quite a lot of detail about particular meetings and the way that decisions were made, but I loved all that. Bernanke took the job with a promise to make the Federal Reserve more transparent and he’s certainly done that by explaining its inner workings in this book.

Bernanke had a hard act to follow. Alan Greenspan had been Chairman of the Fed since the 1980s and was fairly universally respected. With hindsight of course he made some very big mistakes and allowed the buildup of toxic financial products that Bernanke had to help fix. Bernanke hints that Greenspan was a ‘bit of a character’ but doesn’t outright criticise him except to say that he resisted transparency in a way that Bernanke would then go on to reverse.

As Bernanke came to realise, 90% of his job was communication and giving other people confidence that everything would be ok and 10% actually involved action and doing things like providing money to stop ‘too interconnected to fail’ institutions from going under. Bernanke was very well prepared for what happened because of his academic career studying the Great Depression of the 20s and 30s.

One thing struck me about his approach though — underneath all the technical and political goings on he doesn’t mention ever personally questioning whether the American economy could fail. It wasn’t just that the stock market could crash — there were people who were worried that capitalism was teetering and it was time to get out. Bernanke never seems to have thought of that possibility though, which is telling.

The final section of the book contains his reflections on where we are now and he cites three reasons he’s optimistic about the future of the US. I’m guessing it was written before Trump came to power because all three reasons sound pretty flimsy now. The first is immigration, the second is technological innovation and the third is company building. I’m a huge fan of America but I wouldn’t hold out too much hope of those trends improving for the next four years.


I’ve been reading quite a bit about behaviour change over the past few months, partly because I think it’s an interesting investment area but also just out of personal interest and wanting to improve my own health and productivity. Lily suggested I read Switch by Chip and Dan Heath which is great and I definitely recommend it.

The book’s a couple of years old now so I’d heard quite a few of the examples already but the basic framework of the book was new to me. It’s all set up with a slightly cheesy analogy but one which works I think — that any person’s behaviour is a function of both head and heart, or as the Heaths put it a rider and and an elephant.

The book is then split into the three things that you need to get right in order to get both rider and elephant where you want them. These are:

  • Direct the rider: set clear, easy to follow instructions to be acted upon
  • Motivate the elephant: help people feel good about the eventual goal
  • Shape the path: make the environment as conducive as possible to positive behaviour

Get any of those pieces wrong and not a lot will happen. I nodded along to most of the book, seeing things that I’ve done in various situations that didn’t cover off all three principles and hence went wrong or just fizzled out. It gave me a lot of ideas about how I could improve my own ability to get things done both personally and at work. It also gives you some insight into how these techniques are used in marketing and advertising — not always to make the world a better place it has to be said.

To be honest I did find The Power of Habit more interesting from a science point of view and the storytelling meant it felt better written but nevertheless, if you’re interested in changing behaviour in any context, Switch is well worth a read.

Photo Some rights reserved by brendonhatcher.

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How to stop geeks becoming the next bankers

What if the jobs crisis we’re seeing across the western world isn’t just because of the financial meltdown, but is also due to technology? That’s the argument Andrew McAfee and Eric Brynjolfsson make in Race Against the Machine. They point out that the last decade was the first since the Great Depression with no net job creation in the US and are in no doubt about where they think the blame should be placed: “The median worker is losing the race against the machine”.

While technology has had massive benefits for our quality of life and overall prosperity, their argument about jobs is pretty compelling. We all know that the world of work has changed over the past two decades and that technology has become almost ubiquitous in developed economies, especially in workplaces. While creativity has become increasingly in demand and skilled manual jobs that machines can’t replace have remained solid, the information based jobs where somebody tells you what to do have gradually disappeared.

McAfee and Brynjolsson also show that while the number of jobs being created has slumped, the profits made by companies have continued to climb. The reason is that technology is creating productivity gains — leading to less money going to workers and more money to executives and investors who control the capital that invested in the technology in the first place. And we’re only just at the beginning of the trend. McAfee and Brynjofsson point to Google’s driverless cars as a sign of further jobs to be erased in the future by technology. How long will it be before the economics make sense for haulage companies to lay off truck drivers? And when will taxi drivers be a thing of the past?

The authors are actually big believers in technology and are pointing out the statistics as a way of getting a debate going before it’s too late. I think they’re right to do so. At some point people will start to look for the underlying cause. Technology could become a tainted industry in the same way that banking is the current pariah. McAfee and Brynjolfsson even raise the spectre of modern luddites — reprising the movement that broke the looms they thought were stealing their jobs in the 19th century. We can’t just say “That’s progress. Tough luck.” The world simply isn’t organised for a society of mass unemployment.

We need to act now and not just in a superficial way by giving more money to charities or pretending that startups all create jobs (as Stian Westlake points out, that’s just not true). Fundamentally we should stop working on the trivial and work on things that create real value. We should work in areas where technology is creating new industries and new jobs, not just sucking up peoples’ time into newer, shinier more pointless things. As a man much wiser than I put it, we should “Work on stuff that matters”.

We also need to look at the way the sector is financed because I’m seeing more an more evidence that it’s just not right. I know and respect some technology investors but there are others who I think are basically stealing money from peoples’ pension funds by creaming off a percentage from VC deals. Over the next five years finance and investment is going to be ripped apart particularly the cosy, secret deals done between founders, investors and acquirers. We should get real about pay and rewards for founders and early stage investors and become hyper transparent about them. Even Reid Hoffman, who I have a great deal of respect for, dodged the question about Airbnb founder dividends (which would effectively be coming from pension funds that are LPs in the funds making the investment) when I saw him speak last week. I think that makes people think the worst about a potentially great company.

Commentators are beginning to look around for people to blame for the current stagnation, and the stakes are too high for us to ignore the threat of technology becoming an industry that talented people want nothing to do with. We need technology to solve the difficult problems we face so it’s time to get the house in order. Technology should be creating new and better institutions rather than just gradually eroding old ones and leaving a vacuum in their place.
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The Good Society

Compass is a name that is cropping up more and more in the newspapers and on TV news. It’s a pressure group set up by Neal Lawson to try and influence the Labour party’s policy direction after Tony Blair leaves the helm. I’ve been involved a little bit and was a member of their Good Society working group, which has published its report as a short book today. It’s an interesting read and will certainly get people thinking.

Hetan and Jonathan who co-ordinated the process and wrote the final report have a piece in the Guardian today.

Neal’s blog on the way to a book is also well worth a read.

The Indian blog ban episode of 2006

So it looks like the block on a number of major blog hosts in India was cock-up rather than conspiracy. The story going round is that ISPs misinterpreted requests to block a few individual blogs hosted on generic blogging domains and shut down access to the whole lot.

The coverage (particularly by Boing Boing) made me realise how fragile India’s international progressive brand is. The fact that some people easily believed that the Government would block blogs showed that people don’t see the country as a wholly unrepressive regime. India has sold itself in recent years as being different to China because it doesn’t have to go through the potentially destabilising transition to democracy that China will surely make in the next decade or so. There is, of course, unrest, as the recent bombings in Mumbai have shown, but the Government has always pulled out its democratic card when trying to attract investment or sell Indian services. I think this episode might have tarnished that argument a little.

China’s Green Revolution?

I’ve noticed quite a few stories about increasing interest in environmental performance by the Chinese Government recently. This one says the Government is to spend $175 billion (yep, that says billion) on an environmental cleanup. This one says that Bill Dunster (who designed my house) might get a big gig in China and New Scientist also ran a piece (sub reqd) about all the interest in Dongtan — a suburb of Shanghai which is going to be built to very high environmental standards.

With almost a quarter of the world’s population we all need to hope the Chinese do something revolutionary about the environment, especially greenhouse gases. But I also wonder whether it’s just the shot in the arm European and North American environmental technology firms need. Maybe this will give them the economies of scale and proof that green can be done big that they need.

Benkler’s Wealth of Networks

I’ve got a review of Yochai Benkler’s book The Wealth of Networks

in todays Financial Times Magazine. Since the FT website doesn’t let you comment, I’d be interested to know what other people who’ve read it think.

Here’s an excerpt from the piece:

“There is, of course, something perverse about the fact that perhaps the best work yet about the fast-moving, enthusiast-driven internet has taken an academic 10 years to write and is printed on 528 pages of dead tree. But perhaps the interesting social production happens post-publication. The book is released under a Creative Commons licence so you can download it free from his website (www.benkler.org) and Benkler has given readers all manner of collaborative tools to discuss the book and take the ideas forward. You’ll want a hard copy to thumb through, though. This is an important book.”

The full review is here.

George Osborne: Valley Boy

There was a piece on the Today programme this morning about Conservative shadow chancellor George Osborne’s trip to Silicon Valley. He’s meeting a few of the big firms like Google and Yahoo and trying to get a feel for what makes California so much better than the UK at turning little ideas into massive wealth generators. As Osborne pointed out in the interview, even though the UK has world class universities and plenty of money available, there is no British equivalent to MySpace which has become the world’s fifth most popular website in just a few years, let alone a Google or a Yahoo!.

James Naughtie tried to push him on the tax regime, making out that it must be because they have lower taxes. But Osborne quickly pointed out that California has much higher taxes than other parts of the US so it can’t just be that. It also isn’t about intellectual property laws because although, yes, it is more expensive to take out a patent in the UK, actually none of the success stories of the past decade have really been about IP.

I reckon it has a lot to do with a deep understanding of networks. Somebody pointed out in the package before the interview that one difference is the role models that students at Stanford have. Larry Page, Pierre Omidyar, Jerry Yang are all treated as heros. But you have to realise how different these guys are to British business role models like John Browne or Richard Branson. They’ve built business not just through good strategy or PR or relentless personal energy but by incredibly clever hacks that make the most of the underlying network logic of the internet.

If you’re a young entrepreneur trying to emulate the current generation of internet success stories, you’re going to try and think of business ideas that are like Google or eBay, that tap the value of networks of active participants for the simple reason that those are the most likely business to thrive in a network age. At the moment, we just don’t have that culture of understanding network business in the UK.

I reckon if George (or Labour for that matter) wants to know how to build Silicon Valley in the UK, he’ll certainly need to read this.