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Initial Impressions of the British System: House of Lords & House of Commons

In Law on September 20, 2011 at 1:50 AM

In the United Kingdom, there are two precursors to the United States political system – the House of Lords and the House of Commons. Respectively, here we call them the Senate and the House of Representatives. For the first time, this past week I experienced watching the House of Lords in discussion from broadcast, on-line proceedings occurring September 15, 2011. C-SPAN often covers the Prime Minister’s Questions in Commons, but the Lords’ proceedings are not as readily publicized.

Impressively, the Lords appear very similar to the Senate, with appeal to uninterrupted open oratory, under-population of the chamber floor and elegantly-composed monologues spoken in succession, with occasional questioning. Lords, Baronesses, Earls and Ministers all make appearances before the “Motion” of the day. Individuals are addressed with all the neutralized formalities akin to the restrictions implemented in the U.S. Congress, which I agree with.

In contrast to the “American System”, christened and proclaimed by James Madison and Henry Clay as the way to economic self-sufficiency, the Anglo-Saxon system promotes longevity of the individual. Lords, for instance, are elected for life; only akin to what we find in the judicial branch, modularized in America. Thankfully, absence of term constraints withstanding, there appears to exist an abundance of thoughtful and diversely-professionalized leaders in their Royal ranks. The Debate of the Report of the Independent Commission on Banking, accordingly, makes for a great introduction to their civic body. Eclectically, and respectfully, they repeatedly recognize worthy American contributions where the points are worth the taking. Everything American, from Hunter S. Thompson, to Continental Illinois, to joint-collaboration between the Federal Reserve Bank of New York and the National Academy of Sciences, is explored and widely-applauded within a concise few hours’ lapse of time.

Among the highlights from preliminary listening: in full-relief, arguments of Lord Paul Myners, the arranger of the motion for debate, questioning the social benefit of bank assets relative to GDP representing a factor of 6 to 1; and Lord Robert May, a theoretical physicist by training, explaining how large, homogeneously-diversified banks are equivalent to super-spreaders of systemic risk.

From the transcript of Lord Myners, “Let us look at it in context. For more than 180 years until the mid-1980s, bank assets in the UK very rarely stretched either side of 50 per cent of GDP. Over the past 25 years, that figure has risen to 600 per cent. I see no evidence that there has been a concomitant increase in economic or social benefit.”

Re-enforcingly, Lord May adds, “If you look at complex systems in the round in nature, you find that they tell a different tale. Very often, scaling up risks in that way causes them to cascade rather than to cancel out. The conclusion from that is that the present situation in banking is, in many respects, perverse. All banks becoming diversified-spreading risks-means that they become more homogenous, whereas if they were all different and one failed that would be it. The homogeneity and the linkage refer to the system as a whole, and there is genuine tension between the interest of the individual and the interest of the whole, between diversification of individual banks and diversity of the system.”

At a time when Thomas Hoenig, outgoing President of the Federal Reserve Bank of Kansas City, has recently published the UBS article; and while “rogue” traders from UBS/Switzerland, Kweku Adoboli [1], to NASDAQ/United States, Bernard Madoff [2], and Societe Generale/France, Jerome Kerviel [3], again and again confirm and re-confirm international inability to prudentially survey and sufficiently manage common-place trading activities, it is refreshing to read transcripts from unbiased, unfiltered regions, not only considering, but lauding and promoting better available international regulatory ideas for the purposes of the present and future, i.e., ideas simultaneously accommodative to aggressive preventative crisis management techniques like “ring-fencing” and outright business line separation, at the same time as being unaccomodative to growth in homogeneity, hyper-scaling and super-spreading of leverage across the financial networks.

From what I have seen and heard from the Debate, the relevant, un-elected American philosophical tradition represented by Paul Volcker, Jeffrey Sachs, Andrew Lo and the Greeks* is honored well in the British process as reflected in the House of Lords as of this day. May term limit adjustments, whether Michael Bloomberg adjusting the rules in New York City in order to retain Mayoral office, or President Hoenig not adjusting the rules in Kansas City in order to honor Reserve Bank tradition, be judged and viewed in the eye of the beholder for whom is bestowed the greatest wisdom, justice and moderation.

* John Geanakoplos & Harry Markopolos

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