Any market-based economy has financial crises. It is the inescapable eventuality of the biggest market failure of all: human psychology and the lack of moral constraints within the financial sector. Essentially, financial crises are required shock therapy to cleanse markets from the inevitable hubris and decadence that sets in over time. Even though there are always very real and innocent victims in such situations, the cathartic quality of such moments of instability and societal suffering should be celebrated, respected and utilised. The current financial predicament is treated very differently, unfortunately. The current proposals do little to punish those responsible, to remove infected areas from the sector or to reaffirm regulation that tends magically disappear over time. Such failure is symbolic of how the current societal arrangements are increasingly removing us from our basic human psychology.
If anything is a threat to global security in the 21st Century it is surely the dichotomy between our natural human psyche and the mould that society puts us in. We need to use the present situation for a kind of cultural catharsis that reshapes the basic dynamics of society. If not, our short term failures will be eclipsed their long-term consequences.
Although parallels with past crises can certainly be drawn, the increased complexity of our globalized world makes the current financial system unique from a historical perspective. Try reading a PhD thesis on the derivative markets, and its intricacies are likely to put you into a comatose state of disbelief and self-doubt. However, even more important than the difficulty in understanding the financial dynamics that occur with our money is the fact that through complexity, financial markets are increasingly removed from reality. Basic human morality no longer applies to the world of banking in which unethical behaviour no longer has any direct, obvious victims. In the current financial system, actions and behaviour have become so far removed from “real world” impact that those working in this area no longer have the natural ethical boundaries that control standard decency. Taking into account that in many traditions worldwide usury and interest rates are already morally reprehensible, the current ethical void in the financial markets resembles a dark and deep abyss.
Mistakes that cost hundreds of millions of euros lead to readjustments on the balance sheets, rather than serious consequences for those in charge. Bonus packages and golden parachutes are so common because there is no obvious counterpart picking-up the bill. Shareholders are too far removed from the decision-making processes, and those eventually paying CEOs, CFIs and other executives are neither clearly identifiable nor organized. Such lack of internal oversight, exacerbated by the lack of regulation and accountability of the financial world in general, is unsustainable. Those directly involved in the day-to-day business have no longer any way of determining right from wrong.
The basis of any sense of morality can be traced back- from an evolutionary perspective- to the days that our existence was purely local, i.e. within small towns or communities and limited to relatively few square kilometres. As a result, human beings were constantly interacting with familiar faces. In order to avoid a Hobbesian situation that made life solitary, poor, nasty, brutish and short, we were forced to behave “morally” towards our fellow human beings. This practical necessity to be moral laid the foundation of the Golden Rule, i.e. “do not do to others what would anger you if done to you by others” in the version of Isocrates, one of the Attic orators. The Golden Rule, in turn, has been the basic framework on which the majority group of any sustainable society in history has based its ethical principles.
The current financial system has adopted such complexity and levels of abstraction that that very foundation seems to have disappeared. If you are an analyst or trader on the derivatives market, there are seemingly no “others” who are affected by your actions or who can reciprocally affect you. Consequently, there are no ethical boundaries. Combined with an absence of effective legal oversight, risk-taking and selfish rent-seeking have started to run amok. The financial markets are not the only parts of our capitalist system suffering from this moral void, obviously, but certainly are an extreme example. In many ways, they can be argued to be the proverbial canary in the coal mine, warning the world of the dangers of uncontrolled globalized forces that may undermine the basic structures —moral, legal or otherwise— of our societies in a wider sense.
The result is an increasingly significant man-made disaster, albeit one in which the victims are not directly counted through physical pain of morality. Those suffering are home-owners whose houses are repossessed, pensioners who face insecurity about their dollar-based and DOW—indexed wealth and income, and shareholders losing the value of long-term investments. Moreover, in a utilitarian analysis of our society, naming these groups barely scratched the surfaces once we look at secondary effects. Taxpayers, small-business needing every-day funding for economic activities, and shops foreclosing due to a crash in consumer confidence are some other groups affected. No physical genocide, but a breakdown of basic human security nonetheless. Military destructive power seems insignificant compared to economic might and potential negative impact.
The necessary response to such a crisis would re-establish a system of regulation and oversight that fills the inevitable gaps that imperfect markets, financial or otherwise, display. And this is exactly where the present situation is exceedingly worrisome. The subsequent political wrangling that is taking place in both the United States and Europe resembles that of sailors fighting over the rum provisions while their ship itself is sinking into the deep, dark ocean. No responsibility is taken to readjust for the new reality. Money is thrown at markets without any long-term perspectives. Leaders carefully try to protect every imaginable group (or, more accurately, every imaginable voting-block: the current bail-out bill in Washington specifically identifies producers of wooden arrows) affected without truly understanding the necessity and urgency of tackling the underlying system weaknesses.
There is obviously nothing wrong with an emphasis on stopping the bleeding that was caused by the systemic failures, but “stopping the bleeding” is one thing. It is quite another to try to postpone difficult adjustments until future electoral cycles. The plutocratic tendencies that are ever more taking hold in our increasingly unequal societies (both in political power terms as wells as economically) have become a natural barrier that is insulating the downward spirals of our basic institutions and arrangements. The crisis on the financial markets should serve as a stark warning of a bleak future if we do not rethink the basic premises of how we face the globalized and unimaginably complex 21st Century. The current financial unrest is creating a short window of opportunity by exposing structural weaknesses and culprits. As such, it opens the door to the desperately needed readjustment of power and oversight or, put in more dramatic terms, cultural catharsis. If we fail to use this chance to regain control over the basic dynamics of our financial markets, we will not stand a chance when other aspects of our lives become affected by anarchic tendencies of our post-modern existence. The time to think long-term is now. Short-term considerations will have to wait.
On the other hand, every cloud has a silver lining. The current crisis is undoubtedly the nail in the coffin of John McCain’s already faltering presidential campaign. President Obama will face an uphill battle to restore credibility and decency to the White House.