Saturday, 3 November 2007

Indexicals, Causation and Regulation

The Philosophy Department at York University has been holding a series of seminars on causation. The fascinating element of them is that they bring together a collection of scholars who would not normally talk to each other. At the most recent (31 October 2007) Huw Price from Sydney University gave a paper on indexicals and causation to a group consisting of philosophers, computer scientist, ecologists, lawyers, and demographers. (See for example this paper.)

Rather than accepting causation as an ex ante objective state of affairs to be evaluated, Price argued that indexicals (I, you, here, there, now...) determine how causation will be assessed. The standpoint/perspective one adopts will affect the characterization. This should allow us to assess action and non-action.

My query is how does this operate within the recent global liquidity crisis in financial markets. From the perspective of the central banker, we could say that the US (although the progenitor of the crisis) has begun to handle the situation competently through the market manipulations of the Federal Reserve. Similarly, the European Central Bank and the Bundesbank in Germany have mounted rescue operations that have kept markets moving. And in the case of Germany rescued two minor banks, IKB and Sachsen LB, from their subprime morass. None of these banks caused the crisis.

But when we examine the UK, the situation is so different. The Bank of England and Northern Rock should have been a partnership that was quietly consummated without the public being aware. Yet, it was a disaster. Did the Bank of England cause the collapse of Northern Rock? It came close to doing so, and its subsequent actions have hardly inspired confidence.

I have mentioned before that prior to the tri-partite regulatory scheme adopted by the government, the Bank of England was able to coerce gently institutions into mounting rescues through the London Approach procedure. It was informal and private. And it worked. The Bank can't do this now. Partly it's the regulatory apparatus and partly it's the burgeoning array of financial players who won't always abide by the threat of the governor's eyebrows being raised.

Globalization is forcing financial regulators to assess how they handle complex financial instruments such as collateralized debt obligations, to what extent they can rely on private regulation through the credit rating agencies, and more fundamentally whether in fact they can do anything at all.

To this end the Securities and Exchange Commission (SEC) is considering establishing its first office outside the USA in 73 years. It could be London or Brussels. It is, however, a welcome move because one thing sociology has taught us is that no matter how much communication takes place vicariously through email, video links, etc, there is a fundamental compulsion to proximity ("comprox") that impels us to meet and talk face to face. (See eg. this discussion on the handshake and this paper on travel.) Perhaps this is the time to have a proper and sustained global regulatory dialogue.

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