In an interview on Understanding High Finance

Does Sorkin address that lack of legislation in Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System – And Themselves? 

No, he doesn’t. This is purely a narrative – a minute-by-minute account of how the whole financial system nearly went over the brink in 2008, and the astonishing sense of tension and danger involved. It starts with Bear Stearns in trouble and then just charges along. I thought it would take ten years before anything like this came out. It shows the behind-the-scenes deliberation – why did they allow Lehman’s to fail, which was clearly the thing that precipitated the crisis, and why exactly did they do the bail-out in the way they did. Andrew Sorkin covers the markets for The New York Times, and he’s a real insider. The book makes no judgments, which I suppose is why he has such good access. But the thing that’s amazing about it is it’s an absolutely in-the-room, vivid story of the unravelling. When the guys who are running these institutions are swearing and having tantrums and storming out of the room and having panic attacks and ringing each other at 4am, his sources are just so good that he has complete credibility. There’s a scary sense sometimes that there’s no adult supervision – Sorkin’s book leaves you under no illusion that it’s people like us making these astonishingly consequential minute-by-minute decisions, who don’t miraculously know more than we do.

Looking at Sorkin’s book, and Michael Lewis’s book, what good does it do to understand the mentality of those in charge in the world of high finance?

The important thing is we have to have rules to prevent things like the recent crash from happening again. The problems are in the design and the structure, and that we can’t rely on enlightened self-interest and the magical power of the markets to self-regulate, because the sums involved are too big, the flows of capital are too quick and the modern financial instruments are too opaque and too powerful. When you have flows of capital of trillions and trillions and trillions of dollars, the risks are just very high to the general polity. People don’t have to be very stupid or very wrong. They just have to be a little bit wrong. And only once. Britain’s four biggest banks added together are five times the size of our entire economy, and these financial instruments are so powerful that they create enormous potential for damage. The self-regulating market just doesn’t function in this area any more. We have to have rules and structures that make it not just unlikely, but impossible for banks to blow up and bring the whole system down with them, because if we don’t do that, to me it’s self evident that it’s going to happen again. A lot of it’s quite boring – to do with liquidity and capital ratios and things like that, and some of it’s more dramatic: about separating retail banks from the investment banks. But we have to get on with it now.

And in the mean time we, the lay public, have to educate ourselves. 

Yes. The more we know about this the better; because, by and large, the more you know about it the less you think: oh, it’s all fine. And I think, broadly speaking, ‘oh, it’s all fine’ is a concise summary of what governments and regulators have been thinking about the unregulated markets for about 30 years. ‘Oh, let ’em get on with it, it’s fine: markets cannot create any problems that markets cannot solve.’ We now know for sure that that’s not right: the markets can create huge problems that the markets can’t solve. But men make markets, they’re created in spaces that we shape – and now we have to reshape that space. And knowing enough about it to have a view about it is an important part of that.