<http://www.breakingviews.com/2009/04/01/Moralist%20manifesto.aspx?sg=features
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The Moralist Manifesto BY EDWARD HADAS
Moralist manifesto: Finance is not usually associated with questions of good and evil. The last few months have been something of an exception, at least for some politicians. It has become fashionable to blame greedy bankers for the ongoing financial crisis. But that is little more than name-calling. The best way to ward off future crises is through serious analysis of financial morality.
A well-reasoned attack on greed requires some profound changes. Here are seven.
1. Learn and teach moderation. Finance will remain prone to bubbles and busts until it is generally acknowledged that excessively high returns are not just risky, but morally unjust. Sure, some investors will always do better than others, but in the boom years all sorts of investors – in the markets for stocks, corporate debt and houses – seriously expected to earn 15% annually in a world that was growing at less than a 5% nominal rate. Such excessive expectations inevitably led – and will always lead to – financial structures which are sure to collapse.
Investors should ask for no more than is fair. Restraint will not come without a re-education. Students should be taught the concept of financial justice: self-interest needs to be moderated by a concern for the common good. Otherwise, investors and financiers will fall prey to divisive and dangerous greed.
2. Excessive financial gains should be shunned not welcomed. As it stands, almost everyone is happy when share or house prices rise rapidly. There may be talk about making housing affordable, but there is far more gloating over capital gains. Successful investors and speculators – most of whom have profited far more than they have contributed to the common good – are often idolised.
This reflexive enthusiasm is completely wrongheaded. The gains will be reversed, but as long as they last the rich are unjustly favoured over those too poor to play the financial game. The lure of easy gains encourages pointless risky borrowing and financial manipulation. Even inside the financial world, the instinctive response when asset prices rise fast should be a mixture of revulsion and fear.
3. Use every available tool to crush financial greed. When financiers take too many risks and put too much money into their own pockets, they put at risk the trust which supports the whole financial system. That matters, because the financial industry plays a valuable social role in collecting savings and allocating investments.
Greed should be made much less profitable. There is no need to invent completely new tools to do so. What is required is the will to use existing tools when they will have the most effect, before financial excess has carried away popular sentiment and distorted the whole economy. Such dynamism in pursuit of moderation is almost exactly the opposite of what happened before the recent financial collapse. Greed cannot be abolished, but it can be kept in check.
4. Fight against financial gambling. In practice, finance and gambling are often closely entwined, but morally they are quite different. Finance is good – it helps build strong economies and encourages social solidarity. Gambling may not always be harmful, but it is never good. The gambler’s reliance on the illogical hope for disproportionate gains should be kept out of finance as much as possible.
There will always be some gambling in the financial trade because markets offer a better deal for players than casinos or lotteries. But the gambling urge can and should be restrained. Mandate minimum holding periods, increase transaction costs and prohibit the use of leverages in financial investment.
5. Bring back restrictions on usury. Some loans should not be made. Governments should not encourage banks to lend wildly. And borrowers should not be allowed to borrow at dangerously high interest rates.
Bad lending is sometimes called usury. It should be banned, not just to help the profligate poor, who are only made poorer by high rates. The prohibition should extend to all loans which do not serve a good purpose. The standard of the good should be twofold: the use of the money and the likely ability to pay back the debt. Purpose-checks on loans should be as normal as safety checks in aeroplanes.
6. Make finance a middle-class profession. Only a tiny proportion of finance professionals should be members of the economic elite. Their jobs require too little skill, risk or imagination to merit extravagant pay.
Once upon a time, when money and information were scare, financiers, who had both, could perhaps justify their fortunes. But now their work is almost all routine, and should be rewarded appropriately.
7. Don’t let finance stray from its economic purpose. Finance should be the trade of pooling of resources to serve the economic good, but the tools of finance can be used for evil as well as good purposes. Those who oversee the industry should separate the good from the bad.
What is bad? Most government borrowing. In rich countries, governments should usually spend no more than they tax. What is good? Financial institutions with clear missions that make economic sense. Financial innovations can be good, but they should be tested for safety and morality: only products which promise to make the world better should be allowed.
Conclusion. Finance has been a helpful servant to industry in the modern business economy, but all too often a foolish one. Financiers have been given too much freedom, and misused it. In the future, manifestations of irrational and destructive greed should be recognised for what they are. If that is done, financial crises will be reduced in number and scale. Now is a good time to get to work.