Sarum College
The Niblett Lecture 2011
Reflections on the Financial Crisis
Mr. Chairman I would like to thank you for your warm welcome to the college. It is both an honour and a pleasure to be invited to give this lecture and I am delighted that the Rt Revd Peter Selby, the distinguished author of Grace and Mortgage, has agreed to be the discussant. I should also say how proud I am to be a Fellow of the College and to thank all those present, whether members of the governing body or friends of the college for their support for its activities.
The subject I have chosen for this lecture is ‘Reflections on the Financial Crisis’. I shall do so from a Christian perspective which is the heritage of the college.
The financial crisis has become such a frequent news item, much like sport or the weather, that you may well ask to which particular financial crisis am I referring?
------This paper is based on an address given in November 2011 at Sarum College and subsequent discussion at a meeting of Uniapac in Paris the following month.
The global crisis through which we are living started in the summer of 2007 as a banking crisis. In this country the crisis started with depositors in Northern Rock losing confidence in the bank and forming large queues to withdraw their money, something which had not happened since 1866. The crisis became far worse in 2008, resulting in the collapse of banks such as Bear Stearns and Lehman Brothers in the US and the rescue of RBS and Lloyds-HBOS in the UK. This led to a loss of confidence and the worst recession since the Great Depression of the 1930s. The banking crisis has been followed by a sovereign debt crisis in which the governments of Greece, Portugal and Ireland have had to be bailed out by the European Union and the International Monetary Fund, and the credit rating of the debt of many Eurozone countries as well as the US downgraded. Most recently there has been a Eurozone crisis, exposing the faulty structures on which the Euro was created and raising questions of whether the Euro can survive and if it can, whether some counties will have to leave to enable it to do so.
The crisis however is far more than a banking, financial or economic phenomenon. In one country after another the social fabric is being challenged by public expenditure cuts, unsustainable levels of household debt, rising unemployment, high youth unemployment, public sector strikes, protests such as Occupy Wall Street and in some cities riots. The crisis has a political dimension. The governments of Greece and Italy are being led by prime ministers who are unelected “technocrats”. The pressures created by fiscal austerity has led to the growth of political extremism and within the Eurozone the leaders of countries have become openly critical of each others policies. The European Union will almost certainly emerge from the crisis as a different institution – either a more closely integrated political and economic union or one broken down into blocs with some countries conceivably on their own.
The bottom line is that the financial crisis has led to a crisis of confidence in modern capitalism which has been critical to our heritage of liberty, democracy and prosperity.
In this lecture I would like to look at five aspects of the crisis.
Three Decades of Globalisation
The first is its context.
With hindsight the starting point for the crisis was not the collapse of the investment bank Lehman Brothers in October 2008, or the speculative bubble which developed in the years immediately preceding it, but the remarkable success of three decades of globalisation which raised global prosperity and reduced global poverty. Between 1980 and 2007 world gross domestic product grew by 145%, an average of 3.5% a year and it is estimated that during this time between 400-500 million people were lifted out of poverty. These years saw the emergence of Brazil, Russia, India and China with growth rates much higher than Europe or the US, a dramatic shift in the global economy from West to East and a change in the global balance between developing and developed countries. They were also the background to the euphoria which built up in the first decade of the new millennium.
The reason for the emergence of these countries was a radical change in their policies. They abandoned state planning, state ownership, import quotas, licensing regimes and price and wage controls. They moved decisively to allow markets to function more freely. Because market prices were allowed to reflect market conditions, capital and labour was allocated more efficiently, productivity increased and so did economic growth.
This change in policies resulted from courageous leadership. In 1978 Deng Xiao Peng opened up China to foreign trade and foreign investment, and since then the Chinese economy has grown by 10% per year. In the early 1990s in India, Manmohan Singh introduced policies away from a state dominated economy with a strong emphasis on planning and import controls, the so-called ‘licensed rag’ a legacy of British Fabianism, to a more market orientated economy. Since then rates of economic growth have grown to 5-7% per year. The leadership of Gorbachev in the Soviet Union led to the fall of the Berlin Wall and the Iron Curtain, the break up of the former USSR and freedom for the countries of Eastern Europe from Marxist economics. Since then all these countries have moved to adopting market orientated approaches.
For just one of these events to have occurred over a few years would have been remarkable. For all three to have occurred around the same time was similar to sighting a black swan. The changes resulted in more than two billion people entering the world economy as producers and consumers. Asian countries produced cheap goods based on low wages and exported them to the West, which in turn provided the basis for continued economic growth, low inflation and full employment in Western countries.
These policy changes had strong intellectual foundations. In the 1960s and 1970s the Nobel Prize winning economists Milton Friedman and Friedrich Von Hayek championed the case for the market economy and deregulation over state control and public ownership. Even though it was against the received wisdom of the time they set out to show that free enterprise economies were more effective in creating wealth than state planned and state controlled economies. They pointed to the marked contrast between the economic performance of Hong Kong and China, East and West Germany and the Asian tigers and India, something which was difficult to explain on grounds other than allowing markets to work. For them a free market economy was not just the basis for economic success but a necessary condition for greater political freedom and the extension of democracy.
Margaret Thatcher and Ronald Reagan were persuaded by their arguments. When they were elected as prime minister and president respectively they introduced sweeping economic reforms to strengthen enterprise and extend the role of markets in the economy. Price and wage controls, capital controls and foreign exchange controls were abandoned. Taxes were cut. Industries and public utilities were privatised. Quangos were dismantled. In the financial sector cartels and restrictive practices were abolished. Governments were encouraged to keep tight control over money supply growth to keep inflation under control. Public expenditure was controlled to allow room for tax cuts.
Public sector borrowing was restricted to allow scope for private sector expansion. Trade barriers were reduced to spread the benefits of globalization. These policies were championed by the IMF and the World Bank and became known as the “Washington Consensus”. For three decades they formed the cornerstone of the world economy.
The success of these countries is because they moved from being economies dominated by the state to ones which embraced the principles of a liberal economic order. Earlier in the twentieth century the success of the German economic miracle of the 1950s, the Asian Tigers of the 60s and 70s, and the Chilean economy in the late 70s and 80s are examples of the same move. More generally there has been the extraordinary rise in the standard of living of ordinary people following the industrial revolution which began in the eighteenth century.
The success of the past three decades along with other examples of success in economic history raise an important question for theology. Is there a theological underpinning for the success of market based economies?
For some people and especially professional theologians, this question may not only seem outrageously pretentious but an oxymoron. For them, market capitalism is without any theological foundation. They reject it because they see it as an engine driving inequality, injustice, global poverty and the destruction of the environment. From an ontological perspective they see it as a toxic source of greed, alienation and fetishism.
Ever since the industrial revolution of the eighteenth century theologians in the Christian church have seen part of their mission to catalogue the failures of capitalism rather than support its achievements or provide any theological basis to explain its success. The list of theologians who since the mid-nineteenth century have advocated some form of socialism reads like a who’s who of the profession: F.D Maurice, Bishop Gore, Emil Brunner, Paul Tillich, Reinhold Niebuhr, Walter Rauschenbusch, William Temple. In our time, Harvey Cox, Ulrich Duchrow, Jacques Ellul, Jurgen Moltmann. In Latin America theologians such as Boff, Gutierrez, Segundo and Trujillo developed liberation theology as a synthesis of Marxism and Catholic social thought. Until the publication of Centesimus Annus in 1991, papal encyclicals dealing with social and economic issues had, ever since Rerum Novarum in 1891 been highly critical of market capitalism.
As a result of this consensus the vocabulary and the framework used to describe capitalism by theologians is typically borrowed from a Marxist perspective. The key prism through which society is viewed is class, based on economic interest. Wealth creation is seen as a zero-sum game so that if some win others must of necessity lose. Capitalists win and grow wealthy but do so because they are a source of poverty, exploitation and alienation. Because of commodification and fetishism to use Marx’s concepts consumerism has emerged as a diabolical culture.
I believe that there is an alternative theological approach which is far more sympathetic to the market economy and which has its roots in the ancient wisdom of the Pentateuch and is affirmed in the life and teaching of Jesus. The fact of creation offers us a unique perspective on the human person, endowed with liberty, by nature creative and resourceful and with a God-given responsibility to take control and care for the physical world. The political economy of the Pentateuch offers us pointers to a fair and just economy in which exploitation is outlawed and each family retains a permanent stake in economic life. Stated differently this is the basis for sustainable wealth creation in a market economy based on the rule of law and the protection of property rights, in which the state has responsibility to ensure justice and provide for the poor.
In the narrative of the financial crisis which has developed we are in danger of focusing so much on the weaknesses and failures of the capitalist system that we are in danger of neglecting its success over the previous three decades.
Causes of the Crisis
A second issue is the cause of the crisis.
The proximate cause of the crisis is obviously economic. For many economists, bankers, civil servants, central banks and politicians the financial crisis was a purely technical economic event. It was similar to a huge systems failure, a massive brown-out, or a giant mechanical breakdown. The banks were undercapitalised. They priced risk incorrectly. They made bad lending decisions. They held far too little liquidity. They failed to value their assets at market prices. Their compensation structures rewarded short-term risk taking not long-term value creation. Those banks which were too big to fail had to be rescued at tax payer’s expense. The most serious problem was moral hazard. Large banks attracted a higher credit rating and lower funding costs because there was a perception that if they engaged in risky activities they would be rescued. This proved to be an incentive to take ever greater risks. The result was a “heads, we win, tails you lose” culture, in which gains were privatised and losses socialised.
For the banking system as a whole these are valid charges. Some banks were more prudent than others. But no bank can say that it did nothing wrong. If governments had not rescued banks, directly or indirectly, such was the panic at the height of the crisis that the entire banking system would have collapsed. Banks would have had to close their doors to the public and cash machines would have remained empty. Until normal service was resumed we would have been thrown into a world of barter. For this state of affairs the banking system must accept its share of responsibility.
It is important however that the failures of the banking system are seen as part of a wider picture. The years leading up to the crisis were a period of unprecedented prosperity. In the UK in the years preceding the crisis we had 64 quarters of continuous economic growth, accompanied by low inflation and full employment. At the same time average house prices rose from four and a half times average earnings to more than nine times average earnings. The euphoria this created meant that irresponsible lending was matched by irresponsible borrowing. In the mid-1970s the ratio of consumer debt (mortgages, hire purchase, credit cards) to household income was roughly 40-50%. By 2000 it had risen to more than 100% and by the time of the crisis it had reached 170%. This ratio was higher than any other European country and even higher than the US.