STRANGE LOOPS AND BANKING FAILURES

Strange loops occur where we make a move forward to change something. We go through several cycles in some process or other. We might cycle up or down in terms of what we’re trying to achieve. And then we find ourselves back to a similar position that we started from. The concept was created by Douglas Hofstadter, an American cognitive scientist, interested in how our minds work and perceive the world. We all experience strange loops, as do organisations and entire economic sectors.

Strange loops are necessarily bad, but then they’re not necessarily good either. When we get stuck in these loops we effectively stall, stuck at the edge of ultimate success or failure. Worse we might be stuck in a loop that leads to entropy: the progressive decline of someone or something.

One of the strangest loops I’ve observed over many years is the one around banking. It’s a worldwide phenomenon, but let’s focus on a case in point: in Australia there have been major financial system inquiries in 1979, 1996, 1997 and 2013. The ensuing legislation focused largely on promoting safety and efficiency in the system. Yet, in 2017, the Federal Government was forced, through political and public pressure, to convene the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The findings do not make for great reading. Rife misconduct. A focus on profit ahead of all else. Weak regulation. Hollow apologies. Drawn out remediation. The depressing litany goes on. Yet, it was not the world’s first financial services sector inquiry to draw similar findings. The GFC was founded on misconduct, mis-selling and greed. We seem neither to learn nor to legislate effectively.

It’s not that some of us haven’t tried to see this enshrined in legislation. Across 2000 and 2001, as part of the Operational Risk Research Forum, I helped advise the Bank of England on building behavioural operational risk clauses into the Basle International Banking Regulations. The section didn’t make it. Other technical advisors (one from the same university as me) claimed they could model everything – including random (stochastic) human behaviour – with ‘long-tail’ probabilities. History had already demonstrated the invalidity of this claim. It’s repeated its lesson since.

Plus ça change, plus c’est la même chose

Jean-Baptiste Alphonse Karr

There are lessons in history. We’ve just got to pay attention to them, pick up the cues and learn. If we don’t, we loop back; not back to where we started, but to pretty much the same state.