This week we celebrate the first anniversary of the fall of Lehman Brothers.  And I mean celebrate.  Lehman was not providing financial services to ordinary people or businesses.  In fact it was not providing services of very much value at all.  It was a badly run firm – the company finally collapsed in 2008, having already been rescued once in 1984. 

The organisation was populated by people who were, by any reasonable standards, grossly overpaid.  Many of them were unpleasant individuals, like the company’s last chief executive, Dick Fuld.  As he defended his nine figure remuneration package before Congress, he expressed continuing incomprehension that the US taxpayer had not come to his rescue.

       The essential dynamic of the market is disciplined pluralism.  Pluralism implies freedom to experiment.  But that freedom must be combined with discipline.  Unsuccessful experiments are unsuccessful – and most experiments are quickly terminate – but successful experiment is quickly imitated.  Planned societies – and businesses  ‘too big to fail’ – lack either pluralism or discipline.  They are reluctant to experiment, and also reluctant to end unsuccessful ventures.

       In a market with disciplined pluralism, good businesses prosper and grow while bad businesses go to the wall.  That is why there is every reason to cheer the Lehman collapse.  Far from showing the weakness of the market economy, the failure of a bad business shows its strength.  This is the view which the US Treasury took when it refused to help Lehman in September 2008.

       Why then is today’s conventional wisdom that the American decision was a mistake?  Lehman’s activities were so closely intertwined with others that its failure had intolerable consequences for the rest of the financial sector.  Not just for other investment banks, but also for the trading activities of commercial banks. 

The executives of large conglomerate financial institutions could credibly claim that the collapse of a group of businesses like Lehman would jeopardise the whole financial architecture that enables us to pay our bills and receive our salaries.  The failure of Lehman alone led to a freezing of wholesale financial markets which put the survival of major retail banks in jeopardy.  The outcome was a withdrawal of consumer and commercial lending, and provoked the widespread bailouts and stimulus packages which governments adopted last autumn and winter.

       If interconnectedness is the problem, then the solution is to reduce interconnectedness.  In businesses such as Royal Bank of Scotland or at AIG, the largest American insurer, whose near collapse followed immediately on that of Lehman, the activities that crippled the company were a tiny proportion of the whole.  In businesses that employed hundreds of thousands of people no more than a few hundred people were engaged in them. 

In other interconnected utilities,  engineering effort and regulatory attention is devoted to ensuring that systems are robust.  Failures are inevitable, but well designed systems have back up processes and modular systems that enable problems to be confined and controlled.  The electricity grid operates without interruption because engineers constantly monitor its stability and have devoted large resources to making it secure.  When Enron went bust, its Wessex Water subsidiary continued to send water through the taps and Wessex bonds continued to attract a top investment ranking even though those of the parent company were worthless.   The answer to ‘too big’, or ‘too complex’, to fail is redesign systems so that elements fail without too damaging consequences. 

       World leaders are longing to reassure us that tighter regulation will ensure that problems won’t recur.  Tighter regulation probably will ensure that the specific problems that caused so much chaos in 2008 will not recur.  But that crisis came less than a decade after the bursting of the New Economy bubble.  History doesn’t repeat itself exactly, but there is no reason at all to think that regulators will anticipate and head off the next crisis more effectively than they did the last. 

And even if a pledge to prevent future Lehmans were credible – and it is not – the outcome would not be desirable.  Imagine a proposal to regulate so that General Motors, or British Leyland, or Woolworths, would not fail.  To promise that businesses will not fail underpins established firms and discourages entry of new firms.   The better solution is structural – to split the utility banking, the boring bit of the banking system that meets our daily needs of paying bills and receiving salaries, from the casino that engaged Lehman.

       And, when you think it through, utility banking is not boring at all.  Technology is creating a revolution in financial services.  It is easy to envisage a world in which all payments would be made with the wave of a card or the click of a mouse, and cash would only be used for illegal transactions – which would bring about a social and economic revolution. 

Powerful retailers like Tesco and Marks and Spencer use their market position to assess the needs of consumers, and beat their suppliers and wholesalers to get the required goods at the lowest cost.   Their focus is on developing a relationship with customers for reliability and value for money.  The business model is very different from the dismal relationship most people have with their banks, and very different from the petty abuse of retail customers through penalty charges for minor payment lapses and sale of over-priced payment protection insurance. 

The focus of specialist retailers is on the needs of consumers rather than the remuneration of producers.  That is what we need from the banks of the future.