Morality and the GFC

It’s a fascinating time to be an economist. After all, it’s not every day that you live through a near meltdown of the global financial system. But here’s a secret: most economists hang out for events like these because you learn something new and interesting - which is not to downplay or ignore the real hardship these things visit on people’s lives.

I suppose it’s analogous to the medical practitioner who hangs out for a particularly rare disease. I mean it’s a tragedy for the patient but an extraordinary opportunity for the medical profession. Economists are a bit like that. Economics is like the medical profession in another respect too: economics has a very primitive understanding of the world at this point in its development. Economists have achieved the level of practical sophistication displayed by medical practitioners in the days when their standard prescription, no matter what the aliment, was to let blood.

It’s also a fascinating time to be an economist with an interest in moral questions - by which I mean questions that have to do with principles of right conduct. People are reacting to the Global Financial Crisis with much more than dismay at the way things have turned out but with a real sense of moral outrage. Words like “greed” and “selfishness” are being used, and some of the behaviour leading up to and during the crisis has been roundly condemned as very bad indeed.

For an economist interested in moral questions, this reaction calls up the relationship between the technical discipline of economics and its foundations in moral philosophy. The founder of modern economics, Adam Smith, was a professor of moral philosophy at the University of Glasgow. He is best known among economists for his book, An Inquiry into the Nature and Causes of the Wealth of Nations.

But Smith is equally well known among moral philosophers for an earlier work, The Theory of Moral Sentiments. Smith scholars will remind you that it is quite inappropriate to read The Wealth of Nations without having understood what Smith was saying in The Theory of Moral Sentiments. It’s very easy to accuse Smith of promoting a heedless “laissez faire” economics. But he was scathing of where the market could drift if it ever slipped its moral moorings.

The Global Financial Crisis is the worst financial crisis we’ve experienced since the Great Depression. The IMF tells us that something like US$4 trillion worth of wealth has been destroyed worldwide as a result of the GFC. To put this into perspective, US$4 trillion is between one quarter and one third of the annual output of the US economy. Many people fear that the “second shoe” is yet to drop. The US banking system is still “coughing up” bad loans and the banking system in Eastern Europe could well fall into technical bankruptcy. It’s no comfort to know that much of the Eastern European banking system is owned by the Western European banking system.

At one level the GFC is just another in a long line of “bubble” events. Those who enjoyed Niall Ferguson’s book, The Ascent of Money, or watched the recent television series will know this. These sorts of events come along more or less once in a generation. They’re not always as big as the GFC, but there are certainly historical precedents for crises that are as big as this one. Financial systems from time to time suffer crises of confidence - crises of faith. People suddenly don’t believe in financial institutions anymore.

The GFC has shaken people’s faith in the trustworthiness of financial institutions and especially financial advisors. You don’t need to be a specialist in finance to understand that if you undermine people’s trust in the financial system, you’re in deep trouble. The life-blood of the financial system is trust. It’s all about making promises into an uncertain future and, if you can’t trust the institutions or the advisors, the whole system seizes up. People’s faith was shaken when they saw finance professionals nakedly serving themselves at the expense of their customers. They felt that’d been tricked, or worse, lied to.

That’s why the GFC is more than a credit crisis. It’s also a crisis of faith. The near meltdown has shaken people’s faith in the financial system and its institutions. It’s even shaken people’s faith in the way we live. The Prime Minister of Australia, Kevin Rudd, has written not one but three essays in which he essentially says that the system which gave us the GFC is “fundamentally flawed”. Whether you agree with the Prime Minister or not, this is evidence of the depth to which faith in the system and its institutions has been shaken - even very senior politicians feel compelled to write about it.

Recently Stephen Green, who is global chairman of the Hong Kong and Shanghai Banking Corporation, published a book called, Good Value, in which he explores the moral dimensions of the GFC. He points out that there are many great works of literature, both ancient and modern, that expose the morally corrupting influence of money and wealth. Like me, Green is a Christian and makes special mention of biblical teaching in this context.

The Bible points to the need for our lives to serve a higher purpose than self-gratification through money, power, or fame. It does so because self-gratification is ultimately futile - in fact, it’s no gratification at all. In fact, modern secular psychology also points out that self-gratification can be a prime cause of anxiety and depression. In his book, The Loss of Happiness in Market Democracies, by no means a religious or moral tract, Robert Lane concludes that if your life is driven only by extrinsic motivations - extrinsic goals, rather than intrinsic goals - not only will you feel dissatisfied and empty, you’ll actually make yourself sick.

What’s interesting about all of this, and Stephen Green makes the same point, is that we find it relatively easy to recognise these failings in other people. That’s why people are reacting to the GFC in the way they are. Even people who might consider themselves moral relativists, and who struggle with the idea of absolute right and wrong, can’t seem to stop themselves feeling that there is something deeply wrong about what’s happened. Whatever people think about moral questions, it seems to be true that people lose faith in those they think are just looking after themselves. When you discover that some person or institution you trusted turns out not to have your interests at heart but instead is using you, it’s a shattering experience.

The trouble is that we find it much harder to recognise or acknowledge this moral failing in our own lives. It’s very easy for me to pick on “greedy” bankers and to be offended by the $100 million bonuses some executives were paying themselves even after their institution had been sold into the hands of the US Government - or just immediately beforehand. But what about me? Did I sell shares in banks that weren’t performing well and buy shares in other banks that promised higher dividends or higher capital gains because they were taking on more risk? Did I move my funds from one investment fund to another for the sake of a few basis points - to increase my aggregate return, thereby encouraging the CEO to take more risk, and strive for even higher returns?

Well, yes; but that’s just one person. Surely I don’t make a difference? Oh yes I do; when all those little decisions are aggregated up, right up to the top, there is a megaphone screaming into the boardrooms and executive suites of these organisations saying, “More, more, more or you’ll face the music.” I find it easy to see the consequences of other people’s greed but much harder to recognise my own failing in this regard. There’s something in the Bible about motes and planks in people’s eyes, I seem to recall …

We can restore our faith in the financial system but we must first restore our faithfulness towards others. We’ve got to begin this process by striving to suppress our inclination towards self-serving behaviour. It’s as strong in me as much as anybody else. I mean that’s the way we’re built. We’ve got to look beyond our narrow self-interest. Jesus had a nice expression for it. He said, “Love your neighbours as yourselves”. We do love ourselves. How hard it is to love our neighbours like that.

A moral crisis requires a moral remedy. People very readily talk about the need for leaders with integrity. But what are leaders with integrity? They are people who do not compartmentalise their lives, who do not divorce their moral principles, if they have any, from their daily actions. Integrity is about wholeness; it’s about no dualism; it’s about walking the talk; it’s about trying to re-meld your technical expertise with its philosophical foundations.

Restoring faith in our financial institutions requires us first to restore our faith individually that there is more to live for than we can taste, touch and see. That’s the first bridge, and then there’s a second one: to restore our faith that we can live for other people as much as for ourselves; that we should reject selfishness and greed in ourselves as well as in others.

Resolving the credit crisis ultimately requires that we resolve this crisis of faith. It involves re-building trust. But how do you re-build trust? Where do you find the raw material to build trust? My answer is that you build trust by digging “moral wells”, and you need to sink them deep. Then you “pump up” trust from these moral wells. And with that trust you restore faith in institutions. And on that faith you restore the creditworthiness of borrowers and lenders and financial institutions.

You may well be thinking at this point: “So that’s where this is heading: a plaintive call for moral revival.” Well, yes, I am making a call for moral revival. “Then let me put it to you that that is a quixotic or utopian aim. Sure, if we were all good, this wouldn’t have happened in the first place. What you are trying to do is reform human nature and that’s a hopeless quest.”

Perhaps. But conjure with this. Robert Fogel, a Nobel Prize-winning economist, wrote a book in 2000 called, The Fourth Great Awakening. Fogel goes back in economic history and identifies three great moral awakenings. The first began with the campaign waged by the Clapham Sect to abolish the slave trade; it ended with the passage of the Great Reform Act of 1832.

In this book, Fogel says he believes we are on the cusp of a fourth great awakening, and argues that we will awaken to (in his words) a “revulsion against materialist corruption”. How prescient is that? I don’t know whether we are on the cusp of a fourth great awakening or not, but I do know that it’s happened before, and so I figure it can happen again. But if it does happen again - if we do dig new moral wells, pump up trust, re-build faith and re-establish creditworthiness in our financial institutions, and even in our lives - it will have started with me, and my attitude to living for more than just my own stomach and my own wallet.