Moral Questions of the Financial Crisis
by Paul Vallely
Posted: 29 Jun 2010The global financial meltdown, and the faltering attempts by government to create the conditions for recovery within and across the nations, raise as many moral questions as they do technical, fiscal or economic ones.
Media reports of the crisis are most comfortable focussing on examples of individual culpability: the trader who bet the bank and got it wrong; the firm which bent the rules of fair accounting; the bank where greed overtook common-sense in its corporate leveraging or derivative-packaging.
But often are these not simply people who broke the rules but an indication that the rules which have been created - or more likely just evolved by consensus over time - were rules that favoured those involved in their creation rather than the whole community.
John Paul II had a term for that which he adopted from liberation theology. In his encyclical Sollicitudo Rei Socialis he spoke of "structures of sin" which he defined as "influences and obstacles which go far beyond the actions and brief lifespan of an individual".
Obstacles to the development of the common good have a moral character. We cannot assume that systems which are not the product of a single individual are natural or neutral. It is in the light of that insight (and its correlative that the opposite of structural sin, John Paul II says, is social solidarity) that we might develop our line of questioning.
We need to ask about debt. Can a bank be too big to fail? Is it right to privatise profit but nationalise losses? Is it right for fee structures to take a percentage of profits without accepting a comparable liability for losses?
Is there something unethical at the core of the leveraged buy-out? Should investors take more account of the consequences of their decisions on jobs and the lives of communities? Is it possible to incentivise that structurally? How can we insert countervailing balances into a system so highly-leveraged and reliant on borrowing and debt?
We need to ask questions about risk. How do we encourage economically creative risk-taking but discourage socially and economically unproductive speculation? Are there perverse incentives to encourage excessive risk-taking? Are there factors within the finance sector - employment practices, remuneration packets, corporate or peer pressures - which militate against integrity? How can this be countered or regulated? Are there ways of quantifying risk as we quantify potential profit?
We need to question some cultural attitudes. Where is the border between investment and irresponsible gambling? Do traders encourage unnecessary volatility in the markets because greater volatility produces greater potential profits: how can that be addressed? How do we encourage a greater sense of social responsibility of a culture formed by young and emotionally immature traders with a limited understanding - or care for - the social consequences of their deals. How can the City be induced to abandon its excessively short-term perspectives?
Then there are questions about truth and transparency. When is the complexity of derivatives merely a device to disguise the level of risk from investors? Is it ethical to trade derivatives so complex that almost no-one understands them or knows where the risk actually lies. When are we amplifying risk rather than diversifying it? Can some financial products be inherently so complex and dangerous it is not ethical to sell them?
We so badly need a conversation between finance and ethics. St Paul's Institute, attached to a great cathedral in the heart of the great City of London, is the ideal place to do it.
The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.