Do you think that, as a profession, bankers are best presumed to be:
- “knights”: public spirited altruists?
- “knaves”: self-interested egotists? or
- “pawns”: passive recipients of other people’s help?
The answer has a decisive impact on how an industry is regulated. What was astounding about the LIBOR scandal is that, for one of the most important financial benchmarks in the world, bankers were presumed to behave as knights when there was every reason to expect the opposite.
LIBOR was set by simply repeating what bankers said about the willingness of other people to lend them money. Yet separately, the same banks stood to lose or make a great deal of both money and confidence depending on what LIBOR rate was published. Taken together, abuse should have been expected to be autocatalytic - a natural outcome of the way the system was structured.
Almost as bizarrely, the prominent ideas about how to reform the system (e.g. reporting actual market data and increasing the number of players who get to set the LIBOR rates) all appear pretty obvious. So perhaps we should have been following the philosopher David Hume’s advice all along:
In contriving any system of government, and fixing the several checks and controls of the constitution, every man ought to be supposed a knave and to have no other end, in all his actions, than private interest. By this interest, we must govern him and, by means of it, notwithstanding his insatiable avarice and ambition, co-operate to the public good.
As I write this, the Government is legislating to take the regulation of another industry, the press, away from a system that treats journalists less as knights capable of policing themselves in the public interest and more as knaves. But whatever their wrongs, at least we are not bailing out journalists as if they are pawns.