Ed Kane, a professor of finance at Boston College and grantee at the Institute for New Economic Thinking [3], studies the dangerous risk-taking of giant banks. He sees the cultures of Wall Street and regulators coming together to turn taxpayers into victims of theft and great harm. Like extreme drunk drivers before MADD or smokers on airplanes prior to the 1980s ban, megabankers currently get away with endangering others with little fear of repercussions. Kane discusses how changes in corporate law and culture must make it legally and socially unacceptable for bankers to blow their toxic fumes at the rest of us.
Lynn Parramore: Let’s start out talking about the relationship between taxpayers, regulators and banks. How did it become so unhealthy, particularly when banks run into trouble?
Ed Kane: I think of this as a cultural problem. Organizations create a culture through some kind of mission statement, a series of buildings and staffs and procedures to promote that mission, and shared assumptions and norms about how to behave in difficult circumstances.
Financial crises are very difficult circumstances. In a crisis, the cultures of regulation and Wall Street intersect in a way that’s very unhealthy for taxpayers. We get a coerced game of chicken. The world’s biggest banks are aiming at the regulators and taxpayers, and the regulators want to avoid a collision. Regulators can either take over these insolvent zombies, and that’s really a mess. Or they can give the zombies money and let them keep going in the hope that they’ll somehow heal themselves.
The distorted culture tells the regulators to pick the second option. The regulators, the policy makers, and the central banks all around the world share the assumption that they have to rescue this industry. It’s as if they jumped in their ambulances and headed straight toward every big and troubled institutions in every country. This is the cultural norm — the industry expects rescue. Taxpayers have been forced to provide a massively valuable guarantee for giant banks. It’s a very unjust situation.
LP: Why can’t regulators see what’s happening before a crisis sets in and take preventive measures?