We all know what caused the financial crash: greed, capitalism and unregulated financial markets. The Anglican archbishops have told us so. The Archbishop of York blamed short sellers for bringing down HBOS, branding them robber barons. Of course, he was later embarrassed to discover that the Church of Englands Commissioners are involved with short selling and that the short-selling interest in HBOS rose by only 0.25% during the week of its collapse. The Archbishop of Canterbury hastily suggested that the crash showed that the era of unregulated markets would have to come to an end. This too was an imprudent observation. Huge policy mistakes were made in the US in the immediate aftermath of the Great Depression because the real causes of the events were not fully understood for more than two decades. In fact, there is much debating and research to be done before we come to a widely-accepted view on the causes of this financial crash.
A proper analysis of these causes should leave plenty for Church leaders to say, but they should tread carefully. Many factors have created the perfect storm.
Like most major financial crashes this one may well have originated from monetary policy mistakes. In laymens terms, the Bank of England held interest rates too low for too long. People borrowed money who could not really afford to do so. Loose monetary policy also fed a property and asset price boom making borrowers more confident when borrowing against their house values and making banks overvalue the collateral against which they were lending. The Bank of Englands monetary policy makers need to take some blame. They were not greedy, possibly not even complacent. They just made errors of judgement. It will happen again.
People are quick to blame the markets, but regulators have a lot to answer for too. Our financial regulator, the Financial Services Authority, has an extraordinarily wide remit. The details of their regulations beggar belief and they encourage obscure complexity. They are backed up by international regulatory agreements both on bank capital and on accounting standards. Some will argue, as the Anglican Archbishops and some Catholic priests have, that regulators should have intervened more. But, there is much evidence that regulation has exacerbated, if not to some extent caused, the crisis. Indeed, at two crucial junctures, specific regulations prevented an orderly response to events. Government regulators have literally tripped up the Treasury and the Bank of England when they were trying to resolve matters. If regulators had a narrow but specific remit they might have done a better job.
Also, over the last 50 years or so, we have moved responsibility for financial regulation out of the market and civil society and into government bureaucracies. In the process, we have undermined a whole host of institutions mutual building societies being one example which provided savers with security in a different way from standard banks. Consumers have become used to government guarantees and government regulation. This undermines the perceived importance of trust in commercial dealings: banks became more like hypermarkets and less like the corner shop. There are certain advantages of this model as home ownership and the availability of small business loans has widened, but we have lost something in the process.
Of course, we cannot avoid pointing the finger at participants in financial markets. Even here, greed was probably not the main failing: this is just as well because it is difficult to eradicate! It was genuinely and widely felt that the new financial innovations would help reduce costs and spread risk around the financial system. This view was shared not just by the markets but by regulators and central banks. Indeed, two US government-guaranteed institutions (Fannie Mae and Freddie Mac), had their own corps of 236 regulators and were the main promoters of the much-maligned mortgage securitisation. Whilst there was plenty of greed around, a lack of care and competence were probably more important factors in the build up to the financial crash.
Finally, we should not forget the consumer. Savings are at record low levels in the US and the UK, and consumer borrowing is high. People have lied about their income to obtain mortgages. This is part of a general desire for instant gratification which also manifests itself in binge drinking, obesity and casual sex. Clerics often like to blame these problems on abstract concepts such as society, the capitalist system or commercialisation. But, when it comes down to it, individuals need to take responsibility, whatever the pressure from salesmen or their peers, and be prepared to wait so that they have sex, drink, eat and consume when the context and time are appropriate. Priests cannot assume away commercial pressures in society but they can encourage their flock to live lives of restraint.
The recent bank bailout has led to comment too. It has certainly created the impression that there is a welfare state for bankers whilst others struggle to make ends meet. But, it would be wrong for Church leaders to condemn the bailout outright. The state here is acting exactly as the Church suggests it should act in the economic sphere as a last resort. The consequences of the failure of the financial system would be dire for rich and poor alike. It can certainly be argued that the bank bailout plan is misguided indeed I believe that myself - but it is not incompatible with the thrust of Catholic teaching on the role of the state. In many other spheres of welfare such as health, housing, poverty relief and education, the state acts as provider of first resort, displacing community-based welfare. In this case, though, the state is only stepping in when all other mechanisms have failed.
So, can Church leaders help? Those who work in the financial sector can be reminded of their responsibilities. They should be trustworthy and consider the wider impact of their decisions on others. Some Christian economists have called for a return to relationship finance with less reliance on arms-length transactions. They may have a point. Both regulation and the reduced cost of information processing have diminished the value of relationships in financial services and replaced a culture of trust with one of compliance. However, this is not a black and white issue. Relationship banking often benefited the golf club member at the expense of the ordinary person and was exclusive. Nevertheless, we should have the debate. Indeed, parishes could get directly involved by supporting community initiatives such as credit unions.
Financial markets have seen a lot of human imperfection in the last few years. It has been distributed amongst government, central banks, regulators, producers of financial services and consumers. There has been greed, complacency and straightforward human error. We are destined on this earth, I am afraid, to learn from our mistakes and suffer from the mistakes of others. The evidence certainly does not point to more regulation being an effective cure human institutions cannot be perfected by giving power to other human institutions.
Given this, it is appropriate that Pope Benedict raises our sights to higher things. As he said, a life built on money is like a house built on sand. The problems in the financial system are of secondary importance compared with the things that really matter in our lives. Cardinal Pell also made good sense when he said, The only thing we can say is to repeat the central teachings of Christ. When men and women over-reach themselves trouble often follows The financial crisis is enormously complicated, and I would hope that we dont attempt to say too much. Whatever the balance between markets and government regulation we settle on, it will work better when infused with a moral ethos. If we had more of Cardinal Pells humility within governments, regulators, central banks and in the marketplace we would not be where we are today.
Catholic Social Teaching and the Market Economy by Philip Booth.