Moral Hazard - The credit crunch and financial meltdown show money is ‘nothing’
For his tiresome mantra of ‘prudence’ and endless boasting of the end of ‘boom and bust’ were nothing but a house built on sand.
And this is the theme taken by Pope Benedict XVI as he asserts that the global financial crisis ‘shows the futility of money and ambition’. He notes: ‘He who builds only on visible and tangible things like success, career and money builds the house of his life on sand. We are now seeing, in the collapse of major banks, that money vanishes, it is nothing.’ And he added: ‘The only solid reality is the Word of God’.
Of course Cranmer wholly accords with this - as he seems to with approximately 96.75 per cent of what His Holiness talks about – but it is a little irksome to hear the head of what is probably the wealthiest state on the planet warn of the ephemeral nature of Mammon (does the Vatican not have a bank?). It is no less irksome to hear the Archbishop of Canterbury praising Marx and bemoaning ‘paper transactions with no concrete outcome beyond profit for traders’. Or the Archbishop of York denouncing short-sellers as ‘bank robbers and asset strippers’ while the Church of England is itself knee-deep in shares and readily uses short-selling tactics to maximise profits on its £5bn investments.
It was the Governor of the Bank of England Mervyn King who referred to ‘moral hazard’ when he vowed that he would not step in to bail out England’s banks for their irresponsible lending. The concept originally referred to the prospect that insurance distorts behaviour: for example when holders of fire insurance take less precaution with respect to avoiding fire or when holders of health insurance use more healthcare than they would if they were not insured. Thus it is that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.
When we do not bear the consequences of our actions, there is indeed the creation of a false sense of security. While abortion is available on-tap, why not indulge in endless irresponsible sex? And so it is that national governments are granting the banks endless abortions, because the consequences of delivering the children conceived during their age of irresponsibility are too frightening to contemplate.
Banks and building societies are in the business of lending money, and the risks of doing so are offset by the potential for making high returns. But a moral hazard arises when those banks and building societies enjoy all the fruits of the good years but are bailed out in the lean years. Shareholders appoint boards of directors who make decisions on risky loans, and they all profit when the investment turns out well. But Cranmer is more than irked that it is he who shall subsidise their lean years, especially since he never profited during their years of plenty. It is a perverse financial morality when the humble and oppressed taxpayer is forced bear part of the burden of risky financial decisions made by irresponsible lending institutions.
Consider the home. For what family can survive or function without one? And then consider the effects of a moral hazard upon the peace and security of domesticity. The whole ‘sub-prime’ mortgage crisis was inevitable precisely because it wasn’t so much built on sand, but on thin air. Each lender in a very long chain raked in profits while believing they were absolving themselves of risk. The brokers exposed the lenders to loans not only above the value of the asset, but beyond the means of the borrower to repay. The lenders sold these risky mortgages on to investment banks, who in turn fragmented the securities into high, medium or low risk. And another tier of investors bought these securities, hedging (and praying) against the risk of default, and pushing those risks even further along.
Reliance on central banks coming to rescue as lender of last resort is bound to discourage prudent behaviour. When a government guarantees the liabilities of a financial institution, it also risks weakening the currency and causing an increase in interest rates, with all the consequent unemployment, recession, inflation and increased poverty. This is an undoubted moral issue, for people are reduced to hardship and depression, firms are condemned to closure, more workers to unemployment and more families to homelessness through unprecedented levels of repossession. The total number of suicides, heart attacks, divorces and mental breakdowns is never known.
God cares for the poor, the oppressed, and the underdogs in society. He pours his wrath upon those who corrupt justice or create economic machines designed to provide more wealth for the wealthy and deprive the poor. The story of Naboth’s vineyard in 1 Kings 21 establishes that authorities are not free to pursue any policy they please or to ride roughshod over the rights of the poor. These same concerns are vehemently expressed by the prophets Amos, Hosea, Isaiah and Micah, writing in the 8th century BC. God demands conscience above political conviction, and a government which places narrow economic considerations above liberty and justice is guilty of worshipping Mammon above God.
It is a pity that the British Government is impotent, for they have abdicated their control over these crucial powers of state to a foreign power. The Prime Minister and Chancellor must now make their supplications to the Caesar in Brussels, for it is there that the power now resides, and it is thence that morality is defined.
And so we arrive at what Pope Benedict refers to as the ‘Godless character of modern culture’, with the warning that ‘Christianity in Europe could become extinct’.
‘If we look at history we are forced to notice the frequent coldness and rebellion of incoherent Christians. Because of this, God, while never shirking in his promise of salvation, often had to turn towards punishment.
‘Nations once rich in faith and vocations are losing their own identity under the harmful and destructive influence of a certain modern culture. There are those that, having decided that 'God is dead', declare themselves 'god’, believing themselves to be the only creator of their own fate, the absolute owner of the world. When men proclaim themselves absolute owners of themselves and the only masters of creation, are they really going to be able to construct a society where freedom, justice and peace reign?
‘Is it not more likely — as demonstrated by news headlines every day — that the arbitrary rule of power, selfish interests, injustice and exploitation, and violence in all its forms, will extend their grip?’
Within this moral hazard the love of Mammon may indeed be seen as the root of all evil. But, as His Holiness observes, evil and death never have the final word’.