Uh oh – FT columnist Gillian Tett is quoting a French sociologist …
This sort of thing could get dangerous, but it looks intriguing. Drawing on her time in Japan, which prompted me to pull her book about the experience off the shelf, she reminds readers that westerners were constantly telling Japan they had too many middlemen, especially in sectors like retail.

“However, amid all that debate about American efficiency, one point that western commentators almost never discussed was the proliferation of middlemen in America’s financial world.

“If you were to sketch a map of how credit has been sliced and diced in 21st century banking, there would be so many stages and commission hungry middlemen in that process, that the Japanese dairy industry might seem positively rational …
“Three decades ago, Pierre Bourdieu, a French sociologist, observed that elites in a society typically maintain their power not simply by controlling the means of production (ie money), but by dominating the cultural discourse too (that is, a society’s intellectual map). And what is most important in relation to that cognitive map is not what is overtly stated and discussed – but what is left unstated, or ignored. Or as he wrote: “The most successful ideological effects are those which have no need of words, and ask no more than a complicitous silence.”

Her new book recounts the invention of credit derivatives and Tett gets back on the topic here, showing how financial markets are based on a concept of freely flowing information, yet credit derivatives have become so complex they are almost never traded and have to be valued by model.

One does suspect that banks, and their associations such as ISDA, like it that way, because once you break complex derivatives into components that can be listed and traded on an exchange, the margins go away.

In the past I have criticized Tett and the FT for glancing at this topic and moving on without examining the banks’ arguments that OTC derivatives have saved nice guys like pension funds substantial amounts of money. Perhaps it will take some smart investigators – has the SEC hired any at last? – or the nonpartisan Congressional GAO — she cites Adair Turner as a potential source of clear thinking – to delve into these issues in more detail.

Maybe she will take it on. As she notes:

“…one reason why this doublethink persisted for so long is that bankers and policy makers alike have all been trained in recent years to take economic theories at their face value, shorn from social context, or power structures.

But if regulators and politicians are to have any hope of building a more effective financial system, it is crucial that they start thinking more about power structures, vested interests – and social silence.”

She promises to go further into the topic next week.

Filed under: regulation, Technology