Edward Hadas

Here are some depressing figures: 133, 20, 4, 3 and 1. They are the most recent key counts in what might be the most alarming of all the financial scandals since the 2008 crisis, the sometimes successful efforts of traders to rig benchmark rates.

The first four numbers come from Singapore; they count up, respectively the traders, institutions, years and rates involved in attempted manipulation in the city-state. The one is for Tom Hayes, the first and so far only trader to face criminal charges for messing with the Libor interest rate. Investigations of possible unfair play in energy-price benchmarks are continuing, but it is already clear that too many traders in too many markets tried too often to profit by manipulating supposedly objective readings of market conditions.

In cash terms, the machinations are hardly a problem. In comparison to the hundreds of billions lost and the score of institutions capsized by reckless speculation made before the 2008 financial crisis, any losses – the Singapore authorities say that rates there stayed honest – were microscopic. While the distortions of one-hundredth of a percent were large enough to enrich a few traders, they were too small to make anyone else noticeably poorer, or to add much to the profits of the banks which employed the crooked traders.

The ethical and institutional balance is quite different. The small size of the potential gains reduces the role of intoxicating greed. Greed led banks into risky transactions which seemed to promise huge gains, and helps explain why bosses were not vigilant about rogue traders as long as the rule-breaking produced profit. Greed is not good, but it does less social damage than sober dishonesty. And institutional dishonesty is the best explanation for the tolerance of behaviour which brings such small gains and so much reputational damage. The financial industry suffered from the moral equivalent of total tone-deafness.

The provision of financial benchmarks is basically a sort of public service. These reference rates allow economic actors – borrower and lenders, buyers and sellers – to take advantage of the ability of financial markets to determine a fair price without the inconvenience that comes with actual market transactions.

In many ways, the financial world has changed remarkably little in the five years since the 2008 financial crisis. Yes, banks, brokers and other intermediaries are neither as profitable nor as popular as in the pre-crisis years. However, the industry is still arrogant, isolated and ridiculously lucrative. Leading financiers look more like pre-revolutionary aristocrats than normal businessmen.

Pay is the most obvious sign of this privileged social position. Consider JPMorgan, a fairly typical financial firm in terms of remuneration. Last year, the annual compensation per employee was $192,000.

That already seems high, but the measure includes the majority of employees whose pay is bunched around the $45,000 average for non-supervisory U.S. workers in finance. Assume that two-thirds of Morgan’s employees were in that group. For the rest, the people at the top and upper middle of the company, that leaves an average pretax reward of $485,000 – more than 10 times the norm of the lower orders.

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.

Financial markets are unstable, unhelpful and often immoral. They should be kept under better control.

My disdain will be dismissed by free-market enthusiasts. For them, lively markets where equities, bonds and currencies are sold at publicly disclosed prices are clearly a good thing; they may even be capitalism at its best. Such open markets, they say, both improve economic efficiency and make society more free.

Not so; these markets are economically and morally harmful. Let me be clear. I am not discussing what non-economists usually mean by markets, the generally useful supermarkets and farmers’ markets. Nor am I debating the merits of what economists refer to as the “market” – the real or virtual place where buyers and sellers make transactions. Nor is this a screed against all of finance. Banks and insurers do not need financial markets to gather savings and make loans and investments.

The Islamic approach to finance was once the most advanced in the world. The period of pre-eminence ended six or seven centuries ago, but the religion’s fundamental insights into the field could help form a financial system suitable for the 21st century.

From the beginning, Muslim teaching took a religious view of commercial relations and responsibilities. There are a few injunctions in the Koran and far more in the teachings traditionally attributed to Mohammad. I am not an expert, but the basic ideas seem clear enough: merchants should be fair, risks should be moderate and understood, and God condemns all rapacious financial practices.

During the first centuries of Islam, Muslims became great traders, providing an economic bridge between Asia and Europe. Europeans adopted and then further developed the Islamic techniques of providing credit and of sharing responsibilities, risks and rewards. Christian thinkers continued the Islamic debate over what was fair and just, and church authorities copied the Islamic teachers’ practices, ruling on the legitimacy of transactions, and exhorting merchants and investors to restrain their greed.

Greed contributes to all the economic and financial woes of prosperous societies. The United States and other rich countries produce much more than is needed to support all of their people in comfort, so if desires were all truly modest, there would be few problems. Greed encourages people to decide that their own share is too small. Greed influences the popular desire for GDP growth (more, faster), financial gains (higher house prices as a human right) and total economic security (guaranteed pension, come what may). Voters’ greed encourages governments to spend more and tax less.

During the boom years, politicians and economists consistently underestimated greed’s disruptive power. While few endorsed the extremist view that greed is actually good, even fewer acted as if it were dangerous. The rhetoric changed during the crisis. It has become fashionable to add “greedy” to the description of any unpopular group – bankers, highly paid executives, rich people in general, welfare cheats.

In theory, the entry of greed into the public discourse ought to be helpful. If those subject to immoderate desire could be identified with certainty, then society might take up arms against them. While we might never win the battle, we could at least hope to shame and restrain the malefactors.

There is only one good, proven, way to organise a political economy in the modern world – and that’s via the Big Honest State. Right now, one key aspect of the BHS is under serious threat.

What is the BHS? As the name suggests, it is large. In quantity, the various organs of a BHS account for 30-60 percent of GDP. In quality, the state dominates education, health care, industrial policy and the financial system. The BHS is also trustworthy. Its official bureaucracies are expected to be, and mostly are, meritocratic and dedicated to the common good. A BHS, though, is far from the total government of fascists and communists. One of the defining facets of the BHS, indeed, is that it works alongside a vibrant non-state sector.

The basic BHS model has been adopted in all advanced economies and it is aspired to by most leaders in almost every developing country. Universal adoption is easy to explain: the BHS works well. It has delivered a reasonable mix of prosperity, protection and social support. It has proved remarkably sturdy. Since the Second World War, no BHS country has had collapsed into chaos, become impoverished or suffered fundamental social breakdown. The system is also popular with voters, even if many government-hating Americans hate to admit it.

The headline could have come from a hundred places any time in the last hundred years. “Market has gone wild”, it read. The accompanying news report explains that the price of a crucial financial asset is in “free fall”. Traders and businessmen are calling on the government to step in.

The asset in question could be peripheral euro zone government debt today, global equity markets in early 2009. The wild market could have been soaring rather than falling: the stocks of 1929 and 1999, the house prices in Florida or London in the 2000s, or the supposedly safe government bonds today.

The actual headline comes from a Hong Kong newspaper in 1983, when investors in the then British colony began to fear the worst from a Chinese takeover. The UK’s Minister of State told the locals to “have confidence in yourselves”, but, as today’s Spanish and Italian politicians can ruefully confirm, such rhetoric is not enough to stop an investor stampede. A few weeks later, the Hong Kong authorities did indeed take the matter out of traders’ hands – they fixed the exchange rate between Hong Kong and U.S. dollars.

Stability has been one of the most elusive economic goods. Despite more than a century of effort, economies remain prone to downturns, which often come after booms that proved unsustainable. Rich countries are currently stuck in one of the down periods, a seemingly endless Lesser Depression.

Economists argue about the details of what went wrong, but they often miss something basic: persistent instability is surprising. Surely, societies which summon enough economic ingenuity and organisation to develop smart phones, manage global supply chains and pay for a dozen years of universal education can manage to maintain a steady pace of overall economic activity? All that is required is the identification and early correction of imbalances, in both the real economy and the financial system.

In the pre-industrial age, good macroeconomic management was all but impossible. As long as agricultural activity was the economic mainstay, a poor harvest led not only to less food but to less spending by farmers. Their purchases of ploughs and shoe leather declined, even though a temporary spell of bad weather had no effect on production capacity.

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.