Reference Points and the Banking Crisis[1]

Some thoughts 

Frans van der Reep

We need reference points
We need physical reference points such as sign posts to show us which way to go, for example, to the airport; or the hospital; and especially we need a reference point to show us where we are. Why? Because if you don’t know where you are, it’s quite a difficult job to find your way, thus landmarks and “lieux de memoire” play an important role in our lives. 

We need physical reference points like the meter to be able to ‘feel’ distance, to be able to measure and to communicate about the results of measurement.

We also need emotional and mental reference points. If you see someone laughing it should be a safe conclusion for you to conclude that he is laughing/enjoying himself. We need a reference point like the currency we use to pay our bills. This currency allows us to have a feeling of value. The step towards the euro has caused a lot of benefits but also a lot of trouble as people had to change their reference points. Although not reluctant, some of us need many years to adopt this new Euro reference point

Culture can also be perceived as a set of reference points: how we behave, the way we define a social situation, good and bad, nice or ugly. Reference points may be formal or non-formal internally programmed (‘cognitions’ or ‘frames’) and may take the form of rituals, e.g. the ritual you don’t discuss business during holiday or you don’t embark on a certain ‘topic’ before the first cup of coffee. There are lots of reference points in social life, for example, education, membership of Rotary like clubs or the newspaper you choose to read, may be understood as establishing reference points.

We can’t function without them. And my feeling is, even though I am not an anthropologist, that reference points shouldn’t change too often. A change of reference point or a set of rituals, is really very confusing and it takes time to adopt the new ones. That is the reason avant-garde artists often have a problem with selling their art. They don’t sell art. They sell their view, based on different reference points than you and I probably have. That’s why the BAUHAUS[i], built almost a century ago, still looks ‘modern’. 

What about reference points in your life? Do you know them? Are you aware of them? Major events in ones life are usually reflected in a shift in reference points. A divorce, a serious illness, a sudden loss of a beloved, winning the multimillion jackpot. All these events may be looked upon as a reference points reset. 

I will not systematically survey what reference points we have or we need in life. But I’m sure there are many in various aspects of life, even the most intimate ones. My intention is just to give you a feeling what a reference point is, how it serves you and the limitations in each of us in our ability to change them. This paper will focus on the banking crisis to illustrate my arguments. 

Well, why this explanation of this fellow? It colours my statement that we experience so many and massive changes in numerous aspects of our lives nowadays that many of us face the experience of having no reference points. In the business realm, in politics even with respect to the sociological viewpoint of society and in day to day family life many of us really don’t really know where we are, what we see. With the consequence we dare not derive conclusions from what we see. We get stuck. Paralysed. We don’t act and do not take decisions as they might be wrong. 

If many reference points change in a short period of time, there is no context to give meaning to facts. And without context there is no communication. And without communication and the feeling of being part of something, fear and uncertainty enter the picture in and the loss of feeling some personal significance. And with the fear the ego enters the picture as the ego is one of the human mechanism to cope with fear, uncertainty and feeling meaningless. 

I give you one more example how changing reference points affect communication. Communication depends on established reference points. If I don’t know whether you are a friend intending to help me or an enemy focused at damaging me there will be not much exchange of thoughts, you will not leave your comfort zone and we will not enter a real relationship or connection.

But in this comparison, what about politicians, what about banks, what about visiting China looking for new business? Business has to do with interrelating, where all types of reference points are at stake. This is the reason video conferencing usually works fine when we know each other: established relationships need clear reference points.  

We need a set of fixed points
Fixed points may be very concrete and very abstract, for example the definition of the physical meter is fixed. What also should also be fixed, to give a few examples, is the administration of property, the municipal individual records and the rule that we drive at one side of the road, whether left or right I don’t mind. Each society needs a set of these rules and our political convictions as well as practical considerations will determine how broad and extensive this set is.

Sometimes one may use the national character to shape effective solutions. I give you the Chinese example on how they have organized tax paying. Like in other countries people in China don’t like to pay taxes. So, there is a tendency to avoid them. How did Chinese leadership solve the problem? If you ask a formal invoice, the Chinese salesman has to glue a receipt stamp on your bill reflecting the tax amount being paid. However, this stamp also serves as an instant lottery ticket. So, one is seduced to pay tax by triggering the gambling nature of many Chinese: each correct invoice is a gamble and is a promise for a huge amount of money. This is an example how reference points and rituals may shape and serve formal policy

Money, banking and reference points
Let’s turn to the financial system and find out whether reference points have a role to play.

As I have already stated - each system needs reference points, legal systems, mathematical systems, banking systems[ii]. My question here is: does the financial system now have clear reference points and at least one fixed point?

First of all, money it self functions as a very important reference point. It is a well and commonly understood ‘language’, actually a code system, that objectivises and expresses value. Everybody understands money and the related earning power as a communication code. Many songs are about money[iii]. If this objectivity is harmed, this immediately causes social unrest, revival of barter and one usually flies in the last financial reference point: gold.  

Today it might be a good idea to create that transparency with respect to gold and to express all currencies like dollar, euro and yen in the related quantity of gold on a daily basis, putting us in a ‘Bretton Woods extended’ situation[iv].

But what about banks as social reference points? My guess is that banks, in general, have a severe problem with how they are seen. People don’t love banks in general and are not sure, I am at least certain of that, how banks should be evaluated. Are they social? Are they friends? Is it ok to visit that party organised by a bank?

On the other hand, lots of us consider the actual bank representative we meet as a friendly, cooperative person acting in our service. Most of us are not willing to accept that a commercial bank is just a company, striving for profit the hard way, even at your cost. The mental concept that the bank is a shark you should be aware of just doesn’t enter your mind. Fascinating, isn’t it? You know it but many of us don’t still feel that way. That’s the very reason banks do not have to change behaviour.

There is lot of work to do for banks in this field of credibility. However, there actions do not reflect a sense of urgency. I’m sure that will translate in a lot of cost for banks which will be paid by the consumer. PR Cost for damage control. HRM cost as one is less willing to accept a bank job and strives for a compensating risk premium. The banks shareholders will be less shareholders, but more ‘sharehoppers’ thereby confronting the bank with dynamics of the international financial markets, making them even more vulnerable.

It would be wise for bankers to re-establish social and commercial reference points. These are vital for customer intimacy and without this, a bank can not survive. It would be wise to reduce the 70% unattended trades from vague bunkers and automatically led by spread sheets now. And I am sure it would be wise to prepare for peer to peer banking, already put in place by, e.g., smava.de, zopa.uk  and many others, using social currencies like the VEN or the LETS.

In the paper finance2.0[v] there was a plea to skip legal entities because personal business creates personal responsibility. The recent decision of the Americans to forbid trading with money that is not yours as a bank may be seen in that perspective. I think, therefore, it is a step in the good direction as it forces banks to show responsible behaviour and act responsibly.

Fixed points and the financial system
One can analyse the last two years and the way the international political and business arena have sought solutions for the financial crisis as one big cry for fixed points. Banks are no longer fixed points. So, countries have served the international financial system in this respect and, by the means of their Central Banks, provided for a last resort. In fact, Central Banks are being extorted by commercial banks as they are “to big to fail” and have taken over.

I’m sure we have an interest in extending the research to explore the issue of reference points in the context of the systemic pressures produced by a capitalist economic (banking) system. Is Mr Kerviel, former employee of the Société Générale, really an archetype, a reference point?

The next move: as some European countries have more challenges in this field as expected before, the Central Banks of some countries cannot serve as a fixed point anymore. So, a EU supporting structure of 720 billion euro has been developed to solve the problem and especially the German Central Bank has taken over from the Greek. This European structure now serves as the fixed point, a safety net for the financial sector, to communicate to all of us there is a fixed point that has the capability to pay in the end.

The question is how long this financial capability of EU countries, serving as a fixed point will survive. The Dutch National Bank has already sold more than half of its gold supply by now and there are rumours, Fort Knox is empty. It might be a very good idea for the European Monetary Authority to check the quality of the balance sheets of those banks that are to big to fail at once and to stop the current lack of transparency. The leadership of those banks must understand their public responsibility is much more profound than their responsibility towards the shareholder and they must act and decide accordingly. If not, and their power is not offset by responsible behaviour, we will run into serious problems, I fear not even comparable to the financial crisis part one.

Perhaps some infrastructures serving the public are just too important to leave to the market system. 

Future scenario
As financial and political developments always tend to finish the development to the bitter end I give you a scenario for the rest of it.

First, realize that not many of us are really aware what’s going on. That’s my view and I am one of them. Secondly, realize that in this world of distributed power no one what so ever, so no person and no institution, has the power to set the right agenda. So, as the ‘planet’ is lacking the power to set the agenda and solve the problem, things will go on.

So, the next stage will be to intensify the IMF role as the next stage fixed point, also gold taking over as reference point. Then, of course, the question will come up how long the IMF will be perceived as being able to pay the bill.

And what will follow?  What’s next? I don’t know. Sure, the Chinese will have to fund the IMF as the Chinese have the money. But are they willing to do so? At what price? Or are we willing to accept a lower standard of living for many years?  

I’m almost sure the IMF stability has to be bought. This will further accelerate the transfer of both welfare and political power from west to east and probably a shift towards Chinese view points in the European region[vi]. I am quit sure we severely underestimate those effects with respect to adapting Chinese view points as they do not fit into our current reference points. Nevertheless, I expect we have to face these developments as long as Western democracy doesn’t really solve its problems and faces its challenges. 

Perhaps 2012 will really be the very important year some of us already believe. When a big bang would come we probably end up by starting new small P2P village banks where people know each other, with clear reference points.

Perhaps there is reason for optimism and we should look beyond 2012 to 2013?[vii] 

I repeat, responsibility should always follow power. If one becomes more powerful, and many empowered citizens and institutions do have power, one should behave with more responsibility. If power comes without a sense of personal responsibility we are in deep trouble.

Final remarks
At the moment, there is little alternative than for countries and governments to take responsibility as quick as possible and to communicate planned action. Otherwise our current financial system needs drastic reconstruction. Perhaps the Euro turns out, in the end, to be an artificial currency, equivalent to many African borders. These borders have caused a lot of trouble during many decades, as they are also artificially defined without considering nations and local conditions. Perhaps we need currencies that reflect our value reference points again.

What could we do as “empowered citizens”? To influence the macro-system and the big picture is always difficult. But one might be much less naïve and act as a responsible consumer, demanding transparency and integrity from his bank. The good news for the consumers is, you have a choice.[viii]. So, be aware and go for it.

I leave it that way as I’m not yet prepared to consider other consequences. We certainly live in interesting times…..

Frans van der Reep is a visionary practitioner – known as researcher, trendwatcher, writer, regular speaker, and entrepreneur. He is Senior Strategist at Getronics Consulting, Professor at the Dutch INHolland University of applied sciences and holds a number of non-executive board memberships both in the non-profit and profit sector. He has written many papers and a number of books on how the Internet impacts our lives and work thereby connecting the various business realms of Strategy, Marketing & Sales, HRM, Finance, Business Process Management and ICT. This article expresses his personal view