Andreas Whittam Smith

Perhaps not all churchgoers will have thought of financial markets when they listened to the Gospel reading on the first Sunday in Lent, but I did. It describes Jesus being led up into the wilderness to be tempted by the devil. Jesus was put to the test three times. The first was this: ‘if thou be the Son of God, command that these stones be made bread’. That was after Jesus had fasted for forty days and forty nights so the proposition wasn’t without advantage for a hungry man. Jesus replied ‘Man shall not live by bread alone, but by every word that proceedeth out of the mouth of God.”

Actually I didn’t think of bankers at that point in the reading. I could have done so, though. For they largely control the vast resources of the financial markets. Their influence outstrips that of any individual government. I place them as the first power in the western world, followed by the media and then, only in third place, by individual national governments. Using their well-known lobbying skills to shape the way they are regulated, bankers must sometimes feel that they can make anything happen. Even turn stones into bread.

When we came to the second temptation, my mind still didn’t jump to the financial markets. Nonetheless it is worth noting. For it has an unexpected relevance to current debates. “Then the devil taketh him up into the holy city, and setteth him on a pinnacle of the temple, and saith unto him, If thou be the son of God, cast thyself down for it is written, He shall give his angels charge concerning thee, and in their hands they shall bear thee up, lest at any time thou dash thy foot against a stone.”

Now, I know what an easy game it is to take bible passages, fit them to contemporary circumstances and draw portentous conclusions. Still, I find this one irresistible. For banks enjoy an enormous advantage provided by governments: that is the notion that they’re too big to fail and must be rescued. Or, to paraphrase the Gospel reading, you shall be borne up again and not have to risk dashing thy feet against a stone.

There are two substantial problems with this state of affairs. In the first place, this unofficial insurance against failure has enormous value and comes free. In effect taxpayers provide the guarantee. Banks are given this support because some of their activities are in effect a utility like the supply of gas and electricity. We can no more do without the means of money transmission and access to credit than we could get along without the availability of power at the touch of a switch. Nevertheless, no formal decision to extend this ‘too-big-to-fail’ guarantee to the banks has ever been taken. Nowhere in the world does it have statutory backing. It has never been debated in national parliaments. Yet we have just seen it in operation on a grand scale in every advanced economy.

The second problem is when governments subsidise something, as they are doing with this implicit guarantee, more of it is likely to be produced. If you subsidise, say, sugar production, you will get more sugar. Likewise if you subsidise risk, which is what is happening here, you will get more risk.

I have put the problems with the guarantee in somewhat technical terms. But now that I look at the description of the second temptation again it seems to capture rather well the enormity of the banks’ claims that when they’re in trouble, they are really too important to be let go. That is why I am one of those who argue that the problem with the present arrangements is that they make no distinction between utility banking services - what is called narrow banking - and the rest.

I believe we should guarantee the former but not the latter, as was done in the United States immediately following the Great Crash of 1929. The main problem would be where to draw the line, which is why some people shy away from this approach. Nonetheless, the indiscriminating too-big-too-fail promise could be replaced by a reasonable bargain between taxpayers and the banks that would serve both their interests. Jesus himself merely replied: “Thou shall not tempt the Lord thy God”.

So we come to the third temptation. “Again, the devil taketh him up into an exceedingly high mountain, and sheweth him all the kingdoms of the world, and the glory of them: and saith unto him, All these things will I give thee, if thou wilt fall down and worship me”. I did think of the financial world at this point in the Lent reading. For the recent crash revealed it as an industry seemingly possessed, as if in thrall to malevolent forces, as having entered into a Faustian pact with profit and wealth. For those who opened the letters telling them of the bonuses amounting to millions of pounds that they had earned and that would be added to their annual salaries counted in the hundreds of thousands of pounds, it must have felt – or still feels like, for the system hasn’t really changed - that ‘all the kingdoms of the world, and the glory of them’ had indeed been given.

Yet the crisis developed spontaneously in the very financial markets they had sought to control. It was like a forest fire. It was as though somebody had carelessly dropped a lighted cigarette. The subsequent conflagration has damaged every economy in the world.

By imprudent trading, bubbles had been created simultaneously in residential and commercial property, in consumer credit, in the volume and complexity of financial instruments themselves, in stock markets and in commodities all over the world until they all finally collapsed under their own weight at about the same time. Pope Benedict showed a good understanding of what was going on in his encyclical letter, ‘Caritas in Veritate’, ‘In charity and Truth’, published soon afterwards. He wrote: “Profit is useful if it serves as a means towards an end that provides a sense both of how to produce it and how to make good use of it. Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty.”

That is more or less what happened. A bubble is created by greed. Buying something that seems to be going up in price without considering its fundamental merits is greed. It is a moral failure as well as an imprudent action. You don’t have to be in the financial markets to succumb to this temptation; our gambling instincts see to that. I admit I’ve recently wondered whether to buy Greek bonds and bet against the crowd; you always hope there will be another fool greater than you who will relieve you of your speculative purchase at a profit.

By why - given that most of the participants are rational, intelligent people – why don’t they do the same careful analysis in bull markets as they do at any other time? Why didn’t they ask themselves how do specific financial products contribute to human welfare and economic development? Had they done so, they would have been performing the proper purpose of capital markets, which is to channel savings to where the world economy needs them most.

Stephen Green, who is chairman of the giant global bank, HSBC and is also an ordained priest in the Church of England, has put his finger on one reason, what he calls ‘compartmentalism’ or dividing life up into different realms with different ends and subject to different rules. In his reflections on money and morality published recently, he argues that compartmentalism enables us to simplify the rules by which we live and so avoid moral and spiritual questions. One example is seeing our life at work as being a neutral realm in which questions of value (other than shareholder value) or of rightness (other than what is lawful) or of wisdom (other than what is practical) need not arise.

Remarkably in so many cases the banks took compartmentalism even further than this. For instance, they would bundle up hundreds of lending agreements together into packages and sell them on to other participants in the financial markets so that they could clear their books of their old loans and make fresh commitments, earn further fees and then repeat the process all over again. As a customer, however, you would find that you had borrowed money from Bank X but owed it to Bank Y with whom you had had no connection at all. In this way banks distanced themselves from their customers. They really were solely dealing with bits of paper, not with human beings.

In my experience, the wider world of business is marked by a casual dishonesty hardly recognised as such because it is not technically illegal. Business executives, for instance, are naturally collusive. They will compete hard until one of their rivals suggests a deal that would serve to carve up a market. Then they will act collusively. I know, too, that businesses in their role as taxpayers will act in the same amoral way as many rich private people. They will take whatever legal steps are available to avoid paying. So that today we find major corporations being liable for very little tax – in full legality. This same behaviour extends to the financial world in relation to financial regulation. The participants will always seek to avoid regulation up to the limits of legality.

In Lucy Prebble’s play ‘Enron’, the chief protagonist, Skilling, is talking to a lawyer. He says the state’s regulations are a mess. The lawyer asks him whether he took advantage of that. Skilling explodes with indignation. “That’s what we do!”, he replies. It is with passages like this that we begin to see how greed affects human behaviour. The key characteristic of greed is that it makes people obsessive; it makes them blind; it makes them miss warning signs. In the play, Skilling asks a colleague whether he had seen the stock price today. As a matter of fact, it was always on display in the Enron head office everywhere people went, even in the men’s room. Or, as an investment analysis tells the audience: “There’s a strange thing goes on inside a bubble. It’s hard to describe. People who are in it can’t see outside of it, don’t believe there is an outside.’

The Pope’s Encyclical also deals with this phenomenon. He writes: “Economy and finance, as instruments, can be used badly when those at the helm are motivated by purely selfish ends. Instruments that are good in themselves can thereby be transformed into harmful ones. But it is man's darkened reason that produces these consequences, not the instruments per se. Therefore it is not the instrument that must be called to account, but individuals, their moral conscience and their personal and social responsibility.”

As to the ends of financial activities, however, surprisingly little discussion takes place. Is this because the participants know it all by heart and that they do not have to remind themselves what it is all for? I doubt that. Do they remember that in effect, financial institutions and markets should always be intermediaries? That they work for us?

In answer to the third temptation, Jesus replied: “Get thee hence, Satan; for it is written, Thou shalt worship the Lord thy God and him only shalt thou serve.”

In the financial markets, people spend a lot of time looking at computer screens or examining contract notes, or using mathematical formulae to simplify complexity, or having meetings with other bankers, or selling your services to business executives. Many of us lead simultaneously intense and often isolated lives. So we must all remember that there are also ordinary people out there. Only them shalt thou serve.