Gillian Tett: it's time to start raising interest rates

Merryn Somerset Webb talks to the FT's Gillian Tett about interest rates, the bubbles in the US financial system, and how 'silo thinking' can be very bad for your wealth.

Merryn Somerset Webb talks to Gillian Tett of the Financial Times about interest rates, the bubbles in the US financial system, and how 'silo thinking' can be very bad for your wealth.

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Merryn: Hi. I'm Merryn Somerset Webb. I'm editor-in-chief of MoneyWeek and I'm here today with Gillian Tett, who is the managing editor of the FT in the US. Gillian is one of my oldest friends, so I'm pleased to have her with us today, and we're going to talk about her new book. She has written several best-selling books, but this is her latest: The Silo Effect: Why Putting Everything in Place Isn't Such a Bright Idea. So, first we're going to talk a little bit about the book and why she wrote it and then move on to talk about the global economy. So, Gillian, let's talk first about the book. Can you tell us why you started writing this book in the first place? What prompted it?

Gillian: Well, this book started back in the 2008 financial crisis, but it's not actually about finance. It's more about the way people think and act and interact and the spark for it was the fact that during the crisis it was very popular to say, the crisis happened because bankers were mad, greedy, evil, whatever.

Merryn: You mean that's not true?

Gillian: Well, I dare say there are some mad, greedy, evil bankers out there, but when I looked around amongst the bankers I knew, what struck me was that actually many of them were extremely bright and doing things that they thought were more or less in line with the incentive system that they lived in, and I began to realise there was another really big reason why the financial crisis happened which nobody was talking about, and that was the fact that the big banks and the big financial institutions were unbelievably fragmented. They were marred by tribalism between different competing desks and departments. People had tunnel vision and as a result of that there weren't enough people who could join up the dots and see what was happening in finance. And it wasn't just a problem of the big banks or the financial institutions, it was also the regulators like the Bank of England and the Federal Reserve. And so when I looked at what was going on inside AIG or UBS or Citigroup, looked at what was happening with the Bank of England the Fed, I started asking why? Why are all these incredibly bright people doing really dumb things, and why can't they just join up the dots and think in a coordinated, rational way?

Merryn: But isn't this what management is for? In a big bank you've got lots of different departments. You've got your bond section, your this section, your that section, and they may well be thinking in with tunnel vision, looking at only their department and only what's good for their department, but that's why we have senior management to bring all that together and make sure that, you know, the silo effect isn't a problem.

Gillian: Well, in theory top managers are there to break down silos and take an overview. In practice, though take UBS. There you had a bank which liked to pride itself on being boring, you know? It's Swiss. Being boring is a virtue and they spent a huge amount of time at the top management level in the years running up to 2007 looking at what they thought were the risky assets inside UBS, which they defined as hedge funds and leveraged finance. They completely missed the ticking time bomb that was sitting right underneath their noses and that's because not only did the top management have very little idea what was happening on the desk trading subprime mortgage CDOs, but the people in London didn't talk to the people in New York and the people in Zurich didn't know what London and New York were doing and

Merryn: And the people at the very top weren't looking.

Almost everywhere you look there is a problem of fragmentation, tribalism, and tunnel vision

Gillian: Absolutely not. And that was a problem. But if you look so, the UBS top management weren't able to join up the dots but if you look at the Bank of England, the top governors at the Bank of England weren't able to join up the dots either. But the other key thing that drove me to write this book was that in 2010 I moved from London to New York and one of the first stories that I oversaw was the coverage of BP and when I started drilling into the reasons why bright people at BP had done some really dumb things on the seabed of the Gulf of Mexico, I found the same pattern again. It was a real failure of people at the top or the bottom to try and join up the dots. Similar pattern if you looked at General Motors and the scandal there with airbags. Similar story if you look at the White House and why the whole Obamacare project was such a disaster. If you ask why the NHS has been plagued by so many scandals and so much wasted money in recent years in terms of its IT projects, it's the same story again. So, almost everywhere you look there is this problem of fragmentation, tribalism, and tunnel vision. So, I started asking why.

Merryn: What's the answer?

Gillian: Well, I happen to think that silos the problems of tunnel vision and tribalism really arise out of our need to classify the world. We're hard-wired as human beings to put the world into buckets.

Merryn: Now, this is where your anthropology training comes in, right?

Gillian: Absolutely. I mean, I'm a bit unusual because I have a PhD in cultural anthropology or social anthropology and so before I became a financial journalist I spent a lot of time looking at human systems, human societies, and the way that different cultures organise themselves and one of the things that is very striking is that the act of classification the act of putting things into mental and social buckets is completely endemic. Every society has it. In fact, in some ways culture is about classification and the reason for that is totally obvious. We live in a world with so much information, so much stimulus, so much data, and such complex processes that we have to organise it to simply get some order and to be able to function. So, I began to look closely at the issue of classification and realised that silos arise out of classification systems, obviously, but not just out of the formal classification systems that we can draw in a diagram or the kind of labels you put on departments in an organisation. It's also to do with the unconscious maps that we carry in our mind about how we arrange the world and they matter and they can cause us to have tremendous tunnel vision and blindness and miss both risks and opportunities.

Merryn: So, let's go back to the Bank of England, which is one of the case studies that you use, right? During the run up to the financial crisis, how did this work? What were the various silos or separate information sources?

Gillian: The Bank of England is absolutely classic because in the run up to the 2007 financial crisis they you had a lot of very bright people sitting inside the Bank of England and the Fed and other central banks who were in charge of monitoring what was happening in the economy and they did that very diligently. The problem was, though, that they had one department which was looking at macroeconomic policy and monetary policy and you had another department that were peering at the finer details of the financial system through the regulatory world and you also had a separate agency the FSA which was looking at how individual banks were behaving and the problem was that they didn't join up the dots and look at what the different parts of the system meant for each other.

Merryn: So, they didn't meet or when they met they had the wrong conversations.

Gillian: It was a combination of a structural split in the fact that they were sitting in different departments but also a mental split because people who were looking at the macro economy weren't used to thinking about what, say, new financial innovations like CDOs could do to the macro economy. They just didn't see the connection and people who were regulating individual banks didn't understand the implications of what they were seeing for the wider picture.

The good news is that after 2007 and 2008 there has been a real recognition that financial institutions and regulators have to try and join up the dots

So, to give you a tangible example, you had all this credit creation that was occurring by things like CDOs collateralised debt obligations structural investment vehicles, and other new-fangled financial entities which didn't have a name and the credit creation was to a large extent being concealed by the complexity and the opacity and the fact that these things sat off the radar screen of most regulators and that credit creation was having an impact on the economy by meaning there was a lot of money being pumped into the system. However, the people who were looking at the macroeconomic picture and deciding monetary policy were ignoring it and essentially that's one reason why people couldn't see the scale of the credit bubble that was forming and subsequently were very ill-equipped to cope with a bust.

Merryn: Now, has that changed?

Gillian: Well, the good news is that after 2007 and 2008 there has been a real recognition that financial institutions and regulators have to try and join up the dots. So, you have a tremendous initiative underway inside the Bank of England to bring together economic and financial policymaking in really quite an admirable way and you also have an attempt by the Bank to broaden the scope of the people it's hiring so it's not just people coming from one educational silo or tribe namely, economists but have got a wider diversity of views. If you go into most big banks like UBS or Citigroup they'll tell you they're spending a huge amount of time trying to get a holistic view of risk management. So, that's great. The problem is, though, that the time you need to think about silos is not in a crisis. It's when things are going well and it's a big question to my mind about whether people will keep on trying to join up the dots or just slip back into the bad old ways if we have a long period of calm and as I said before it's not just about finance. It's about many other companies, parts of public sector institutions, and non-governmental institutions, too, where these questions need to be asked. So, it is possible to deal with silos, but it's such a subtle problem that most of us don't ever stop and think about how we classify the world until it's far too late.

Merryn: And you're right in that a crisis is almost always a natural result of complacency, right? So, we have too long a period of peace and quiet and it will all happen all over again and we'll look back and say, well, we should have read that book called The Silo Effect and this wouldn't have happened.

Gillian: Absolutely. Well, maybe everyone should go out and buy the book and read it and keep reading it once a year to ask themselves, but I mean, I draw on my anthropology background because there are lots of techniques you can use in terms of management techniques to try and break down silos and combat siloed thinking in your company and I give examples in my book of entities that are doing that quite well. So, you can try and keep the departments very porous, move people between teams you can try and use technology to ensure everyone can communicate. You can try and use architecture to try and ensure that people bump into each other and keep talking. You can instil a culture

Bumping into the unexpected can be a very powerful way to try and break down silos

Merryn: So, you can design your office so that people have no choice but to meet each other in corridors or in cafeterias or coffee areas or whatever.

Gillian: Colliding with each other and bumping into the unexpected can be a very powerful way to try and break down silos.

Merryn: But is this possible inside a huge company? One of the companies you write about in your book is Sony and, you know, the companies of this kind of size how can they ever create the kind of communication that can stop what you're talking about happening?

Gillian: Well, silos are partly a function of size and as companies get big they need to think about it more and more. A company like Sony has got a tremendous problem because of its legacy and one of the big challenges of a group like Sony is that when you've had great success in the past as Sony did with products like the Walkman, what happens is that the little tribal department in charge of that success becomes incentivised to defend it at all costs and they often end up competing with each other inside the company rather than trying to collaborate and so what happened with the Walkman is a classic example of that because Sony was brilliantly successful with the Walkman. We all had a Walkman. Anyone over the age of 35 grew up with that as an iconic brand and it should have dominated the world of portable music in the internet age.

Merryn: Yes. We should still be carrying some kind of Walkman, shouldn't we?

Gillian: We should be carrying a digital Walkman because at the year 2000, which was when the whole Internet began to boom, Sony had absolutely everything you needed to create the portable digital Walkman. It had content ie a music label it had electronics, and it had computing all sitting inside the same company and the reason it didn't was because its different departments were so siloed and so defensive of their own position and so much at war with each other that Sony produced not one but in fact eventually three separate products, each of which competed with each other. It actually unveiled two different competing products at a great trade fair just as the century was turning and those products cannibalised each other. They couldn't bring together software, hardware, music. So, that's the bad news about how silos can destroy a company or at least undermine it.

The good news, though, is that one person's silo is another person's opportunity because every time a big company fails to spot an opportunity or falls prey to a risk, that creates a space for somebody else to inhabit. So, in this case the somebody else was Apple who came in and Apple at that stage was actually very unsiloed because Steve Jobs was such a forceful leader that he basically bashed the different pieces of the company together. So, he managed to find the magic sauce that got hardware, software, and music to collaborate. Some incredibly innovative, boundary-busting ideas like iTunes, which didn't really sit in any bucket at all, or the tiny, little iPod device, which again didn't really sit in a bucket he got them all to collaborate and that's why today we're listening to iPods instead of Walkmans.

Merryn: Interesting. Now, let's step back and take this from the point of view of an investor. Let's say we're out there and we're looking at a variety of companies. We're wondering where to invest for the very long term. Obviously we don't want to invest in a company that has a silo problem. How can we from the outside spot a company that has issues like this?

Gillian: Well, I think there are three questions an investor ought to be asking themselves when they look at this book in terms of practical how they use this information. The first is to actually look at companies and ask, are they so streamlined and efficient? Are they so dedicated to cost cuts all the time? Are they so wedded to past success that they are creating silos? Because one of the best ways to actually combat silos is to create just a little bit of slack in an organisation which allows people or at least one or two people or some people to roam, to communicate, to spend time trying to break down boundaries, to try and think about how to organise a company in a more innovative way and it's very hard

Merryn: So, they need a few members of staff who from the outside look kind of pointless.

Gillian: You need a few people who are actually able to circulate. So, yes, it's often very hard at the time to justify the silo-busting members of staff. In the long-term, though, they can be crucial. So, first step is to talk to management about how they're actually trying to break down these divisions. I mean, take car companies for example. Today lots of car companies say that they're no longer a car company. They want to be a transport company. They want to bring together technology computing with hardware ie lots of metal and much wider social goals to do with what transport is about. It sounds brilliant in theory, but can a company like, say, General Motors or Ford actually break down those silos internally to do that? To my mind it's a very open question. So, that's the first point. The second thing that investors

Merryn: I think you just told us not to invest in General Motors, right?

Gillian: Well, I'm actually raising a question, but you know

Merryn: I know.

Gillian: I mean, certainly Mary Barrow, who is the CEO of General Motors today, is incredibly focused on silos because one of the key problems reasons for the scandal there in relation to airbags was this issue of knowledge staying in tiny pockets and not being spread across the company.

Merryn: Second thing

Look for disruptors who are able to jump across boundaries in ways that other companies can't

Gillian: Second point is think about who is going to silo-bust and grab opportunities because the story of silos very much is, one company's silo is another company's opportunity. So, look for entrepreneurs. Look for disruptors who are actually able to jump across boundaries in ways that other companies can't because they could well have some kind of winning ideas. And the third idea is really to do with the wider investing climate and how you manage your portfolio because another area where silos and tunnel thinking and tribalism can take place is in our own lives and our view of the world. This isn't about institutions. It's about the wider social picture and one of the common threads of the financial crises in recent years is that they've emerged because we live in a global financial system today which is hyper-connected, you know? We are tied together by the Internet, by supply chains, by aeroplanes, by cell phones, and shops can be transmitted across the globe fantastically fast and yet our lives and our minds are still very fragmented.

If you think back to the 2007 crisis, how many people who actually owned or were exposed to subprime mortgages or derivatives in their portfolios had the foggiest idea of what was actually happening on the ground in these subprime mortgage borrowing communities? Very few. How many actually bothered to stop and say, what would happen if I went out a bit like an anthropologist and walked around and looked at what was happening on the ground? The Fed didn't do it. Most investors didn't do it. Most of the bankers who were actually repackaging these loans didn't do it and the reason is that there's a tremendous temptation today to get sucked into social and intellectual ghettos. We think we're hyper-connected, but the Internet actually can suck us deeper into cyber tribes because we choose to just listen to news or just read about things that already confirm what we know and just hang out with people like us. It's very dangerous and very deceptive.

So, I would say one thing investors should be asking themselves is, if you have exposure, say, to oil, do you have any idea what's actually happening in OPEC today? Can you actually put yourself in their minds? What about China? I mean, China to most people

If you're on Twitter, look at who you follow and take off 20 people on that list who are people like you and put on 20 people from a completely different world

Merryn: You're asking an awful lot of investors here.

Gillian: Most people in China most people who have got exposure to China have got no idea about how the world might look, say, through the eyes of a Chinese person, so trying to mentally roam can be a very powerful I would say you have to geographically roam, too, but as a simple first step here's something that everybody can do. Just try for a week if you're on Twitter to look at who you follow and take off 20 people on that list who are people like you and put on 20 people from a completely different world and just try mentally roaming a bit. Break out of your silo; your intellectual ghetto.

Merryn: Try a little empathy.

Gillian: Yes. Try and see the world through someone else's eyes. I happen to think being an anthropologist is one way to do it, but we can't all be anthropologists. So, just try and mentally roam for a bit and it can be a very powerful thing to do.

Merryn: Now, you obviously do a lot of mental roaming and a lot of geographical roaming.

Gillian: Not enough.

Merryn: How does today's world look to you? The last few weeks and last couple of months have felt quite dramatic certainly in the financial markets and the global economy. We've seen China slowing or people have begun to recognise the extent to which China is slowing. The markets have had an incredibly volatile time and now of course we have various crises around the world including the refugee crisis in Europe. How do things look to you?

China's financial system is one they've frankly outgrown and managing that transition is going to be very hard

Gillian: Well, I think that the good news is that overall the global economy is still growing. I mean, let's not forget that. It's far too easy amongst the headlines to forget that actually the global economy is growing and it's growing more or less in line with where it has been in recent years. It's not that terrible. The bad news is that there are a number of big risks hanging over the entire system. The ones that worry me in the short term that are definitely impacting on the world markets are firstly China. The Chinese economy is clearly slowing. They're trying to manage a fantastically different transition from being an industrial exporting machine to a machine relying on domestic consumption. They have overinvested in the past. Their financial system is one they've frankly outgrown and managing that transition is going to be very hard.

Merryn: This is a transition that other countries have been through. I mean, we both know Japan very well and they went through a similar sort of transition in the early seventies. Korea has done it, etc. It's not unheard of. It's possible.

Gillian: This transition is very

Merryn: China might be doing it on a larger scale.

Gillian: This transition that China is doing right now is very familiar, but let us not forget that when Japan started to go through this transition in the 1970s it basically messed up very badly in the financial system because its reform of finance from a bank-centred system to something founded supposedly on capital markets and an open system where the price of money was set by democratic demand; not autocratic fiat. It did that reform process in such an uneven, belated way that it created enormous bubbles and frankly Japan is still trying to recover from that. So, that is not a good parallel necessarily or very comforting.

Merryn: Well, it worked quite well for investors who got in and out at the right time.

Gillian: Well, if you're lucky enough to time the Chinese market, congratulations. Keep doing it, is my best advice, but the other areas of the global economy that, you know, people need to watch are obviously OPEC. OPEC is basically imploding and that is incredibly significant. It's significant in terms of geopolitics; very alarming. It's also very significant in terms of where the oil price is going and the knock-on implications of a world where oil prices could be a lot lower. You need to look very closely at what is happening with the Fed right now and the potential hike in US interest rates. I personally suspect it probably will happen this autumn.

Merryn: But I you sound like you don't think that's the right move.

Gillian: I actually think it should happen.

Merryn: You do.

The geeks in the corner are doing something which can affect us all but which very few of us not so much understand but even bother to try to understand

Gillian: I actually think it's time to start raising rates because of the level of bubbles that are being created in the US financial system right now.

Merryn: So, as far as you're concerned, the stock market perhaps, the US bond market all these things are in bubbles and this is unsustainable.

Gillian: I happen to think

Merryn: And so rather than let it crash nastily, start raising rates now.

Gillian: I think the US basically needs to rediscover the price of money and the fact that there actually is a yield curve for risk and that money, you know, does actually matter in terms of, you know, the time factor and things. So, I actually think the Fed should get on with it now personally and my instinct is that they will from talking to Fed officials recently. The other risk obviously in Europe, you know? I mean, that's more of a slow-burn risk, but that's certainly there. Emerging markets Brazil is distinctly worrying right now.

Merryn: And that's really a direct result of China and falling commodity prices, right?

Gillian: Brazil is suffering

Merryn: A lot of emerging

Gillian: Well, Brazil is suffering from China and falling commodity prices. It's also very much suffering from its own big mistakes. I mean, comparing and contrasting Brazil and Colombia right now is very interesting because Colombia really has grasped the nettle on a lot of reform recently. Brazil has staved hard decisions off over and over again and now that the real has weakened so dramatically, it really is essentially bearing the cost of that. I would expect to see some Brazilian corporate defaults in the coming months.

And then last but not least the other thing investors need to think about is another classic area of silo problems, which is that deep in the bowels of the equity markets dramatic changes have taken place in terms of the way that shares are being traded. All of these robo-traders, high-frequency traders, algorithmic programmes and things these now account for about half of all share trading in the US and the key point to understand is that this kind of trading this kind of shift has the potential to affect the entire stock market in an interconnected system and yet once again only a tiny pool of people understand what's going on. They're in a silo as much as the people who were creating CDOs back in 2006 were and so yet again we have a problem of the geeks in the corner doing something which can affect us all but which very few of us not so much understand but even bother to try to understand.

Merryn: Yes. Well, we know a little about it, but it seems so complicated and so distant and so techy and minor that we don't really look at it as carefully as we should.

Gillian: When you look back at 2007, what's very striking is that the problems that caused the big crisis were not concealed because of some kind of big plot. They were actually hidden in plain light in daylight underneath our very noses, but people didn't look at them because of silos. The problems dogging the equity market today I suspect are very similar. People need to look at what they're not looking at, what they're not talking about because they think it's boring and geeky and technologically complex and they need to ask hard questions about how it could affect them and why no one is talking about it.

Merryn: Gillian, thank you very much.

Gillian: Thank you.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.