{"id":591,"date":"2008-11-19T10:38:04","date_gmt":"2008-11-19T10:38:04","guid":{"rendered":"http:\/\/astraea.net\/blog\/?p=591"},"modified":"2008-12-15T10:44:33","modified_gmt":"2008-12-15T10:44:33","slug":"morals-and-the-meltdown","status":"publish","type":"post","link":"https:\/\/www.astraea.net\/blog\/morals-and-the-meltdown\/","title":{"rendered":"Morals and the Meltdown"},"content":{"rendered":"

A good perspective from Robert Skidelsky.\u00a0 He writes well.\u00a0 His language is a bit religious for me, but the analysis is all too accurate.\u00a0 Here’s the link to his website<\/a> and the article is copied below.\u00a0 In our view, we are now confronting the limit to the growth of humanity he concludes with.<\/p>\n

\n

Morals and the Meltdown
\nRobert Skidelsky<\/span><\/span><\/h1>\n

London \u2013 After World War I, H.G. Wells wrote that a race was on between morality and destruction. Humanity had to abandon its warlike ways, Wells said, or technology would decimate it.<\/p>\n

Economic writing, however, conveyed a completely different world. Here technology was deservedly king. Prometheus was a benevolent monarch who scattered the fruits of progress among his people. In the economists\u2019 world, morality should not seek to control technology, but should adapt to its demands. Only by doing so could economic growth be assured and poverty eliminated. Traditional morality faded away as technology multiplied productive power.<\/p>\n

We have clung to this faith in technological salvation as the old faiths waned and technology became ever more inventive. Our faith in the market \u2013 for the market is the midwife of technological invention \u2013 was a result of this. In the name of this faith, we have embraced globalization, the widest possible extension of the market economy.<\/p>\n

For the sake of globalization, communities are de-natured, jobs off-shored, and skills continually re-configured. We are told by its apostles that the wholesale impairment of most of what gave meaning to life is necessary to achieve an \u201cefficient allocation of capital\u201d and a \u201creduction in transaction costs.\u201d Moralities that resist this logic are branded \u201cobstacles to progress.\u201d Protection \u2013 the duty the strong owe to the weak \u2013 becomes Protectionism, an evil thing that breeds war and corruption.<\/p>\n

That today\u2019s global financial meltdown is the direct consequence of the West\u2019s worship of false gods is a proposition that cannot be discussed, much less acknowledged. One of its leading deities is the \u201cefficient market hypothesis\u201d \u2013 the belief that the market accurately prices all trades at each moment in time, ruling out booms and slumps, manias and panics. Theological language that might have decried the credit crunch as the \u201cwages of sin,\u201d a come-uppance for prodigious profligacy, has become unusable.<\/p>\n

But consider the way in which the term \u201cdebt\u201d (the original sin against God, with Satan as the great loan shark) has become \u201cleverage,\u201d a metaphor from engineering that has turned the classical injunction against \u201cgetting into debt\u201d into a virtual duty to be \u201chighly leveraged.\u201d To be in debt feeds the double temptation of getting what we want as quickly as possible as well as getting \u201csomething for nothing.\u201d<\/p>\n

Financial innovation has enlarged both temptations. Mathematical whiz kids developed new financial instruments, which, by promising to rob debt of its sting, broke down the barriers of prudence and self-restraint. The great economist Hyman Minsky\u2019s \u201cmerchants of debt\u201d sold their toxic products not only to the credulous and ignorant, but also to greedy corporations and supposedly savvy individuals.<\/p>\n

The result was a global explosion of \u201cPonzi\u201d finance \u2013 named after the notorious Italian-American swindler Charles Ponzi \u2013 which purported to make such paper as safe and valuable as houses. By contrast, the virtuous Chinese, who save a large proportion of their incomes, were castigated by Western economists for their failure to understand that their duty to humanity was to spend.<\/p>\n

The key theoretical point in the transition to a debt-fueled economy was the redefinition of uncertainty as risk. This was the main achievement of mathematical economics. Whereas guarding against uncertainty had traditionally been a moral issue, hedging against risk is a purely technical question.<\/p>\n

The main uncertainty in life \u2013 the destination of one\u2019s immortal soul \u2013 nudges one toward morality. Even the existence of mundane uncertainty gives rise to conventions and rules of thumb that embody the best of human experience in dealing with the unknown. The abolition of uncertainty abolishes the need for moral rules.<\/p>\n

Future events could now be decomposed into calculable risks, and strategies and instruments could be developed to satisfy the full range of \u201crisk preferences.\u201d Moreover, because competition between financial intermediaries steadily drives down the \u201cprice of risk,\u201d the future became (in theory) virtually risk-free.<\/p>\n

This monstrous conceit of contemporary economics has brought the world to the edge of disaster. Obviously, the traditional moral taboos surrounding money had to be loosened for capitalism to get going centuries ago. For example, the classical prohibition on usury was softened from a ban on charging interest on all loans to a ban on charging interest on loans for which the lender had no alternative use, i.e., for charging interest on \u201choards\u201d or cash balances.<\/p>\n

Without the development of debt finance, the world would be a lot poorer than it is. Yet, in going from one extreme (keeping one\u2019s spare cash under the bed) to the other (lending out money one does not have) is to cut out the sensible middle.<\/p>\n

The prudential supervision regime initiated by the Bank of Spain in response to the Spanish banking crises of the 1980\u2019s and 1990\u2019s shows what a sensible middle way might look like. Spanish banks are required to increase their deposits in proportion to their lending and set aside capital against assets in their off-balance sheets.<\/p>\n

With little incentive to manufacture \u201cstructured investment vehicles,\u201d few Spanish banks created them, thereby avoiding excessive leverage. As a result, Spanish banks typically make provision to cover 150% of bad debts whereas British banks cover only 80-100%, and Spanish homebuyers must pay between 20% and 30% deposit on a house, whereas 100% mortgages have routinely been given in the United States and the United Kingdom in recent years.<\/p>\n

H.G. Wells was only partly right: the race between morality and destruction encompasses not just war, but economic life as well. As long as we rely on technical fixes to plug moral gaps and governments rush in with rescue packages that enable the merry-go-round to start up again, we are bound to keep lurching from frenzy to frenzy, punctuated by intervals of collapse. But, at some point, we will confront some limit to growth.<\/p><\/blockquote>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

A good perspective from Robert Skidelsky.\u00a0 He writes well.\u00a0 His language is a bit religious for me, but the analysis is all too accurate.\u00a0 Here’s the link to his website and the article is copied below.\u00a0 In our view, we are now confronting the limit to the growth of humanity he concludes with. Morals and …
Continue reading Morals and the Meltdown<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[5,22,4],"tags":[],"class_list":["post-591","post","type-post","status-publish","format-standard","hentry","category-worldofmoney","category-living","category-philosophy"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p4hwcd-9x","jetpack_likes_enabled":true,"_links":{"self":[{"href":"https:\/\/www.astraea.net\/blog\/wp-json\/wp\/v2\/posts\/591","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.astraea.net\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.astraea.net\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.astraea.net\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.astraea.net\/blog\/wp-json\/wp\/v2\/comments?post=591"}],"version-history":[{"count":0,"href":"https:\/\/www.astraea.net\/blog\/wp-json\/wp\/v2\/posts\/591\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.astraea.net\/blog\/wp-json\/wp\/v2\/media?parent=591"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.astraea.net\/blog\/wp-json\/wp\/v2\/categories?post=591"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.astraea.net\/blog\/wp-json\/wp\/v2\/tags?post=591"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}