Edward Hadas

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.

“Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.” The words are from a recent speech by Bob Diamond, chief executive of British bank Barclays. In a way, this is just the usual corporate guff. No boss will tell the world about untrustworthy workers who try to harm customers. But Diamond’s aspirations are a particular challenge for the financial industry.

Not that finance itself is an ignoble activity like drug dealing or contract killing. On the contrary, finance has a noble goal, the support of a just and effective economic community. Banks, fund managers and the like collect funds that is surplus to the owners’ current requirements. The funds are then made available to organizations and individuals which can make good use of them. The gains from that good use are justly shared between provider and user, with the intermediary taking a small fee for its valuable services.

That is a pretty picture, but in the pre-crisis finance world, the intermediaries often lost sight of their economic purpose. Customers came third, after employees and shareholders. Bankers, banks and other institutions were misled by a particular form of greed, the belief that finance is more about gaining than sharing.

These days bankers are often called greedy. The opprobrium is basically merited, but financiers are not that different from other players in the financial game. Investors are greedy whenever they try too hard to outperform the economy, especially when they don’t invest in new projects but only trade financial instruments. Homeowners are greedy when they expect to become richer by doing nothing more useful than borrowing money. Governments, and the voters they try to please, are greedy when they borrow to offer more services than taxpayers are willing to pay for. And shareholders are greedy when they ask for profits which cannot be earned without taking advantage of customers.

Financial greed permeated the economy before the crisis – and it has hardly diminished since. Of course, like lust or pride, greed lurks wherever people are found. But in most parts of the economy, higher aims keep greed in check. Yes, airlines are run to maximize profits and passengers try to minimize fares, but the planes would not stay in the air if safety were not everyone’s first priority. Yes, workers rarely say, “I don’t deserve or need that raise,” but the economy would grind to a halt if workers did not mostly try to do a good job, whatever the level of pay.

Finance really is different. Financial greed is not merely tolerated; it is lauded. Star investors are treated as heroes. Politicians, fund managers and homeowners all welcome sharp increases in the prices of stocks or houses, even though the gains are unearned and asset price inflation benefits the rich and leaves the poor behind. Financial regulation provides little help. It generally aims at making the game fair, not encouraging moderation among the players.

Barclays’ Diamond is on the right track; financial institutions should promote a new attitude. But bank employees do not work in a vacuum. Unless most of their clients also accept that greed is really not good – and regulators stand ready to take a firm moral stance – memories of the last debacle will fade and regulations will be circumvented. The lure of excessive financial gain will soon lead to excess in the markets – followed by collapse and new calls for moral introspection.

There is a better way, and it does not require the exercise of superhuman virtues. Ethical finance demands no more trust, integrity or respect for clients than is already found among airlines. What it does require is a clear understanding of the purpose of the trade: the mutual benefit of all.

That understanding is hardly new. It was accepted by most local banks (think of the community support offered by Bailey Savings and Loan in It’s a Wonderful Life) and it inspired mutually owned financial institutions, which were common – and mostly successful – until a generation or two ago. The mutual structure (banks owned by their customers) makes economic sense, since bank depositors and borrowers are basically the same people and institutions, just in different phases of their economic life.

Demutualization, which turned careful depositors into greedy shareholders, was a theme during the decades of financial excess. A return to the practice and culture of mutuality should be at the top of an anti-greed financial agenda. The rest of the agenda is a topic for future columns, but Diamond does not go far enough. Nothing will work unless all of us – not just bankers – are committed to trust and integrity. In the words of George Bailey: “We can get through this thing all right. We’ve got to stick together, though.”