Tuesday, October 07, 2008

Moral Hazard - The credit crunch and financial meltdown show money is ‘nothing’

As £100bn is wiped off the value of UK shares and recession looms, the Prime Minister pontificates that ‘markets need morals’. But he might first reflect on the amorality of his own intervention in the financial turbulence sweeping the globe, not to mention the absence of his own ‘moral compass’.

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’.


Anonymous martin sewell said...

An additional 'false god" in this debate is that of the State whose intervention makes all things well. Our Archbishops have run with the zeitgeiss that these problems arise out of the evil actions of speculators without knowledge or curiosity about the earlier causes.

Whilst undoubtedly traders have made matters worse, they have primarily been in the position of one who bet against Paula Radcliffe winning an Olympic Gold medal in the marathon - unpatriotic and cynical, but founded upon truth.

The market traders were simply right in spotting a financial turkey when they saw one.

As this week's lead story in the Spectator shows, the origins of this crash lie in decisions of the Carter and Clinton Presidencies who decided to use legislation and the power of the State to force Banks to change their lending criteria and practices to facilitate home purchase by those who simply could not afford them. When the economy turned, those were the "sub prime" mortgages which have undermined the financial system.

A prime mover in using Equal Opportunity legislation to threaten Banks into granting the imprudent loan through harassment litigation, was ACORN ( Association of Community Organisations for Reform Now). This was the body in which Barack Obama did his "community organising. ( He was no Boy Scout Leader).

I need not dwell upon the role of the State in Freddie Mac and Fannie Mae in buying these junk securities under political direction until 50% of these taxpayer funded security holders comprised such toxic mortgages. Both organisations were defended by the Democrats and after 3 years in congress Obama became the 2nd highest recipient of donations from them. When John McCain tried to reform these two years ago their defence was led by Barney Frank ( Dem Mass) and supported by Speaker Pelosi and Barack Obama

Buried deep in the the first Bailout Bill ( s 105) ,put forward by the Democrats, was a provision that would have meant that 20% of any profit made after the realisation of sound securities was to paid over to ACORN - the folks whose politics started the debacle in the first place!

The Bailout Bill was advanced by Nancy Pelosi and Barney Frank from California and Massachusetts respectively. Having mismanaged their finances, the first two States putting in for their own Government bailout of their finances are .... California and Massachusetts.

I do not object to our Prelates attempting a prophetic voice, but if they either do not understand the complexities, or, some may fear, they come from the same slant of prejudice as the ( God damn America ) Rev Richard Wright, they might be better off leaving to Caesar the things that are Caesar's.

If they want to sort out America - they could start with the Churches

7 October 2008 at 09:44  
Anonymous Anonymous said...

From David Lonsdale

With respect to the comments by Martin Sewell, having returned from America in the last month I would suggest that it is Britain where the church needs sorting out rather than America.
The Cornerstone church in Corona CA had almost 3000 folk at the 0900 service and a full house of 3000 at the 1100 service. The message from the Pastor was scripturally sound and a million miles away from anything you would hear from Rowan Williams.
As for the Pope exhorting us to follow the Word of God, it is a bit late in the day to be telling us that. We Protestants started doing that over 500 years ago, in spite of Rome's efforts to prevent us. Perhaps if the Pope would separate Roman tradition from the real Word of God his words might begin to carry weight.

7 October 2008 at 10:02  
Anonymous Anonymous said...

Your Grace,

I understand that you generally have a rule not to respond to anonymice, but I was rather hoping for some comment on the recent discussion of the London Plan at St Paul's- and more particularly the disgraceful "Flying Bigots" headline in the Telegraph.

The PEVs are doing a very difficult job in trying circumstances and yet the tolerance and understanding so needed seems to have gone out of the window.

Does your Grace see any future for the SSC and their FiF flocks within the national church?

7 October 2008 at 10:10  
Anonymous anonymous2 said...

"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."

Oh really? I thought G_d could be appeased with subsequent 'good' acts, ie. for some, a good deed cancels out a bad deed. What does that do to the concept of 'moral hazard' one wonders?

7 October 2008 at 10:21  
Blogger Holy Smoke said...

I think every Christian should look at Crown Financial Ministries for financial advice. The website has the following article.

God and money
God says that if we pray for anything in His will, believing, it will be given to us. However, God's will and His ways do not always coincide with ours. So, when we turn our finances over to God, we also must be willing to accept His direction.
Too often we impatiently seek our own way without any clear direction from Him, sometimes even borrowing money to do His work. We forget that God says He will not frustrate His work for the lack of money (see Luke 22:35).
There is nothing wrong with asking God's direction, but it is wrong to go our own way without waiting for God's answer.
In order for us to recognize God's directives, it may be necessary first to understand God's view of money and how He uses it to enhance our relationship with Him.
How and for what purpose God uses money
Money is neither good nor bad: it is merely a medium of exchange. It is the misuse and abuse of money that cause the problems.

Because God is so good, He uses money for our benefit in several different ways.
1. God uses money to strengthen our trust in Him. It is often through money that God can clearly and objectively show us that He is in total control, if we will trust Him and accept our positions as stewards and managers of His possessions (see Matthew 6:32-33).
2. God uses money to develop our trustworthiness. This principle is important because our lives generally revolve around making, spending, saving, and using money. If He can trust us with money, He can trust us with greater responsibilities and His true riches (see Luke 16:11).
3. God uses money to prove His love. Scripture tells us that God assumes the responsibility of providing the basic necessities for everyone who trusts in Him (see Matthew 7:11). By transferring all money to Him, He often uses money to meet those necessities of life.
4. God uses money to demonstrate His faithfulness. Moses reminded Israel that it was God who would give them the power to make wealth. Our security is in God, not in our bank accounts. Discovering His faithfulness though financial needs encourages reliance on Him.
5. God uses money to unite Christians in blessings. God will use the abundance of one Christian to supply the needs of another. Surplus money in our lives has been given by God for the purpose of helping those who are in need.
6. God uses money to provide direction. There is probably no way God can direct our lives more meticulously than through the abundance or lack of money. Too often we believe God directs our lives through the abundance of money, but He also will lead us down His directed path by withholding money.
7. God uses money to cultivate self-control. One of the fruits of the Spirit is self-control, a key aspect of successful money management.
8. God uses money to clarify spiritual maturity. Many temptations clamor for Christians' attention. A great deal can be learned about our personal character and spiritual maturity by noticing how we handle money and determine financial priorities.

Areas in which God does not use money
Just like there are several ways in which God uses money for our benefit, there are several areas in which God never uses money to influence our lives.
1. God never uses money to worry us. If Christians are worried, frustrated, and upset about money, God is not in control. God said that wealth without worry is His plan for our lives. In addition, He promises to meet the needs of those who trust in Him (see Matthew 6:25).
2. God never uses money to corrupt us. Many Christians have fallen into Satan's trap and are being corrupted. Christians whose financial life is characterized by greed, ego, deceit, and other worldly snares are at enmity with God and His plan.
3. God never uses money to build egos. Frequently, Christians are trapped by financial ego in that they use money in an attempt to build self-worth. However, in Christ all are financially equal because all wealth will pass away. What will remain will be those things that have been laid up in heaven—the true wealth.
4. God never allows money to satisfy our personal whims or desires. God does not expect His people to live in poverty; however, He also does not endorse lavishness. Surplus is provided so that God's work can be funded and those in need can be helped. If the surplus is hoarded or wasted on lavishness rather than used for His plan and purpose, chances are the surplus will be removed.

God offers countless financial principles, intended to make our lives meaningful, because He's interested in us and how we earn and spend money.

Once we understand how God uses money and why He chooses to use it in a particular way, we generally become more familiar with His plans and purposes for our lives and are able to recognize and comprehend His directives.

In times of plenty and in times of financial crisis, God's principles remain the same. He wants to draw us closer to Him and to make us more like Christ. His peace comes when we trust Him with all of our resources.

7 October 2008 at 12:34  
Anonymous Anonymous said...

From D. Lonsdale

Anonymous 2. God is not appeased by 'good' acts and never has been.
As Paul writes in Ephesians 2v.8, "For by grace are ye saved through faith; and that not of yourselves: it is the gift of God:
Not of works, lest any man should boast."

If God were appeased by good works we would be even more boastful than we already are. Following true repentance we are saved from the consequence of our sin by the grace of God.
See Romans 6v23,

"For the wages of sin is death; but the gift of God is eternal life through Jesus Christ our Lord.

7 October 2008 at 12:41  
Anonymous Anonymous said...

From David Lonsdale.


I earlier mentioned the Cornerstone church in Corona. I meant the Crossroads church. For anyone interested, my son committed his life to the Lord in the 1100 service. Hallelujah.

7 October 2008 at 12:45  
Blogger Tomrat said...

Your Grace amen,

Whilst I am committed to mans freedom of autonomy over his body, property and freedom I am well aware that as a Christian I have laid mine at the Masters throne; he is a far better plan for my life than anything mere men can understand or fathom.

Equally though man will never realise the full extent and implications of his failings without complete liberty; to fail and succeed in equal measure.

Amen to an end to all abortion, both financial and social.

7 October 2008 at 13:32  
Blogger dizzyfatplonka said...

Critically thinking is a post I came across some time ago your Grace that just about sums the whole thing up.

7 October 2008 at 14:41  
Anonymous Anonymous said...

Holy Smoke et al: See Jacques Ellul "Money and Power" on the demonic power of money.

7 October 2008 at 15:41  
Blogger Elby the Beserk said...

Would that be the same Pope Benedict who ordered sex abuse by Catholic priests to be swept under the carpet? Fine man to lecture anyone on morailty; indeed, the Catholic Church has little connection with morality, or ever has.

7 October 2008 at 15:43  
Anonymous The Recusant said...

Contrary to common belief the Istituto per le Opere di Religione (Vatican Bank) is run by a professional bank CEO and its assets are not considered property of the Holy See. The purpose of the Istituto per le Opere di Religione is "to provide for the safekeeping and administration of movable and immovable property transferred to and entrusted to it by physical or juridical persons and intended for works of religion or charity".
It is thus not a department of the Roman Curia, and is therefore not among the departments of this central administrative structure of the Roman Catholic Church. Nor is it a central bank responsible for a country's monetary policy and for maintaining the stability of a currency and money supply. It is unlike a normal bank also in that any profit it makes does not go to shareholders, which in this case do not exist, but is used instead for religious and charitable purposes.
As for the enormous wealth of the Vatican, according to the CIA World Fact book, the budget in 2006 was revenues: $310 million, expenditures: $307 million. The Holy See made $3 million dollars, approx £ 1.5 million GBP You win more on the lottery.

PS If you want to know what God thinks about money, just look who he gives it to.

7 October 2008 at 17:36  
Blogger McKenzie said...

A most excellent post by His Grace. You have it spot on, I concur 100%.
My brother's friend has been renting his house from a private landlord, who has not been paying the mortgage on the property. A notice was pinned to the door last week giving 14 days notice to vacate the property. he has been to the CAB and it seems that he, his wife and two kids have no leg to stand on: the local council has offered them B&B. Compare and contrast this kind of treatment with that of the billions of greenbacks being pumped into the system in order to take care of their own. Sorry about this but emotion dictates, I hope they all fucking rot in hell.

7 October 2008 at 18:07  
Blogger McKenzie said...

I read this today and thought of ya all.

"The way I got it figgered, man is like a Tree Beettle. He's gonna eat himself outta house an' home an' keep fuckin' things up an' all, an' after the 'uman race is gone things'll get good again. Ya can't talk no sense inta tree Beettles, an' ya can't talk no sense inta 'uman bein's neither. Why, man is so dumb he couldn't find his ass with a six-cell flashlight and a mirror, so dumb he could fuck up a two-car funeral. Me - I'm gonna get my share while the gettin's still good."

7 October 2008 at 18:38  
Blogger Ttony said...

"96.75 per cent"? I'd have guessed at 97.36.

But you miss the fact that the Pope is smiling when he says that "money vanishes".

7 October 2008 at 20:44  
Blogger Cranmer said...

Mr TTony,

97.36%? How dare you.

His Grace could never agree with a pope to such an absurdly high degree.

7 October 2008 at 20:55  
Blogger Menelaus said...

"The credit crunch and financial meltdown show money is ‘nothing’..."

That's almost right, Your Grace. What the the financial meltdown shows is that most of the supposed money about is indeed ‘nothing’. It is merely paper. Indeed, some of it isn't even that.

The problem is the creation of imaginary money and abstruse financial instruments based thereon. When the game has got completely out of hand, the system of risk and lending collapses. (The lender can sometimes no longer even see the risk - "securitised" as it is.) Then the poor punters have to do the leg-work. Down to Northern Crock they go and start asking for their pennies. Pennies are there none - or not enough anyway. The banking dominoes then start to fall. These are the prime causes of the firestorm. The pretend money is the tinder but the cartel is the spark.

The cartel allows the weakness of the whole system to be disguised for a time. The apparently sound big beasts eat the apparently unsound little beasts from time to time. Everyone beats their chests and shouts about the market prevailing. And then the next weakest must be eaten and so it goes on. It is all in vain eventually. As the collapses accelerate the walls come tumbling down.

If it is any comfort I do not think that the fact that Labour governments crash and burn in financial crises is a coincidence. Nor is it really, I think, completely unintended. Maybe it is a rationally thought through but grossly inefficient way of redistributing wealth. Win power and then spend like billy-o on the sections of the populace and economy you favour. Use imaginary paper money and it has the added benefit of actually disbenefitting (through inflation and delay) those sections of the economy you don't want to favour.

7 October 2008 at 21:28  
Anonymous Jason said...

Interesting that the Pope's latest blatherings about false gods seem to directly forget the fact that the Vatican is sitting on a vast collection of priceless artworks which no-one has access to. I detect a slight hypocrisy here.

7 October 2008 at 21:55  
Anonymous steadmancinques said...

'The Countrey Parson is very circumspect in avoiding all covetousness, neither being greedy to get, nor niggardly to keep, nor troubled to lose any worldly wealth: but in all his words and actions slighting, and disesteeming it, even to a wondering that the world should so much value wealth, which in the day of wrath has not one dram of comfort for us'
George Herbert, 'The Countrey Parson, 1630

Glad to see that His Holiness has come round to the point of view of such a sublime Protestant and Anglican as George Herbert was....

7 October 2008 at 22:56  
Anonymous Anonymous said...

Jason, there is nothing hypocritical about the Pope's remarks. Those artworks as you rightly said are priceless. They are to be appreciate for the great works that they are. Are you the type of person that knows the price of everything and the value of nothing? - Damo Mackerel

8 October 2008 at 16:19  
Blogger Alex said...

Your Grace,

The pontiff should look to his church's own practices and how it has fostered recent behaviour through the use of derivatives.

Since its inception, the Christian church has offered nil-premium American style call options on salvation which expire on personal expiration. Instead of investing up front, rational market players with adequate controls in place to protect against the risk of failure to exercise will adopt such an option strategy, achieving the same payoff with a lower cost of carry and avoiding lifetime compliance costs.

It is not the personal cost that puts many people off: the regulatory environment has been quite daunting. But then as the Abbey shareholders and Bradfor & Bingley depositors remarked, nobody expects a Spanish acquisition.

Bearing in mind the current discussion regarding the extent to which loose money are to blame for the current state of affairs, the Pope should reflect on the extent to which the church’s lax policy on salvation has been a contributory factor.

8 October 2008 at 18:29  
Anonymous Anonymous said...


4 euro entry vatican museum, see all the art you want

8 October 2008 at 18:33  
Blogger prziloczek said...

The Iron Chancellor: a sonnet.

The original Iron Chancellor was, of course, Otto von Bismarck, who founded the Second Reich and unified Germany, making her one of the greatest states in the late nineteenth century world.

“The Iron Chancellor,” you said,
“Is what I plan to be,
“With Prudence as my handmaid,
“Your money’s safe with me.”

And then, with trust established,
You spent our hard earned cash,
Until, your pocket empty,
The Banks began to crash.

And now, in times of trouble,
You scrabble round the floor
Searching for extra pennies,
Yet promise billions more.

A nail-biting, silly Scot,
Otto von Bismarck you are not.

9 October 2008 at 17:33  

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