Edward Hadas

For once, investors have got it right. In 2008, their panic turned a financial crisis into a long multinational recession, but they have mostly yawned right through the drama in Nicosia. They hardly twitched at a stream of warnings from investment banks and pundits: bank deposits are no longer sacrosanct; the European Union has been exposed as despotic and incompetent; the Russians are coming; the Russians are going; capital controls will destroy everything; “bail in” (taking losses on loans that cannot be repaid) is the end of the world as we once knew it.

Such talk was out of proportion. Cyprus is a small country – its GDP would put it at 116 on the Fortune 500 list of the largest quoted U.S. companies – with a financial sector that had expanded excessively for two decades, almost entirely by attracting flight capital from Russia. A national financial collapse was both insignificant and merited. Besides, the EU and the International Monetary Fund had a plan to deal with the collapse: a combination of financial help from other countries and managed pain for depositors in Cypriot banks.

Alarmists could not deny all this, but they invoked the great demons of financial crises: precedent and contagion. That was silly. Cyprus was obviously a special case, and the European Central Bank was clearly determined, and able, to keep its problems from spreading. Even if Cyprus had left the euro zone, there would have been no dangerous precedents or grim effects, just a demonstration of a bizarre desire for economic self-harm. For everyone else, Cyprus would still be like a flea-bite – scratch for a minute and forget about it.

Why then have so many distinguished economists made so many dire predictions? I believe the answer is that they overestimate the current power of finance.

Recent history is on their side. For more than three decades, financiers almost always prevailed over political authorities. In the 1980s, they bamboozled politicians with spurious arguments for financial deregulation. In the 1990s, banks trampled over their regulators. In the early 2000s, central bankers became votaries at the altar of finance. They treated rising asset prices as signs of divine favour.

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.

“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.