Grahame says (I have put his words in bold)

“No-one really understands how the system works”

But the system is dynamic. It is changing all the time. People knew there would, some time, be another banking crisis. They just did not know what would start it.

Five years ago I had the privilege of attending a conference of CEOs and Chairmen of banks, insurance companies and regulatory organisations. I was there to discuss “Restoring Trust” (Tomorrow's company 2004) a business-led inquiry into the investment system. I was surprised at the time to hear them devoting whole sessions to “systemic risk” and where the next banking crisis might come from.

I have read plenty of articles over the last two years by people like John Plender and Martin Wolf in which they talk about the risks of an over-inflated property market in the UA and the UK, and a bubble that must, sooner or later.

 “An  alternative explanation is that lots of people did know how the system works but didn’t care that that it was all going to hell in a handbasket and taking the rest of us with it; in a way that is even more terrifying.”

It is a sad truth about economic and investment life that it is not enough to know, in general, that something is risky or likely to explode. It is a bit like swimming in a maritime minefield and knowing that al of these devices need to be made safe, but never knowing when you may accidentally set one off.

“Participants in the system only understood their small part of it and the incentives therein and could take no practical responsibility for the system as a whole (even if they wanted to be a force for good).”

Sometimes . But even if you do understand the system, it can be career limiting to act on that understanding, rather like trying to stand still in a stampede. Remember a fund manager called Tony Dye . For years before the hi-tech bubble burst he said that the market was overvalued and the tech bubble would burst. He was right, but it only happened about three years after he first said it. He stayed well away from equities, and lost the business of many of his clients as the market went on going up, and was sacked before the bubble burst!

So I would rephrase it to say “The people who know how the system works can  still  find that it doesn’t pay to be right too soon”

“The most important lens to look at this whole sorry mess through is a systems lens”

Agreed and there are some brilliant commentators who have done that. Look at Gillian Tett in the FT, for example. Of course that’s what Tomorrow’s Company did – at least in the UK, with Restoring Trust.

“What our policymakers and legislators need to now turn their attention to is the architecture of the system”

Right, but very hard. The system is global. Regulation isn’t. Or, to be more precise, the system is a lot more global than the regulation. Or to be more precise still, finance flows globally. Confidence in the financial system is a global phenomenon. This is a typical example of the “frameworks” issue developed in Tomorrow’s Global Company. That’s why G8 Finance Ministers do spend so much time meeting each other. It’s why there is now a debate about whether Europe needs a single regulatory regime. For example one of the interesting

“The system’s purpose needs to be reset. A big job but perfectly possible given that it is a system that is supposed to be serving us not the other way around.”

Agreed but what does this mean in practice. Wasn’t it Josef Schumpeter who talked about the animal spirits that underpinned capitalism?  Adam Smith recognised that markets are great mechanisms provided that they operate within an overarching moral framework.

In the familiar language of Tomorrow’s Company, and an inclusive approach, I think it is the system’s values, more than its purpose, that needs resetting. When things are complex, and unpredictable,  and no one player controls them, and you need some of that complexity and chaos to continue because out of it comes healthy competition, diversity and innovation that’s when you need values. Values which guide the behaviour of all participants, but which operate 80% of the time through self- restraint, through embedded values, but are ultimately underpinned by ethics and rules.

So what does this mean in practice? Just imagine how a Hippocratic Oath, subscribed to by all parts of the banking and financial services system, would operate. A Hippocratic oath for financial services would bind every member of one of its professional bodies to their own code to deal honestly and fairly, and to make the interests of the customer and the ultimate customer, the consumer, paramount.

A Hippocratic oath would enfranchise Shame .People who lent money to others would have a responsibility to assess whether they can afford to repay it .People who got the applicant to fill in misleading information on the application form for a subprime mortgage would know that their act, if discovered, might not only lead to their losing their job but to their expulsion form their professional body. People who bundled up the loan and passed it on would be culpable if they knew the information underlying the security of the loan was false – never mind if everyone else was doing it. Intermediaries who facilitated the securitisation of the loan would, as a natural extension of their professional code, feel a personal responsibility to the customer and the consumer to satisfy themselves of the ultimate implications of the securitisation. It would never be enough to say this looks profitable so I will be OK doing it because I am acting in my shareholders best interests.

This is, after all, no different in principle from the shift in mindset which makes a manufacturer of running shoes feel a responsibility for the conditions in which the shoe was produced. In tomorrow's financial system the manufacturer of a debt instrument feels a responsibility to know the conditions in which the debt was manufactured.

I am not suggesting this instead of stronger regulation. I am suggesting that without an underpinning moral and ethical code, regulation will not make behaviour more responsible, it will breed a higher level of evasive behaviours. The regulation will be ideally designed to deal with yesterday’s risk, and unable to anticipate tomorrows.

Because people have signed up to a code, others will be able to challenge them on whether they are living by it. Hence the importance of transparency. It is all in “Restoring Trust”.

But let us not have too much faith in transparency.

There is an excellent piece by John Eatwell (who taught me a little economics over 45 years ago!)  in Friday’s Guardian . “Greater transparency is the mantra of the ignorant”  (p42 19 September) I have tried to put in the link but for some reason it won’t let me!

He agrees with Grahame Broadbelt's analysis. Regulators have concentrated on regulating individual institutions. They should start regulating the system, and try to anticipate the cumulative system consequences of behaviours by particular players in the system. They should also not regulate organisations by what they are – banks, insurance companies, etc, but by what they do. After all, AIG wasn’t acting as an insurance company when it took on so much toxic debt; it had turned itself into an investment bank.

He also points out that they  should focus most on those institutions that are most leveraged – i.e. have bet the heaviest.

So let’s be like the military strategists, who say the best way to capture a bridge is to take in from both ends. Go for the regulatory weaknesses. Strengthen the regulation of leverage and take a systems approach. But go also for behaviours, and insist that financial service companies in the future cannot get a licence unless they demonstrate that they operate by professional codes; and equally refuse to renew the Royal charter or equivalent of any professional body that is not a signatory of the financial services Hippocratic oath, and not regularly kicking out from membership people who fall, short of its ethical standards!