Football is regulated activity much in the same way that banking is. In an ideal world people behave with honesty and honour. They do the right thing without having to be monitored and reprimanded. In high trust societies you can dispense with the transaction cost of laws and regulation, customs and mores sort it out. In such societies you only really need light level regulation and enforcement to guard against the risk of error that can still have negative consequences. Errors certainly happen at the World Cup. And there is a lot of cheating too.

In this respect, the World Cup is akin to a low trust environment such as banking where asymmetries of information benefit certain actors over others. There are so many different ways of interpreting the credit crunch (that will keep economists and historians occupied for centuries; me? I’ve got football to watch.) One is that there was a widespread and systemic failure of regulation that only came to light as a result of financial calamity. This view says little about the fundamental root causes of the calamity but let’s run with it for our purposes today.

Stephen Adshead, guest blogging on this site, detailed the contemptuous way in which a Goldman Sachs trader Fabrice Tourre, self-styled ‘Fabulous Fab’, wrote about products he was peddling:

23 January 2007 – “…More and more leverage in the system, the entire system is about to crumble any moment…the only potential survivor the fabulous Fab (as Mitch would kindly call me, even though there is nothing fabulous abt me…) standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstruosities !!!”

These emails earned him and his employer, Goldman Sachs, a charge of two counts of securities fraud. The problem is that a month after his comments of January 23rd, he was still peddling the monstruosities [sic]. But this would have been widespread in the rip-roaring Wild West years on Wall Street and in the City of London. The difference was that Fabulous Fab got caught. Why? Because the bloody doors had been blown off the whole racket as the financial edifice crumbled. In another time, another economy, Fabulous Fab would still be, well, fabulous. Instead, Fabulous Fab is now a monstruosity.

If no-one had lost anything, it would have been fine. The weak financial regulators would never have known a thing.

I don’t know whether Fabulous Fab is a football fan or not. If he is he must be feeling a little sorry for himself. How galling it must be to look at Luis Suarez being held aloft like a hero for what the whole world regards as a cheat. But there is a difference. What Fabricce Toure is accused of is a cheat- if he is found guilty he was exposing investors and the financial system more widely to risks that he did not communicate. In this regard, he would be more of handling Thierry Henry against Ireland, or a diving Abdul Kader Keita for the Ivory Coast against Brazil resulting in Kaka’s sending off, or, in the same game, Luis Fabiano’s double handball then denial to the ref. Here is that last incident in stills:

These were all cheats. But financial markets are different to football. They are private, difficult to understand, and difficult to monitor. Football is a panopticon. There is almost nothing you can hide from the camera’s gaze (illegal substances perhaps but little else.) Financial regulators have immense difficulty catching a Fabulous Fab and it is mainly during times of crisis that their reckless risk-taking becomes obvious. FIFA- which regulates world football- has every opportunity to catch and punish cheats so they do not prosper. They choose not to.

It would be easy to introduce video technology to intervene to stop Henry’s handball. If it was used, he’d just own up and would be booked if he didn’t. It shouldn’t be down to the ref to ask Luis Fabiano whether he handled it. He should have proof. Again, if Fabiano didn’t own up right away he would get a yellow card. And as for Keita, he would be the recipient of a yellow card and preferably a fine rather than his innocent opponent. All these cases are in the same category as Fabulous Fab.

And yet FIFA chooses not to act. The difference between FIFA and financial regulators is that there isn’t a financial crisis to drive action. People are not going to stop watching the World Cup if FIFA doesn’t act so why should it care? It removes the very worst excesses and is blasé against anything else.

Where it does act it is limp-wristed. And this brings us on to Luis Suarez. He didn’t ‘cheat’ as such. He broke the rules. He was caught. He was punished- with red card and a penalty to Ghana- and he knew that was the price. Tough you might say. Only it wasn’t. Ghana were denied a certain goal and were given a 12 yard shot at a goal in exchange. The punishment didn’t fit the crime and Luis Suarez knew this. It was not his fault but FIFA’s. He chose to break the law and do the time. There was a price; he paid it. The price was cheap- and that is why he was held aloft by his team-mates and is now a national hero.

It was disgraceful and unsporting but it was not a ‘cheat.’ It was a blatant and open breaking of the rules which is different.

He is not the first and will not be the last. FIFA doesn’t care. The money comes in anyway and that is its priority. Until the World Cup is regulated by body completely independent of FIFA with a brief to eradicate cheating from the game then it will remain the same. But what will create the incentive for FIFA to sort this out? The reality is only by better and more principled leadership- no external force could be strong enough to change it.

Until that happens there will be cheats, injustices, and unsporting national heroes. What a great moral force world football has become. Cricket or rugby anyone?

1. Financial and banking reform. I had a bit of fun at the Shadow Chancellor’s description of his proposals for financial regulatory reform as being ‘Obama style’ on Friday. Today I’m going to give him some credit- if these possibilities have become something we used to call ‘policy’ then he is headed in the right direction. If he were to make it contingent on international agreement then he may get nowhere. So some of the thinking is right. As I argued on Friday, I just doubt that he will get there.

2. Growth strategy. He states clearly in the article:

“Exports and business investment provide the key to a sustainable recovery.”

He goes on to tantalise us with a new world where the UK is invading Chinese markets:

“The Chinese are likely to develop from a nation of manufacturers to a nation of consumers, just as we did in our Industrial Revolution. We can sell them our branded goods, our aircraft engines, our films and television, our pharmaceuticals, our financial and legal services, our higher education, and we can even attract their tourism.”

Sounds great. But how do we get there? And that is where George Osborne’s economic argument completely collapses. There is no plan. Oh sorry, there is the normal drum banging on removal of red tape. Is that really why we haven’t grown an advanced manufacturing base as we might have done- red tape? The argument is just silly- especially when you take into account the fact the World Bank places the UK fifth in its ranking of ease of doing business.

And that’s the problem with George Osborne’s argument (and let’s leave the argument that the recession was caused by government borrowing when the UK had one of the lowest national debt levels amongst the advanced economies as not being serious.) He has some good hopes and dreams but not any clue about how to achieve them. The market either delivers or it doesn’t.

No, the more serious thinking is being done by the Government- Lord Mandelson in particular. The approach is strategic and aimed to coalesce business, finance, government, and education behind strategic economic opportunities. Yes, of course business investment, export growth, banking and financial reform are important objectives. The real question though is which policies have a better chance of achieving those objectives and re-balancing the UK economy in the process.

That’s where the Government has an argument and George Osborne has vague hopes and dreams.

Well, my reflexive response was not unjustified it turns out.

Here’s what President Obama said about splitting retail banking from proprietary trading etc:

“It’s for these reasons that I’m proposing a simple and common-sense reform, which we’re calling the Volcker Rule, after this tall guy behind me. Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers.

If financial firms want to trade for profit, that’s something they’re free to do. Indeed, doing so responsibly is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.”

Notice that it is a clear set of proposals- not aspirations, hopes, something to be discussed, speculated about, agreed with other governments or the financial services industry. Of course, these proposals will have to travel through Congress. But the starting point is absolutely clear.

Now here is the Conservative policy (apparently George Osborne doesn’t really bother reading policy documents- keeps the public pronouncements guilt free and the body language in check I guess):

“We will empower the Bank of England to impose much higher capital requirements on high risk activities such as large scale proprietary trading carried out by banks that also take retail deposits. In practice this could [my italics] prevent banks that take retail deposits from engaging in many of these high-risk activities by making them more expensive. At the same time the Bank will examine the case for a more structural separation of these activities in international policy forums.”

So it’s not a separation proposal at all. It is about ‘empowering’ the Bank of England. It is contingent on international negotiations in a way that President Obama’s proposals are not. It may or may not happen. In fairness to George Osborne, Mervyn King is broadly in favour of these changes but these Conservative proposals will tie his hands.

Nonetheless, to go around saying that he believes in the type of separation proposed by President Obama is beyond disingenuous. And it’s beyond his party’s policy. Which, one has to suppose, is his policy too.

It also marks a trend in Conservative campaigning where they float aspirations and hopes as if they were policies in an attempt to deflect proper scrutiny. They may think that’s a clever approach but I guarantee it will make them look incredibly shifty in forthcoming campaign- just as George Osborne appeared this morning once Justin Webb got his teeth into the issue.

* Picture from the excellent Stuart King for Putney, Roehampton and Southfields website. (If I give him a credit, I’m hoping he won’t be stroppy with me for nicking it!)

Anyway, the more prosaic business of the economy: people’s jobs, homes and businesses.

Giles Wilkes at CentreReform has run some separate scenarios on the Conservative approach to solving the fiscal deficit and extracting the economy from recession. The Osborne strategy is to lift the burden from fiscal supports and let exports and capital investment take the strain.

It could work. It’s just highly unlikely. In Slash and Grow. Spending cuts and economic recovery. Wilkes points out:

“Several organisations, from the CBI to the Bank of England, predict that the UK can only grow sustainably through net exports and business investment. Consumption, both by households and the government, needs to fall. But if these two elements (which tend to comprise 80-85% of the economy) are to remain stagnant, the other two will be left with a huge burden to carry. The highest 5 year contribution that capital investment and net exports have ever made was in the mid 1990s, when they added an average of 1.1 percentage points to annual growth.

An even more extraordinary performance will be needed if a future Conservative administration is to achieve budget sustainability by 2015. This is because, even with spending flat in real terms for five years, the gap will need to be closed by higher revenues, which require economic growth.”

And remember, such a strategy would require there to be sufficient growth in world demand to take up the slack of the loss in domestic fiscal support. Other countries would also have to be pursuing strategies that were not similar to ours (everyone can’t devalue all at once.) And the business sector would have to gear itself towards export markets very rapidly- this is in an economy that has a largely non-tradeable sector (Ocado can’t deliver in Brussels.)

Moreover, capital investment- the second Tory anticipated economic recovery driver- is highly volatile. There is no way of predicting where it will head. It is one reason for a degree of caution in the imposition of tougher capital reserve requirements for banks- that may drain the markets of liquidity just as the recovery is gaining some pace. I must emphasise this is absolutely a short-term consideration. And you really have to wonder just how capital investment can expand at the 9% rate needed in Wilkes’ Osborne scenario to get the deficit back to sustainability. The Government is not having to force Lloyds TSB and RBS to lend because they are desperate to anyway…..

This also assumes that there is a huge appetite for corporates to leverage themselves up again. There will be caution both with households and corporates if we look at, say, what happened in Japan in the 1990s and 2000s which bears some similarities to our current situation, i.e. it is a credit recession rather than an inflationary adjustment.

So what is likely to happen when fiscal supports are withdrawn?

Well, time to dust down my trusty old friend, Richard Koo, once again. Japan tried a premature fiscal consolidation in both 1997 and 2001 as I discussed a few weeks back. What was the result? Well, fiscal deficits actually increased and they precipitated a credit crunch and multiple banking failures as well.

What this means in practice is for George Osborne’s highly optimistic, high risk scenario to work he needs an enormous amount of luck.

For what it’s worth, my prediction? Should the Tories win and begin cutting expenditure immediately, Osborne will be forced to reverse his policy within a year or face a new economic/ fiscal crisis.

But is there any logic to such a move?

The first question has to be: did the fusion of the two forms of banking contribute to the financial crisis in the first place?

Well, it’s far from incontrovertible. Glass-Steagall, the 1933 act legally separating the two functions, was repealed in 1999. As a fascinating piece in the New Yorker about the role of Chairman of the National Economic Council’s, Larry Summers, in the crisis, makes clear, there are those who hotly dispute the repeal of the act as a cause.

As Ryan Lizza points out in the piece:

“Others note that the pure investment banks, like Lehman Brothers, have been the greatest source of instability, while the banks with combined commercial and investment arms have fared the best.”

However, Robert Reich and Joseph Stiglitz are both clear that the issue wasn’t necessarily about institutional arrangements, it was about the cultural impact of such arrangements. The casino approach won out over the safety first approach. There is little doubt that high-risk investment meant that traditional banks were up to their necks in it, even if it was Lehman Brothers, AIG, Bear Sterns, and Merrill Lynch who were swallowed by the waves. In the UK, that meant that our High Street banks were in severe jeopardy.

It’s a difficult case to prove, but there is little doubt that the major banks on which savers and investors depended had become severely incautious. We can simply speculate on whether that was due to structural issues. Stiglitz and Reich argue that it was due to the consequences of such arrangements. Others, such as Robert Shiller, argue that there was a dynamic that led to ever greater risk taking. Both are right. Would having Glass-Steagall in place have prevented the financial crisis? No, I don’t think the evidence is there to support that but it was probably a contributing factor. However, that does not mean that we should not consider re-introducing it.

Mervyn King’s concerns are that these super-institutions: (i) are very difficult to police and regulate; (ii) when they go wrong, pose systemic risk. I agree with him.

A separation of the casino parts of the banking system from the boring bits would make things far more transparent and would place a division between the two conflicting cultures that define each. There would still be risk and the investments that High Street banks were making on our behalf would have to be monitored carefully for contagious risk as would the risks taken by insurance and pension companies. This would be far easier if there was a separation.

The argument is not just historical, it’s about the future as well. As a nation that plays host to a disproportionately large financial sector, we have an interest in de-risking our exposure as depositors or, far more probably, as tax-payers.

As things stand, we have the most appalling moral hazard within our financial system. Bankers thought that they would be bailed out prior to the financial crisis. Now they know that they would be. They only way to reverse that is to ensure that no bank is ‘too big to fail’ and the legal separation of investment and High Street banking is part of that.

Post script: There was an intriguing debate between Will Hutton and Heather McGregor in The Observer on Sunday. My beef and Yorkshire pudding ended up on the carpet when I read this pearl from Heather McGregor:

“Lord Turner and I may agree on bonuses, but we disagree about the social relevance of investment banks. Would I miss Goldman Sachs if it didn’t exist? At every level – not only does it provide a valuable service to companies whose continued financial health my business depends on, but even at the most basic level they help the country – the tax their UK bankers pay on their bonuses will help fund our budget deficit.”

And why, pray, do we have a Budget deficit of £175billion or so if it was not for the reckless actions of those who you want to reward handsomely to pay down the very same deficit?!?

Her piece improves as it goes on. I made friends with her again towards the end of the piece when she argues:

“We need to return to an age when investment banking and mainstream banking are separated, as they were in the US under the Glass-Steagall Act”

Unfortunately, the gravy stain is still on the carpet just as the gravy train has already left the station.

Post script 2: Though he doesn’t argue that banks should be broken up, Martin Woolf takes on the moral hazard and ‘too big to fail’ arguments in his column today. Worth reading.

He is absolutely confident that his party have the most radical environmental policies of any of the ‘main’ parties. I’m not sure I accept that but, that notwithstanding, the Lib Dems- who admittedly were in the vanguard of political environmental awareness in the UK- have been able to do absolutely nothing about it. Why? Lack of what Nick Clegg calls ‘influence.’ I call it power.

For the simple fact is that if you apply Nick Clegg’s logic to his party then a voter would be absolutely mad to vote Lib Dem in any constituency where they are not currently first or second. And given that numbers around 120 seats or so, the only identifiable reasons to vote Liberal Democrat even in those seats is that you are banking on a hung parliament or all the other parties are equidistant from your political standpoint so you cant decide which other party to vote for. Hardly a strong basis.

Now on to the proposal to impose a 0.5% levy on houses over £1million. We’ll put aside some minor technical confusion over what that £1million is based on and look a the policy more fundamentally. I am in favour of exploring the possibilities offered by wealth taxes for the most affluent as a means of giving those who are asset poor a better start in life- for example, the young unemployed.

This levy proposed by the Liberal Democrats seems to be the wrong way of going about it. Levies are good because they are difficult to avoid but bad because they take no account of ability to pay. Instead, I would favour a special capital gain tax on house sales worth more than £650,000 (say). It is very easy to calculate (and would be separate from capital gains tax): house price (sale) – house price (purchase) x tax rate. If the price had gone down there would be no tax. It would be collected at point of completion so would be difficult to avoid.

The weakness is that revunues would be weakest when they are needed most, i.e. during a recession. However, this policy is about long-term investment in the asset base of the asset poor so I am not overly concerned about that (income tax take goes down in a recession too but that doesn’t make it a bad tax!)

The Lib Dem policy has gone off half-cock unfortunately. That will make the debates about how we can tax wealth more difficult. This needs much deeper thought before this is thrown into a media maelstrom so the Lib Dems ideas haven’t actually helped very much- other than we now know what we’re up against. But we knew that anyway.

Included in this is the issue of national debt. As Felix Rohatyn, former US ambassador to France, says in a Newsweek article last week:

“Americans look at debt more as wasteful expenditure, whereas the Europeans look at debt more as an investment.”

It would seem that the Conservatives have adopted exactly the same approach as their ill-informed neo-liberal cousins on the right of US politics. Deficits and debt are bad, period. Now, don’t get me wrong: if you are borrowing to spend rather than invest or if your debt can’t be serviced then you are clearly borrowing too much. However, what if you are borrowing to invest in future economic performance, environmental improvement, or social progress, all of which add to national well-being? It is less clear cut that debt is undesirable. In fact, in many cases it is very desirable.

If you build schools, colleges and universities, broadband infrastructure, transport infrastructure, invest in health facilities, reduce carbon emissions, invest in science, or even save the banking system can debt not be of economic, social and environmental benefit? This is one of the issues that the Stiglitz-Sen Commission on the Measurement of Economic Performance and Social Progress is looking at. Its broad outlook is that GDP growth is not the be all and end all. It may be wise to sacrifice some economic growth in GDP terms for a better quality of life and that actually is national growth of a different kind. President Sarkozy has initiated a fascinating process and many eyes will be on its outcome.

But in terms of the domestic debate, there needs to a different dialogue about debt and growth. Clearly, the levels of borrowing that have been reached will have to come down. However, there comes a point where investment is hit and that has to be considered carefully. The Tories are not even in the hare versus tortoise race described in the Newsweek article above. A simple analogy is mortgage finance. Is a mortgage a bad thing? In most circumstances no it’s not a bad thing. So it is with national investment. We just need a means of separating the ‘good’ debt from the ‘bad’ debt. And maybe once the Commission has finished we can do the same for GDP growth.

But the real question at the back of my mind this morning is what is the consequence of failure today? This is simply the question, ‘what is this conference for?’ in reverse? And when you consider it, actually the consequences of the leaders failing to show unity, instill confidence, and mapping out a different way of managing global finance today are enormous. What would it say about the capacity of the world’s leaders to find a way out of the morass if they come up with either no agreement or a weak agreement today? Not a lot.

Despite the histrionics, President Sarkozy knows this as do all the other world’s leaders. It would be amazing if he did walk away- it would be a short walk into the wilderness. So there has to be a degree of optimism that the G20 will do the right thing today.

In fact, if the draft G20 communique leaked to the FT is any indication of what will emerge at 3.30 pm today then today will be a success. It’s not perfect but seems pretty meaty on further development on international regulation, clamping down on hedge funds, irresponsible banking, and tax havens (see draft clause 17!) but will need to be rather more expressive on the need to move towards a global deal on climate change with teeth and should be a lot more expressive on help to developing countries: provision of both capital and aid. The draft communique will have been completely re-written from the one that was leaked to the FT: the language clearer and the message sharper. But if that is the basis then today’s meeting is starting from a good place.

So good prospects for today. I’ll blog as much as seems worthwhile and see who we get to talk to. If there’s anything you want covered just get in touch- try twitter @anthonypainter.

*Picture courtesy of @tom_watson.

However, there really has to be some thought about whether the plan places the administration on another political collision course. There was visceral and popular outrage at the bonuses that AIG executives paid themselves which emerged last week. Here there is a clash of cultures. The public insist on humility and restraint and it is their money after all that bailed out AIG. The Wall Street culture is one of maximising individual reward and ignorant of public scrutiny. Wall Street and Main Street couldn’t be culturally more apart.

Geithner’s plan will either (a) work; (b) not work. If it works then lots of lenders and fund managers will get very rich. There will be popular outrage and that will be aimed at both Wall Street and the administration. Perhaps if the economy and financial system has recovered by that point the outrage will be more muted than the reaction to the AIG bonuses last week. Nonetheless, the Republicans will do all they can to stir up trouble- they will easily be able to round on Geithner and his staff as representative of an out of touch elite. If the plan does not work- as Krugman rightly points out- then the administration will end up going to Congress anyway and it will do so with one failed plan under its belt and a financial system still in crisis. That would be a political and economic disaster.

So in order to avert a short term political confrontation the administration has risked either a greater show-down or the potential for popular backlash. They will just have to hope that they have an ‘it worked’ argument to deploy in their defence. No-one said this was going to be easy.