Bruce Packard: Are the banks fixed? If you want to separate the signal from the noise, just ask the Rev Tom
Information is widely available, and it has become harder to pull the wool over peoples’ eyes
Thursday 25 October 2012
On a small bit of greenery, five minutes' walk from London's Moorgate tube station, I arrange to meet up with Reverend Tom. I am late, but he has been waiting patiently, a benign smile on his face.
"What is your view? Are the banks fixed?" I ask.
"The Bank of England interest rate is still at a 318-year low, and we have the data going back to 1694. That interest rates are so low, suggests to me that the banks are not fixed. When we return to a normal interest rate, we will know if the banks are fixed," he says.
Although Reverend Tom is a clergyman, he is also something of an amateur mathematician, interested in probability and uncertainty. He is very good at separating out the signal from the noise.
"Many people did not realise how interconnected the financial system was. For instance, brokers in the equity market, who rely on customers buying and selling, did not realise how much of this trading business was driven by leveraged investors in the debt market. The brokers were always good at creating noise, but now it is very quiet on the trading side. But we do know that the City never stays the same for very long. History suggests that finance will always go through cycles. My model suggests we tend to overweight recent events, and tend to play down the longer-term, historical context."
Tom's model is not universally popular, but it is such a useful way of thinking about the world it has been widely adopted because it answers practical questions.
In fact, his work has been used in all sorts of interesting ways: from code breaking during the Second World War, to the foundations of the modern insurance industry or assessing the likelihood of a nuclear accident.
But Tom, being a member of the Presbyterian Church, also has a theological take on the crisis. "We live in an agnostic society, where the Church plays a much smaller role. In some ways finance has replaced the Church in the last half century. House prices are the opium of the people," he chuckles.
And what does he make of the Occupy movement? "They have a good slogan. Statistically, they really are the 99 per cent."
Perhaps this is the other way to interpret the financial crisis. Information is widely available, and it has become harder to pull the wool over peoples' eyes. In one sense you could call this a crisis, but perhaps the problems from subprime to PPI mis-selling to Libor arose from the very essence of banking normality – and people have noticed what banks do normally and they don't like it.
I ask Tom how long this uncertainty will last. He doesn't answer directly but says it is a myth that when you have a lot of uncertainty, you need a lot of data to tell you something useful. Instead, if you have uncertainty now, you don't need much data to reduce uncertainty significantly. It is when you have a lot of certainty already, then you need a lot of data to reduce uncertainty significantly. The variables that have high information value, are the ones we routinely ignore. In retrospect it is obvious; banks' balance sheets became so big, and so leveraged, almost without anyone noticing. We should have ignored the noise, and focused on that one, powerful signal.
The Reverend Thomas Bayes' gravestone says he died in 1761, at the age of 59. He is buried in a small, green cemetery, five minutes' walk from Moorgate tube station.
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