Goldman Sachs and moral hazard
Ah, Mammon. How we worship thee.
It is something of an outrage that the US and UK governments bailed out any of these deficient financial institutions. Perhaps the moral order demands that they be allowed to fail in order that malpractrice might be rectified. Bankruptcy is humiliating, it is a corrective, and capitalism is the system where people are allowed to fail.
But now that the banks have had their state aid and are turning around their fortunes, one gets the feeling that the taxpayer suffers the lean years while the bankers revel in the fat.
We hear the mantra ‘markets need morals’. But is it not profoundly amoral to bail out the banks for their irresponsible lending? Moral hazard refers to the irrefutable fact that insurance distorts behaviour: when one is insulated from the consequences of risk one behaves differently from the way one would behave if one were fully exposed to that 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 have granted 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 moral hazard arises when those banks and building societies enjoy all the fruits of the good years but are bailed out in the bad. Shareholders appoint boards of directors who make decisions on risky loans, and they all profit when the investment turns out well.
If Cranmer never profited from the years of plenty, why should he subsidise their years of famine? And if that famine is short-lived, why on earth are directors permitted to revel at the taxpayer's expense when the lean years are over?
Should they not invite the lowly, forgotten taxpayer to their party?
It is a perverse financial morality when the humble and oppressed are forced bear part of the burden of risky financial decisions made by irresponsible lending institutions.
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.
Judgement is inevitable.