Religious authorities do not necessarily spend a lot of time pondering the nature of global financial systems, but Pope Francis' recent comment that 'money has to serve, not to rule' suggests it can be useful when they do. For at least a decade, the failure to make money something that serves is exactly what has gone wrong in world finance — and to an extraordinary degree.
The tension is hardly new, indeed it is as old as the vice of usury. Allowing bankers to gain too much power has been a recurrent problem for centuries. In the 1930s, Franklin D. Roosevelt used the term 'banksters' to describe a rapacious finance sector that was exploiting the misery of others for profit.
In 1861 Abraham Lincoln created the 'greenback', dollars that were printed in green by Congress which had no interest rate and had not been borrowed from banks. That way Lincoln was able to get around paying money lenders interest rates of between 24 per cent and 36 per cent to finance his war effort.
'The people can and will be furnished with a currency as safe as their own government,' announced Lincoln. 'Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.' Needless to say, these interest free greenbacks did not last long — and neither did Lincoln.
This time, however, the problem is different. Money is rules, rules about value and obligation.
Normally, financiers depend heavily on the enforcement of those rules by governments, even as they exploit them for their own use. Thus Shakespeare's character Shylock praises Portia when she gives judgement in his favour as 'noble' and 'worthy' when she says the law must be carried out and he can have his pound of flesh (he is only defeated by a legal technicality, not by the law being flouted).
Governments change the rules of money from time to time, often in order to stop financiers enjoying mastery over everyone else. But over the last three decades, a period euphemistically described as financial deregulation, something very different has been happening.
If money is rules, then how is it possible to deregulate them? It isn't. So what was financial deregulation? It was governments allowing financiers to make up their own rules, in effect ceding their responsibility to govern. This is not the usual cycle of boom and bust, nor is it a customary battle over who is servant and who is master.
When the debauch with rule making (financial deregulation) all went wrong in 2007 the financiers realised they were as dependent as ever on governments. Predictably they turned to them to bail them out (to the tune of $6 trillion in the United States according to some estimates). The financial system is sputtering back into life.
But there seems to be little appreciation of how deep the problems are. The basic problem, allowing financiers to make up their own rules, has not been addressed.
Permitted to become the rule makers, rather than just people who know how to exploit the rules created by governments, financiers have manoeuvred themselves into a position of systemic mastery — this time they really have become the 'masters of the universe'. It is a new form of hyper usury.
These new rules come in many forms, usually accompanied by heavy computerisation. They go under the title of derivatives (transactions derived from more conventional forms of money like stocks, bonds, bank debt, currencies, physical gold). Derivatives amount to more than $US700 trillion, according to the Bank for International Settlements, more than ten times global GDP and more than twice all the world's capital stock.
These large sums allow financiers to be masters over governments. Dr Robert Johnson, executive director of the Institute for New Economic Thinking, recently commented that the attorney general of the US, Eric Holder, complained that he cannot prosecute crimes in the largest banks because it might undermine confidence. That is why not one prosecution has been brought against bankers since the global financial crisis.
The derivatives market is 97 per cent dominated by six banks, which make about $35 billion a year from the trade. Analysts estimate that if you properly structured derivatives — brought the rule making under at least a semblance of control by putting them on exchanges, making them more transparent, properly capitalising exchanges — the banks would lose $7 billion a year.
A financial bill gets through Congress about every five years, calculates Johnson, so the profit at risk if bankers are not allowed complete freedom to make up their own rules is about $35 billion.
'As it turns out,' said Johnson, 'the banking lobbies spend about $600 million which overwhelms American politics. It is the dominant force in American politics given the importance of money and how our society works. For $600 million these guys can protect $35 billion of profit. Fabulous risk return for them. Terrible for society.'
When financiers are allowed to make up their own rules, the result will inevitably be a crisis or collapse as they try to game each other. The global financial crisis was an inevitability, and the subsequent partial recovery has been about the best possible outcome.
Pope Francis argued for the 'need for financial reform along ethical lines that would produce in its turn an economic reform to benefit everyone'. This seems unlikely when financiers are able to make up their own rules. The hubris that accompanies such mastery tends to destroy perspective, let alone ethics.
The Columbia university economist Jeffrey Sachs described the situation this way in a recent talk to bankers at the Philadelphia Federal Reserve: 'I regard the moral environment as pathological. And I am talking about the human interactions ... I've not seen anything like this, not felt it so palpably.'
David James has been a business journalist for 25 years and is the author of Managing for the Twenty First Century and The Business Devil's Dictionary. He has a PhD in English Literature from Monash University.
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