The futility of hoping for a reset of finance’s ‘moral compass’

This post is prompted by reading in my twitter feed that Martin Wheatley of the UK’s Financial Conduct Authority had said that finance had ‘lost its moral compass’.  Sermonising like this is completely unhelpful in my view.

Almost all in every era in every field of activity were guided by self-interest.  I doubt that financiers of days gone by had more tender hearts.  Or that the £ signs light up any less fiercely in the eyes of non-finance business people.  All that differentiates business from finance is that the consequences of selfishness for the wider economy are less serious.  Business selfishness is less likely to lead to systemic fragility.  All that differentiates past financiers from those of today is the possibilities for money-making afforded by innovations (internet, credit scoring, securitisation), new clients (newly wealthy emerging market investors) and new regulations.  Financial leopards won’t change their spots.  So no moral compass now means none ever.

Campaigning for moral finance is a distraction from the task of actually doing something useful to prevent another crisis from happening;  like understanding what really caused the crisis [why the consequences of ubiquitous selfishness were so acute in finance], and what activities could be regulated and how.

How would you ever objectively measure financial morality anyway?  And who would ensure the moral compass of the moral compass inspectors?

Moral compass sermonising misses one of the key points about the crisis.  Let’s imagine that it culminated in one gigantic bank run.  It wasn’t all about retail banks, of course, but the other non-bank intermediaries perform very similar functions.  There came a point where everyone wanted to pull their money out because they thought (correctly) that everyone else did.  Suppose we could somehow persuade all these investors that when they cash in, they should give their entire wealth to charity [achieving a kind of Wheatlian moral bliss].  If they feared for their investment, they would still pull out, and bring the market/banks crashing down.  Because if they didn’t, they would not get their money back, and their hearts would bleed.   Resetting everyone’s moral compasses in this way would not stop runs.

I suppose you might say that if we could hard wire their compasses with an ‘after you’ instruction that would cure bank runs.  True.  But no-one is ever going to manage that.

To some extent, the damage is done.  It’s already de rigueur to try to stress how nice you are in your advertising if you are a financial services company and is a standard part of the PR budget.  Just as for other companies they have to spend to pretend to be greener than they are, or pretend to be cooler, or not to be advertising when they are, or to be selling stuff because they like it, or to be representing you in Parliament because they feel it is their calling [or to be blogging because they think it might be useful].

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7 Responses to The futility of hoping for a reset of finance’s ‘moral compass’

  1. Dan Davies says:

    The ugly secret is that:

    a) Wheatley is actually more correct than you give him credit for. Banking and finance genuinely were less rapacious and less aggressive in terms of finding new and dishonest ways to rip the customer off, back in the pre-Big Bang era

    but

    b) What he refers to as a “moral compass” is actually what economists of the day refered to as “the clearing banks’ cartel”. When you’ve got a tight oligopoly in the market for current accounts, and Bank Rate is 6%, then you don’t need to go hustling round mis-selling payment protection insurance. When the mortgage market was capital-constrained to the point of literal rationing, then there wasn’t much of a push into subprime. Banks were less aggressive about finding new ways to rip off the customer because they were less aggressive about everything, because they could afford to be.

    It’s partly a story about X-inefficiency (“the greatest monopoly profit of all is an easy life”) and partly a story about franchise value. When being a clearing bank is a licence to print money, then a bank will do everything it can to protect its good name, and will jump six feet in the air every time the Governor raises an eyebrow. When it’s a so-so business subject to competition from all sides, you can’t be surprised that the management decides that a good name is a luxury item and the regulator is their enemy.

  2. Luke says:

    Following the above comment, could there now be a greater number of people/companies involved, so you can stiff someone and move onto the next victim? Also if you make money faster? No need to keep your good name if you can retire at 40.

    Neither have much to do with morals, I agree

  3. Andrew Poulton says:

    Anthropological studies in resource management are instructive here, as observed by the late great Elinor Ostrom.

    Human morality (in this case in resource management – be it water, food, money…) will out, given the right environments and frameworks. When there are common interests, transparency, and clear negative consequences of misdeeds for all to see, we will tend to make the “correct” moral choices.

    Thus it is very plain why, in the world of finance, morality does not… out as naturally as we like or indeed, need. Transparency is a laughable dream, vested interests and squewed incentives abound, and negative consequences of misdemeanors and anti-social actions are far outweighed by obscene reward.

    I agree with Tony that rather than concern ourselves with finding moral compasses, the authorities (and the electorate) should concentrate on correcting governance and reward systems in the sector. Unfortunately, that hope might be just as futile…

    @PoultonCambsCC

  4. richardhserlin says:

    A big part of the problem in relying on moral compass in finance is that even if 99.99% of people are very ethical, that .001% will fly to finance to cash in big, doing whatever it takes, and doing monumental harm if the government lets them run wild in this area with massive economic consequences and asymmetric information, externalities,… It just takes so few immoral to do such colossal, profound harm with finance. Plus, obviously, money that astronomical is too tempting to many — a reason for the government to keep it from being so astronomical.

    • richardhserlin says:

      Of course, if regulation, policing, rules, etc. are done well by the government, you really limit the opportunities to profit by doing great harm. Then, there is plenty of opportunity to do great good by helping channel capital to higher and better uses, to make sure massive amounts of money are used efficiently.

  5. Tony, I am genuinely puzzled by “Almost all in every era in every field of activity were guided by self-interest.” Our banking system was born at a time when the existence of moral values that transcended human desires was widely accepted – see for example the writings of Adam Smith in The Theory of Moral Sentiments. In several cases, banks were founded by individuals with strong ethical convictions – Lloyds by a Quaker and a Unitarian, Barclays also by Quakers and so on.

    We can all agree that the moral compass was not much consulted by bankers in the early years of this century, but it was there nonetheless, its needle pointing North as it always has for any that cared to see it. Today we witness the new leaders of those banks scrambling to reinterpret the values of their founders for today’s world. In short, it seems to me that the rampant self-interest of the last thirty years or so is an aberration rather than the historical norm.

    Or are you making a deeper philosophical point, that all human activity is ultimately selfish because even what we think of as altruism is only undertaken for the sake of the satisfaction it provides to the giver?

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