Monday, March 02, 2009

Is the banking crisis going to teach our public services something?

Three weeks away from domestic politics is a useful time to do some serious reflecting. My weeks holiday back to back with two long business trips abroad has given me ample time to think about our current crisis in a slightly new light.

For a long time, ten years or more, my wife (who is a part qualified accountant and book-keeper) and I have been privately aghast at how easy it has become for businesses to borrow very large sums of money. In some cases we know of people who have disasterous financial histories have had absolutely no problem starting new businesses and promptly running up six and even seven figure debts.

Now partly I agree this is largely pure jealousy, when my own food business was developing in the 1980's we always used to complain that our No 1 challenge was persuading anyone to lend us a penny - my bank manager used to take a peculiar delight in refusing to lend us more money, or increase our overdraft, basically because he thought it would make us lazy about collecting in our debtors cash.

But since the early 1990's the rules changed. Banks merged and merged again and became bigger and bigger and soon they couldn't handle the concept of thousands of individual managers making millions of individual lending decisions all over the globe. So they centralised.

Bank managers lost their discretion and lending decisions were first taken to regional office level and then centralised altogether, sometimes in a different country. Central decision making about loans meant systems had to be devised to regularise the process and hence we ended up with the 'credit score' system that dominates lending today.

Bluntly, with credit scoring, if you answer the right questions the right way the computer will always say 'yes'; and what a surprise, quite quickly canny businessmen began to arrange their business affairs so thet the computer would say 'yes' a lot.

Lemming-like, the entire banking sector has galloped off a cliff together - the computers telling local managers it was fine to lend to people they knew full well from bitter experience were unlikely to ever pay them back, but were powerless to refuse.

And the worst of it all is that the banks have become so big that not one of them can be allowed to fail for fear of catastrophic knock-on effects to the survivors.

The lesson is clear, centralised decision making might be more scientific and outcomes more measurable but it isn't necessarily of better quality. And in some activities the quality of decision making is the most important issue of them all.

A large number of our public services have gone down the same route as the banking sector. Policing, social work and teaching are three areas of the public services where I believe the centralising of decision making has been a reverse step, with the potential for similar disasterous consequences.

Smaller, localised decision making by professionals whom we pay and train well enough to trust their judgement is the only way forward for banks, and a large number of our public services too.

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