THE FINANCIAL CRISIS, PRIVATE AND PUBLIC DEBT - a view from Biblical ethics

1. THE FINANCIAL CRISIS, PRIVATE AND PUBLIC DEBT- a view from Biblical ethics Course on Financial Instability at the Estonian Central Bank, 9-11 December 2009 – Lecture 12 E Philip Davis NIESR, Brunel University, Pembury Baptist Church West London e_philip_davis@msn.com www.ephilipdavis.com groups.yahoo.com/group/financial_stability

2. Overview of paper • Current crisis is of unprecedented intensity… • …but little has been heard from a Christian perspective • In fact perspective grounded in biblical theology has a great deal of distinctive analysis to contribute… • …especially when set alongside the ruling paradigm of today, that of economics.

3. Study - for UK Evangelical Alliance – has three aims: • To provide distinctive Christian-Economics analyses, deriving policy implications from a biblical point of view, informed by economic thought • To provide material for ministers seeking to understand and interpret the crisis to their congregations • To highlight in a prophetic manner radical Christian solutions to some of the current difficulties, while there are still open ears and before vested interests reassert themselves • Focuses on three key aspects of the crisis: • understanding the role and incentives of the bankers • the plight of households with indebtedness • the massive rise in public debt and overall responsibility of governments

4. Summary • Variety of actors in the economy – banks, public and government – have acted “economically” in recent years to maximise their personal utility in the pursuit of self interest • Flaw in the rationality of each of these approaches, contrary to expectations of economics but strongly in line with biblical view of the fall and mankind’s imperfection (greed, selfishness, impatience) • Outcomes not only undesirable in themselves but also often counter productive

5. Casualties of the process beyond principals themselves, implying injustice • Highlight some potential remedies…. • ….and underlying pattern of idolatry of institutions • Come to critique of the overall aims of economics – wealth, consumption, power - in contrast to Jesus’ proclamation of the Kingdom of God • We present in detail section on risk taking incentives for banks:

6. The financial sector – incentives to underestimate risks The issue from an economics perspective • Economic role of financial institutions such as banks • Clearing and settling payments • Pooling funds • Transferring economic resources over time, across geographic regions, countries or industries • Manage uncertainty and control risk • Price information • Dealing with incentive problems

7. So, widespread bank failure very damaging • And, performance of these functions requires integrity and prudence on the part of bankers • Dangerous incentive pattern in combination of the bonus culture of banks and the “safety net” provided by the government… • …for employees and especially managers… • …benefits for shareholders less clear • Direct culpability but also “disaster myopia”

8. Particular vulnerability of securitised products • And weakness of mechanisms to control principal-agent problems: • Complete contracts • Reputation • Ongoing relationships • Prudential regulation as response – but also subject to “disaster myopia” • Overall questions raised about rationality… • …as well as prudence, trust and honesty

9. The issue from a theological perspective • Business ethics • in Genesis story of the Fall • Hubris and pride, seeking to be like God and overlooking risks • Breakdown of the relationship of cooperation between human beings, also in banks • The blame game after disaster • Quality of work and the Fall • Realism of Bible regarding irrationality • Hard work and vocation is encouraged but also integrity

10. Banking related texts • Need for diversification, and accurate weights and measures • Issue of interest and usury • Jesus’ views relevant to finance • Parable of the shrewd manager • Issue of being trustworthy • Who is your master? • Warnings of the dangers of greed • Risk of compartmentalising lives • Banks and judgement of “Babylon” in Revelation 18 • exploiting people • ostentation • pride • Challenge to seek integrity

11. Confrontation and reconciliation • Tightening of regulation • Rules versus values versus virtues • How can we instil Biblical virtues? • Retention of experience • Decline in the importance and influence of the financial sector… • …and even in its size? • Or at least, re-establishment of relationships in banking

12. Wider range of key points emerge from study: • Challenging the dominance of economics as a ruling paradigm of society, and addressing the impact of its amoral approach on the way we live. • Questioning the common assumption that the market system is both rational and self-stabilising. • Regulation is not enough to generate stable banks, values must be adhered to and virtue must be nurtured – but “virtue” among bankers may be difficult to encourage without religious faith. • Accordingly, the importance of Christians engaging in the City. • The importance of banks retaining experienced staff. • The need for the importance and size of the financial sector to decline somewhat. • Re-establishing the importance of relationships in lending and other financial transactions.

13. Limiting the scope of indebtedness – by bank behaviour, regulation, and individual restraint. Considering the behaviour of other EU countries where credit is less freely available and saving is more common. • Reducing house prices relative to incomes, given the injustice to the coming generation. • Ensuring responsibility is taken for the destruction caused by consumer credit. • Assessing whether existing household debt can be reduced – is a “Jubilee” feasible? • Are non-credit forms of housing finance feasible and superior to interest? • The church as a provider of an alternative culture to debt and consumerism – and its role in education, debt counselling and relief of poverty generated by debt.

14. The burden of government debt generated by fiscal policy on the future generations. • The role of structural deficits persisting over the cycle in boosting growth and hence potentially misleading the population about their sustainable level of debt. • The responsibility of government to warn of the consequences of a credit/housing boom, and to act to defuse the boom. • Addressing the degree to which the tax system – or other aspects of government policy - promote indebtedness. • Considering whether we treat the government as something sufficient, rather than the responsibility of the citizen – or bankers treated their institutions as a way to avoid personal responsibility. • The common aspects of greed, selfishness and impatience exhibited by many individuals in respect of all three aspects of the crisis.

15. References • Davis E P (2009), “The financial crisis, private and public debt - contrasting the approaches of economics and theology”. Mimeo, NIESR and Pembury Baptist Church