GOD & the Markets

In the Middle Ages, the financial crisis that has devastated Wall Street would no doubt have been likened to the wrath of God that destroyed Sodom and Gomorrah. One of America's biggest banks, Lehman Brothers, has filed for bankruptcy, throwing thousands out of work (including up to 5,000 at its London subsidiaries) and threatening a dangerous chain reaction throughout the global financial system. As in the story in Genesis, so in the twenty-first century, the root cause of this sudden reversal of fortune was pride, arrogance the sense of being able to act like Masters of the Universe. Indeed this is the title used, only half ironically, to describe the self-regarding financial dealers whose excesses lie at the core of what has gone wrong now. The retribution they face, if not explicitly divine in origin, is providential, for the financial system they had manipulated for their own ends had become unstable. A corrective, however painful, was overdue.

The fate of Lehmans was a dramatic demonstration of the principle of moral hazard in financial markets. Those who take large risks should have to face proportionately large consequences if things go wrong; it is moral hazard to remove risk by removing those consequences, for instance by Government intervention, thus encouraging irresponsible behaviour. That has been one of the major arguments against interfering to alter the natural outcome of market forces. But another principle has had to be given even higher priority: that governments have to ensure that financial systems do not collapse altogether. The American authorities calculated that the meltdown of Lehman Brothers, notwithstanding the colossal scale of the sums involved, was not worth preventing, and turned off the tap. But the British authorities, faced with a similar dilemma when Northern Rock defaulted last year, decided the effect on public confidence in the banking system would be too severe if events were left to take their course, and took it into public ownership. The American Government acted similarly over the two major US government-sponsored mortgage lenders, so-called Freddie Mac and Fanny Mae; and has stepped in to rescue AIG, the country's biggest insurance company.

These are striking failures at the heart of the capitalist system, showing it has an inbuilt tendency to self-destruction. However they are presented, these recent nationalisations are solutions which 20 years ago might have been described as socialist. Where this leaves the ideology of free market capitalism, which Americans have often thought of as their great gift to the world, is too soon to say; but it is palpably discredited. The proposition that the common good should always trump market forces, which is at the heart of Catholic Social Teaching, has, albeit belatedly, been vindicated.

What has happened to financial markets in recent weeks seems almost remote from the everyday lives of ordinary people. In the months to come its effect will be felt in savings plans, in pensions, and in prices. It is yet to be seen whether the theory that wealth trickles downwards works in reverse. Financial speculators have driven up the price of fuel and food, while the vast bonuses they have been paid have stretched the divide between rich and poor. Their success has spread the dangerous message that greed is good. All these anti-social tendencies needed correction: it is an ill wind that blows nobody any good.