Finding a way to make finance less sacred

By Edward Hadas
February 29, 2012

Has finance become a “false divinity in the world”? Pope Benedict XVI thinks so. “We see that the world of finance can dominate the human being,” he has said.  “[It is] no longer an instrument to foster well-being… [it] becomes a power that oppresses, that almost demands worship.”

As well as warming the hearts of banker-haters everywhere, the Pope’s criticism is well aimed. Not only did the finance industry’s arrogance help spur crisis and recession, but there’s something dangerous at the core of finance. The human good can all too easily be lost when people’s past work and future hopes are expressed in purely monetary terms.

In the Old Testament, the ancient Israelites were warned that too rigid a view of financial obligations is cruel and socially divisive. Aristotle added another essential objection. The ancient Greek philosopher pointed out that monetary wealth can keep on increasing forever — unlike our appetite for the things that money can buy. Yet while the worldly infinity of finance is alluring, it is ultimately false. Money has no human meaning on its own, but only when it serves a meaningful purpose.

The risks of inhumane finance may be eternal, but the Pope is also alluding to a more modern problem – the treatment of finance as a sort of god, and financiers as its priests. Consider four manifestations of the quasi-religious approach.

First, the magical expectations of finance. Too many people, and too many governments, imagine that some arrangement of the financial system — this monetary and fiscal policy mix, that sort of mortgage, this stock market, that collection of derivatives — will generate durable wealth or economic justice.

Second, think of the awe which surrounds the industry. The economic forecasts of financial professional are rarely right, but they receive the sort of respect once given to (equally inaccurate) oracles of divinity. The pronouncements of leading financiers, from George Soros to Warren Buffett, are taken seriously simply because these people have made lots of money in the financial markets.  Political leaders tremble at the judgements of financial markets.

Third, consider the treatment of central banking as an activity beyond normal human understanding. A few decades ago, these financial practitioners were considered too elevated to be politically accountable. More recently, faith in central bank independence has been shaken: but it has not been destroyed by their abysmal record before the financial crisis. Indeed, Ben Bernanke and his peers have been given more power — and only a little more supervision from the mere mortals who have won elections.

Finally, despite much anti-banker rhetoric, the world continues to shower its own rewards on the high priests of finance. Thomas Philippon, a professor at New York University, has shown that the share of U.S. national income dedicated to finance has fallen only slightly since the crisis, when it was at its highest since records began in 1865. The profession’s leaders are amazingly well paid. The average income per head at Goldman Sachs in 2011, a grim year for the leading investment bank, was $354,000, or about nine times higher than the national average. Philippon estimates that about a quarter of the financiers’ total income is unmerited. I suspect he is much too kind to the financial world.

In an ethical economy, none of this is right. Money can seem to make money for a while, but no amount of financial alchemy can generate real wealth. Financial professionals and financial markets are fallible. Central banking is inherently political. And the temple offerings to finance, in the form of inflated salaries, are excessive.

Still, finance should not be condemned as entirely evil. The modern industrial economy relies on money, credit and the hurly burly of investment to function. For all its flaws, the current financial system is more efficient and flexible than alternative means of gathering and allocating economic resources such as barter or rationing. At its best, and when it works, the business of banking and investment promotes the common good: it creates solidarity among savers and borrowers and rewards both daring and prudence. Lloyd Blankfein, chairman of Goldman Sachs was not entirely wrong to claim that his firm did “God’s work”.

Indeed, at the bottom of the economic ladder, people need more, not less, finance. Financial inclusion of the sort endorsed by the G20 finance ministers last week is desirable. But at the top of the ladder, the industry needs what students of religion call desacralisation.  The modern incarnation of the Israelites’ golden calf should be stripped of the trappings of holiness. It is better for finance to serve the genuine economic good on earth than to aspire to an unmerited place in heaven.

10 comments

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Great article displaying insight. I would only add that it is the watering down of real religion,where practices used to be for the purpose of diminishing ego and now provide avenues to increase ego, that creates the vacuum for a false religion to thrive. As Albert Einstein once prophetically said,the religion of the future is Buddhism. It’s only logical!

Posted by urownexperience | Report as abusive

The fact that Warren Buffet is referred to as the Omaha Oracle screams that money has replaced deity. The Pope is correct – when you are poor, finding a way to get money dominates your thoughts. Money is necessary but the obssessive desire to have and hoard insatiable ungody amounts is demonic in its nature. It is more about power than on what you can spend it all on. Of course I am speaking of the multi-billionnaires and mega rich corporations hoarding millions in the Caymen Islands or some other island. Remember the more you hoard, the less someone else will have. So by massive hoarding you are stripping someone else of the opportunity to get basic necessities or their chance to retire at all. Only so much money is printed and therefore in circulation. If you have it all, someone else doesn’t have any.

Posted by JLWR | Report as abusive

And after picking up my jaw which had dropped through the floor to the basement of my building, I can only say one word: “AWESOME”

Finance is the medium to make capital more liquid and available so that an individual with ability to make something that can improve the standard of living for all of us can actually realize his idea.

Finance and borrowing creates more equal opportunities for people who were not fortunate enough to inherit lot of money from someone else. These people can now have certain level of capital to consume and do their job and make life better for all of us.

But as we move forward with technology, less and less capital is needed for an unfortunate man to realize his potential. Google was started in a garage which needed way less capital than starting a factory. Finance’s role has to shrink, but they refuse to and keep channeling money into the wrong hands creating bubble and inflation.

Finance does not create real wealth (and thus makes life better). Finance only channels capital into people who don’t have capital, but capable of generate real wealth in the future.

What we have now is the channeling of money into the hands of a lot of people/companies who are not really capable of generating real wealth.

Just think of all the people trying to swindle us into buying junks everyday, all the companies (hello dot com) that are bubble just so certain people can be swindled into giving their money to these companies’ stocks and lose it to the scammers.

The way I see it is very simple, real wealth (good standard of living) comes from two sources only:
1) People working more hours
2) Better technology so people can work less hours and/or less resources being necessary

No amount of “financial alchemy can generate real wealth”. And general inflation is very simple. It’s money supply being increased (printed) but incorrectly channeled into people and/or companies incapable and/or unwilling to do 1) and/or 2) above.

There is another kind of inflation which is product specific, sector specific, region specific, etc.. (ie local inflation). It’s caused by the same thing, imbalance(over flow/supply) in demand/money in that particular sector/product/services/regions/etc.. without adequate increase in 1) and/or 2) of that locality. Hello inflation of basic food, gas, etc…

Money is like the blood of the economy and financial institutions are like the veins and the heart, but the brain, the technology is actually the main important thing. I think we make the same mistake as certain people of the bronze age overestimated the importance of the heart and underestimated the importance of the brain.

Posted by trevorh | Report as abusive

True, “for all its flaws, the current financial system is more efficient and flexible than alternative means of gathering and allocating economic resources such as barter or rationing.”

Except that the next step down the ladder is NOT barter or rationing, which leaves a false impression among those not familiar with finance and economics. There are numerous alternatives available that could do the job reasonably well without all the collateral damage of capitalism.

Also, the problem with capitalism is globalism. Capitalism, as proposed by Adam Smith in his Wealth of Nations, was and still is the finest distribution method in history. And therein lies the problem.

This is NOT capitalism as it was proposed by Adam Smith. This form of capitalism is what he warned us about in the Wealth of Nations.

——————————————————————————————–

Note the following except from Wikipedia:

“Smith’s belief (was) that when an individual pursues his self-interest, he indirectly promotes the good of society.

Self-interested competition in the free market, he argued, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services.

Nevertheless, he was wary of businessmen and warned of their “conspiracy against the public or in some other contrivance to raise prices.”[76]

Again and again, Smith warned of the collusive nature of business interests, which may form cabals or monopolies, fixing the highest price “which can be squeezed out of the buyers”.[77]

Smith also warned that a true laissez-faire economy would quickly become a conspiracy of businesses and industry against consumers, with the former scheming to influence politics and legislation.

Smith states that the interest of manufacturers and merchants “…in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public…

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”[78]

———————————————————————————————–

In other words, what we call capitalism today is EXACTLY what Adam Smith warned us against.

EVERYTHING that society tells people today about capitalism and what it means is a deliberate distortion of the whole truth for their advantage at our disadvantage. A zero-sum game. They win, we lose.

Globalism has allowed capitalism to be perverted because through the internet it can provide real time control of distant manufacturing facilities, thus making capital investment anywhere in the world relatively risk free for the first time in history.

Globalism has enabled the wealthy, who Adam Smith warned us about, to do everything he mentions in the excerpt — all safely beyond the reach of any laws or regulations.

This results in a total lack of control for anyone who isn’t on the “inside”.

THAT is the problem with today’s version of capitalism.

Posted by Gordon2352 | Report as abusive

It’s probably a mistake to try to make a moral issue. The real question is whether financial economists are using models that are adequate to the task at hand. For example, it is said that the economic models used today discount future earnings too much, with the result that present gain is overemphasized compared to future loss. To illustrate, look at the unstated policy of the United States during the last 40 years or so to encourage its manufacturers to move production overseas. In the 1980s, there was a substantial movement of production to Japan, and, in the 2000s, there was a substantial movement of production to China. In both cases, there was immediate gain for the owners of the companies that moved their production overseas (or, in the case of Japan, companies that shifted their distribution from U.S. to foreign brands). The downsides did not show up when the U.S. economy was viewed on a day-to-day basis. Over time, however, these shifts of production have meant transferring substantial wealth from U.S. consumers to foreign manufacturers. This wealth does not return to the United States as long as the United States is a net importer. That means that the wealth that U.S. consumers are transferring overseas no longer circulates within the U.S. domestic economy and is not replaced by new money coming in from overseas as long as the United States is a net importer. This is an example of how the economic models used to guide U.S. policy are inadequate and can lead to bad policy. The problem is a practical problem of developing the economic tools to get U.S. policy right in this regard.

Posted by Bob9999 | Report as abusive

To Bob9999,

A VERY accurate summary of how and when we as a nation took the wrong road towards globalism, which I maintain is the real problem for the reasons stated.

However, I wouldn’t cast that movement in moral terms, but as a logical result of a shift in geopolitical perceptions and ambitions in the US after WWII (which was, for example, dramatically different than after WWI when we wanted isolation and no more European wars).

After WWII the US began to think of itself as some sort of savior/guardian of the human race from tyranny, a policeman responsible for punishing the wicked, bringing the benefits of democracy to the world in the style of an evangelist, and certainly as a knee-jerk reaction against communism, the ultimate Evil Empire.

Those were fundamentally political decisions based on a “new order” in the world, and had no sense of morality in them, except perhaps a sort of quasi-religious morality that we are better than everyone else.

In other words, for a number of reasons far too complex to cover here, the US developed a massive superiority complex that quickly morphed into a lust for power.

This was a fundamental shift in our society from the top down, but I wouldn’t characterize it as being moral — religious fervor perhaps, but certainly not moral in the classical sense.

Contrary to what you said, most economists do not consider morality in their forecasts, but take a more “objective” approach. For example, in considering labor they see it as interchangeable from one nation to another (i.e. simply another factor of production).

So in the advice being offered to the politicians/wealthy class that run a country there is no question of morality about a decision to move a job overseas or not.

Moral considerations simply do not enter into the equations.

You might think this would make an argument FOR injecting humanism and morality into economic theory, but that would be a grave mistake.

History has shown many times over that religion/morality do not combine well with economics and financial policy. It merely adds yet another reason for one person/nation to see another as inferior, and use moral superiority to justify massively immoral conduct.

Morality has its place, but it certainly isn’t in economics.

Morality rightly belongs in politics.

It is what keeps a society from self-destructing on its own greed and folly.

The main difference between the US pre and post-WWII is that we were a more moral nation — not in terms of classic morality because we have never treated our citizens or other countries well in that sense of morality — but in terms of a feeling of morality of the common good as a nation.

I would rather cast this “morality” in terms of “a sense of national morality” that expanded with the nation as it moved westwards. This was certainly done without a sense of “classical morality”, but one of “national morality” at the expense of others.

Nevertheless, prior to WWII there existed a sense that, despite all our differences, we were one nation with a sense of purpose as a untied people. Rightly or wrongly, it existed and we survived.

That morality/nationality for the common good of our country — a commonality of purpose as a people — disappeared after WWII.

Due to the loss of that sense of “morality as a cohesive nation” our government leaders have lost their sense of morality they owe their own people.

Thus, like economists they have become “distanced” from their own nation, completely unconcerned with the fate of its people, and see themselves as “global citizens” without any lingering concern for what they are doing to the US as a result.

THAT is how I see economics and morality.

The problem is that we, as a nation, have begun to see ourselves as “global” when nothing could be further from the truth. We need to rediscover ourselves as a nation once again — hopefully with a better sense of classical morality — otherwise we will not survive much longer.

Posted by Gordon2352 | Report as abusive

Who decides morality? What special dispensation is required to judge anyone else’s actions? The use of ‘right’ and ‘wrong’ is a piece sheds light on the writer’s bias and their shortcomings. When the word ‘should’ appears then the writer has climbed onto the soapbox of moral high ground called BELIEF. The real danger here is that the box get too tall and the writer falls off.

What religion is ‘right’ or ‘wrong’? Every child is spoon fed a huge dose of garbage thoughts by their parents, teachers, friends, religious leaders and the media. They settle on a hand-me-down set of rules and beliefs that they are expected to defend to the death if necessary by their peers, parents, country, religious or political leaders. They wind up defending something they have never even thought about in depth before.

No wonder the majority of people are referred to as sheeple or sheep people. Follow the leader to the slaughter no matter what. Do not have an original thought and never take a career or political risk and threaten those who say they love and trust you.

Finance as religion? Sure, it makes as much sense as any religion. Symbols, rules, incantations, offerings, run by white men in suits and the bar to get in is always moving. Nice if you want to get into the game, but interestingly not really necessary to live a good life, and soon, the house will begin to deteriorate and the new kings will be producers of goods again.

Posted by Tallcoach | Report as abusive

This is a Pulitzer Prize winner.

Posted by WeWereWallSt | Report as abusive

[...] see a similar bit of “almost” in a recent article by Edward Hadas: “Finding a way to make finance less sacred“. It’s a good article. Hadas is all over this thing from the start. He starts by [...]

Water still flows downhill. Money still flows to where it finds the best return on investment. With an evermore interconnected world, trying to make investors invest in poorer performing risks is naive. It will not work. it should not work. It never will work.

Posted by 3thompto | Report as abusive

“Remember the more you hoard, the less someone else will have.”

Wrong.

Money – or better, wealth – is not a finite commodity. Wealth ebbs and flows. In one day, trillions of dollars of “wealth” can disappear because of market downturns. No actual bills were destroyed, no banks exploded.

Wealth is the perceived value of things seen and unseen that have the potential to create more wealth. In other words, wealth is intangible and ethereal.

Saying that because 1% have more “wealth” than a significant portion of the rest of the population merely is stating that the perceived ability of that small group to generate additional wealth is disproportional high. Take all of their investments away and come back ten years later. Odds are, the formerly wealthy will once again be the top 1%.

Posted by 3thompto | Report as abusive