Thursday, 20 May 2010

Enron and the Financial Crisis III.

I recently had a chat with someone who used to be a trader in the City of London. I asked him if he thought that the ethical practice of those working in the financial sector would improve following the economic downturn. "No," he replied, looking at me with bemusement. The Nobel prize winning economist, Joseph Stiglitz would agree with this assessment. He writes in Freefall: free markets and the sinking of the global economy:

No matter how you look at it, our banks and our bankers, both before and during the crisis, did not live up to the moral standards that we should hope for, especially in the exploitation of ordinary borrowers. The subprime mortgages are just another example of a long litany of abusive practices in a variety of venues, which include student loans, pay day loans, rent-a-centers, and credit and debit cards.

Stiglitz echoes some of the fundamental tenets found in Catholic Social Teaching. "In the economic and social realms," the authors of the Vatican II document, Gaudium et Spes, write, "the dignity and complete vocation of the human person and the welfare of society as a whole are to be respected and promoted. For man is the source, the centre, and the purpose of all economic and social life." This could be dismissed as moralistic musings - fine for the pulpit, but not for the economics lecture theatre or boardroom. Yet people have paid increasing attention to Stiglitz because such ideas have been vindicated in his warning of global economic catastrophe. In 2000, sacked from his job as chief economist at the World Bank, Stiglitz pointed the finger at the "third-rate graduates from first-rate universities" working in the US Treasury and the International Monetary Fund who had run inflexible free-market models to solve the Asian financial crisis of 1997-8. Rather than solve the crisis, they exacerbated it. Stiglitz saw this as the thin end of the ideological wedge and with worldwide economic collapse, he has been proved largely correct. For him, the fundamental issue and root cause of recent troubles is financial concupiscence:

Economics, unintentionally, proved sustenance to this lack of moral responsibility. A naive reading of Adam Smith might have suggested that he had relieved market participants from having to think about issues of morality. After all, if the pursuit of self-interest leads, as if by an invisible hand, to societal well-being, all that one has to do - all that one should do - is be sure to follow one's self-interest. And those in the financial sector seemingly did that. but clearly, the pursuit of self-interest - greed - did not lead to societal well-being, either in this episode or in the earlier scandals involving WorldCom and Enron
"Avarice, the spur of industry," remarked the Scottish philosopher, David Hume, has in recent times been expressed, according to Stiglitz, in an ugly, rugged individualism and materialism that weakens societal bonds and responsibilities. Others agree, including Dr Catherine Cowley, a former City banker and now religious sister and academic, who has produced The Greed Imperative for BBC Radio 4.

For Stiglitz state regulation is the only way to limit the excesses of the free-market and the inequalities in the global economy between debtor and creditor nations. So far, he sees little evidence that this is happening and the status quo of hands-off de-regulation remains largely intact. Larry Elliot, co-author, with Dan Atkinson of The Gods That failed: How the Financial Elite Have Gambled Away Our Futures writes:

Already, there is a whiff of business as usual as a receding sense of danger blunts the appetite for radical Britain the imminent election will be dominated not by which party has the right policies to cut the City down to size but which can be trusted to cut the budget deficit. Revisionist versions of the crisis, suggesting the problem was too much government rather than too little, are doing the rounds...Stiglitz wants this to be moment of "reckoning and reflection" - a reassessment of the sort of economy in which financiers enriched themselves by selling over-priced and risky products to some of the most vulnerable citizens in America. Materialism has outweighed moral commitment, the needs of the environment have been ignored, and there has been a catastrophic break down in trust.

Of course, Stiglitz's high vision of a moral economics has to be worked out in reality. What kind of state regulation is appropriate and how much? Do politicians have the will to regulate financial institutions? Must we legislate for "moral commitment" or does that just speak of moral failure? How (if at all) should governments intervene in the workings of the market? Is there an ethical and spiritual reality appropriate to the workplace? Not, I suspect, easy questions to answer, but the challenge presented by Stiglitz and others to the financial community and beyond cannot be ignored, unless we want to risk him returning to us in ten years time and saying, "I told you so":

It has become a cliche to observe that the Chinese characters for crisis reflect "danger" and "opportunity". We have seen the danger. The question is, will we seize the opportunity to restore our sense of balance between the market and the state, between individualism and the community, between man and nature, between means and ends? We now have the opportunity to create a new financial system that will do what human beings need a financial system to do; to create a new economic system that will create meaningful jobs, decent work for all those who want it, one in which the divide between the haves and have-nots is narrowing, rather than widening; and, most importantly of all, to create a new society where each individual is able to fulfill his aspirations and live up to his potential, in which we have created citizens who live up to shared ideals and values, in which we have created a community that treats our planet with respect that in the long run it will surely demand. These are the opportunities. The real danger now is that we will not seize them.

Freefall: free markets and the sinking of the global economy, Joseph Stiglitz, Allen Lane, 2010


  1. I keep coming back to Christ throwing the money lenders out of the Temple. What would he be doing now and how should we behave towards this crisis? I sometimes think that the argument that corporate greed in the banking sector has caused the recession which is causing misery to millions of people around he world is naive and simplistic, but the more I look at it, the more difficult it is to poke holes in it. Perhaps we should all be turning over tables and chasing financiers out of the temple. And that's my main issue with football (your latest blog): sport does create temporal transcendent experience, it is true (France v All Blacks, Rugby Union World Cup Semi Final, 1999 - look no further), but unfortunately now there is always someone in the background making money: it is increasingly manufactured experience, manufactured for profit and not love of the game - cf: the Glazer brothers at Manchester United.

  2. I'm not sure about such an overtly political reading of Christ throwing the money changers from the Temple - within the context of the passage, this incident has a spiritual significance that should not be ignored. Having said that, Christ (as is mentioned in my link to The Greed Imperative above) does warn that one of the greatest evils is greed and the dehumanising effects of pursuing money. Before we cast stones at bankers, we also have to be aware of the greed within us...but, yes, of course, bankers must take responsiblity for their actions. But I think they are not the only ones at fault - governments (of all political hues) have too long excused the excesses of the business and the financial markets and have uncritically accepted the prevailing orthodoxy of the free market. From the little reading I have done, I'm not sure this is going to change...but I hope I'm proved wrong.