I have been rambling on for some time about how Government is failing in good part because it can not cope with Complexity.

Thus the preoccupation with Objectives/Targets/Strategies and the rest is, I unhumbly suggest, theoretically meaningless, ergo operationally harmful.

In the light of the utter mess now unfolding within private and public sectors alike, this passage from April reads pretty damn well:

… governments (and the public) have no way of deciding how to manage risk, in the sense of reasonably calculating the likelihood of policies (a) being properly implemented and (b) producing the good results we expect, over (c) a realistic timescale, while (d) keeping an eye on the opportunity cost of not doing something else.

Thus no-one can tell us which is better:

  • short-term likely-to-work quick wins
  • medium-term, maybe-less-likely-to-work significant wins
  • longer-term, medium risk, potentially huge wins

Government thrashing around in this conceptual morass is now horrible to behold.

Not surprisingly the public get fed up and confused. Populist noises and a Sense of Looming Unease grow in parallel.

Remember that Y2K issue – the fear that somewhere lost in all those computer programmes was an inability to get the date right when the previous century ended?

That turned out OK. But now we have a similar sort of problem, the ramifications of finding ourselves trapped in computerised banking and other systems of dynamic cause and effect which are so subtle and complex we mortals can no longer keep up.

Tim Congdon lucidly explained the essence of the situation here, namely that as wealth scales up it can also scale down:

Unfortunately, last year the wholesale money markets closed up for a wide variety of reasons, of which the most important was the fall in American house prices and the implications of that fall for the value of the structured finance securities.

Triple-A securities dropped in value, often by 10 to 20 per cent. If such securities were, say, 10 per cent of high street bank assets then they had lost 1 or 2 per cent of the value of all their assets.

That sounds trifling, hardly enough to threaten the banks’ charitable donations let alone the future of capitalism. But here comes the vicious arithmetic.

A drop in the value of assets of 2 per cent wipes out 40 per cent of the capital of an organisation such as a bank that is only 5 per cent owned by its shareholders.

According to rules developed by international financial bureaucrats in Basle over the past 20 years, a bank that has lost a big chunk of its capital must – at least theoretically – shrink its assets to restore the sacred capital-to-assets ratio to its original level.

A ghastly downward spiral, called “debt deflation”, can now engulf the system. The banks can shrink their assets by selling off securities or forcing their customers to repay loans. But sales of securities aggravate the fall in their price, and forcing customers to repay loans is even more gruesome.

As loan portfolios decline, so does the level of bank deposits. Bank deposits are the principal form of money in today’s world. If the quantity of money goes down, so do asset prices, incomes and spending.

Meanwhile EU Referendum are doing a stunning job in drilling down into the European-level regulatory framework which is impacting the UK’s capacity to act independently now, even though the UK is not in the Eurozone. They draw our attention to the deep madness of Euro-complexity:

This is what is has all come down to:

The text of Article 1(1) of Directive 86/635/EEC shall be replaced by the following text:

‘1. Articles 2, 3, 4(1), (3) to (5), Articles 6, 7, 13, 14, 15(3) and (4), Articles 16 to 21, 29 to 35, 37 to 41, 42 first sentence, 42a to 42d, 45(1), 46(1) and (2), Articles 48 to 50, 50a, 51(1), 56 to 59, 61 and 61a of Directive 78/660/EEC shall apply to the institutions mentioned in Article 2 of this Directive, except where this Directive provides otherwise. However, Articles 35(3), 36, 37 and 39(1) to (4) of this Directive shall not apply with respect to assets and liabilities that are valued in accordance with Section 7a of Directive 78/660/EEC.’

You will be pleased to learn that this comes from Directive 2001/65/EC of the European Parliament and of the Council of 27 September 2001 amending Directives 78/660/EEC, 83/349/EEC and 86/635/EEC as regards the valuation rules for the annual and consolidated accounts of certain types of companies as well as of banks and other financial institutions.

This sort of thing can continue only because we the Western citizenry of the planet blink and turn away in shame at the horror of what modern government has become, and therefore at what we have become as well.

And as the State moves in to ‘nationalise’ some key banks, it will only get worse. And worse.

Instead, what we need is a robust, easy-to-follow new plan which will last for, say, six or seven centuries and be almost fraud-proof.

And we do not even have to invent one.

That was done for us some eight hundred years ago.