Policy in the Wake of the Banking Policy in the Wake of the Banking Crisis:Crisis:

Taking Pluralism SeriouslyTaking Pluralism Seriously

Sheila C DowSheila C DowSCEMESCEME

University of StirlingUniversity of Stirling

for presentation to the ‘Economic Policies for the New Economic for presentation to the ‘Economic Policies for the New Economic Thinking’ Conference, St Catherine’s College Cambridge, 14 Thinking’ Conference, St Catherine’s College Cambridge, 14

April 2011April 2011

IntroductionIntroduction

purpose is to explore a pluralist approach to purpose is to explore a pluralist approach to policy with respect to the financial system in the policy with respect to the financial system in the wake of the crisis wake of the crisis

will consider pluralism in its range of meaningswill consider pluralism in its range of meanings

will consider both monetary policy and the will consider both monetary policy and the regulation of the financial systemregulation of the financial system within the wider within the wider policy agendapolicy agenda

Meanings of PluralismMeanings of Pluralism

different approaches to economic theory: different approaches to economic theory: methodological pluralismmethodological pluralism

range of disciplinesrange of disciplines

range of methodsrange of methods

recognition of the plurality of culture and values recognition of the plurality of culture and values in societyin society

Justification of PluralismJustification of Pluralism

Epistemic: open-system reality, including Epistemic: open-system reality, including pluralitiespluralities

Ethical: principles of tolerance, rights etcEthical: principles of tolerance, rights etc

Methodological Pluralism Methodological Pluralism and the Banking Crisisand the Banking Crisis

Different framingsDifferent framings

Understandings on the part of different groupsUnderstandings on the part of different groups

PerformativityPerformativity

Power relations (between government, Power relations (between government, financial markets, non-financial firms and financial markets, non-financial firms and householdshouseholds

Theoretical Explanations for the CrisisTheoretical Explanations for the Crisis

Old mainstreamOld mainstream

narrow definition of rational behaviour narrow definition of rational behaviour within competitive marketswithin competitive markets

explanations:explanations: market imperfections or market imperfections or irrational behaviourirrational behaviour

Pluralist approach:Pluralist approach:

individual behaviour under uncertainty individual behaviour under uncertainty relies on institutions and conventions, relies on institutions and conventions, including money (and thus banks)including money (and thus banks)

Explanation for crisis:Explanation for crisis: changing market sentimentchanging market sentiment breakdown of confidence and trustbreakdown of confidence and trust

Methodology and policy designMethodology and policy design Old mainstreamOld mainstream: :

incentivise rational behaviour, with respect for incentivise rational behaviour, with respect for example to inflation targeting and addressing example to inflation targeting and addressing moral hazard, and/or remove market moral hazard, and/or remove market imperfectionsimperfections

Very limited use of psychologyVery limited use of psychology

Mathematical method applied to establishing Mathematical method applied to establishing one best modelone best model

Presumes culture and behaviour are Presumes culture and behaviour are homogenised by financial incentiveshomogenised by financial incentives

Pluralist approach:Pluralist approach:

recognise the socio-psychological foundation recognise the socio-psychological foundation of money and banking, such that policy of money and banking, such that policy needs to focus on rebuilding confidence and needs to focus on rebuilding confidence and addressing moral (including distributional) addressing moral (including distributional) issues. issues.

Model uncertainty: role of judgementModel uncertainty: role of judgement

InterdisciplinaryInterdisciplinary

Range of methods of analysisRange of methods of analysis

Recognition of plurality of culture, valuesRecognition of plurality of culture, values

Pluralist Policy ImplementationPluralist Policy Implementation

Policy analysis should connect with reality as Policy analysis should connect with reality as experienced by different groups to be effectiveexperienced by different groups to be effective

Policy decision must reflect one methodological Policy decision must reflect one methodological stance (even if synthetic)stance (even if synthetic)

But importance of awareness of range of stances But importance of awareness of range of stances (relating to different experience)(relating to different experience)

Policy-making by committeePolicy-making by committee Pluralist judgement, not just differences in skills, data, Pluralist judgement, not just differences in skills, data,

preferencespreferences Variety of opinion doesn’t necessarily imply uncertaintyVariety of opinion doesn’t necessarily imply uncertainty

Triangulation approach Triangulation approach with respect to data, investigators, theoretical perspectives with respect to data, investigators, theoretical perspectives

and methodsand methods

Pluralist Policy in the Wake of the CrisisPluralist Policy in the Wake of the Crisis

Monetary policyMonetary policy Not separable from fiscal policy or regulation or Not separable from fiscal policy or regulation or

social policy: negotiated stancesocial policy: negotiated stance Importance of signalling to different groupsImportance of signalling to different groups

Financial RegulationFinancial Regulation Multi-pronged (traditional overdetermination Multi-pronged (traditional overdetermination

under uncertainty)under uncertainty) Emphasis on supervision and monitoring more Emphasis on supervision and monitoring more

than CARsthan CARs Exploit the public sector presence in banking to Exploit the public sector presence in banking to

improve judgement in policy-making and to improve judgement in policy-making and to encourage new socially-acceptable encourage new socially-acceptable conventionsconventions