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].