The Philosophy, Politics and Economics of Finance in the 21st Century

From Hubris to Disgrace

Patrick O'Sullivan, Nigel Allington, Mark Esposito, Nigel F. B. Allington

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9780415859011
• eBook ISBN: 9781135122522
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Since 2008, the financial sector has been the subject of extensive criticism. Much of this criticism has focused on the morality of the actors involved in the crisis and its extended aftermath. This book analyses the key moral and political philosophical issues of the crisis and relates them to the political economy of finance. It also examines to what extent the financial sector can or should be reformed.

This book is unified by the view that the financial sector had been a self-serving and self-regulating elite consumed by greed, speculation and even lawlessness, with little sense of responsibility to the wider society or common good. In light of critical analysis by authors from a variety of backgrounds and persuasions, suggestions for reform and improvement are proposed, in some cases radical reform. By placing the world of finance under a microscope, this book analyses the assumptions that have led from hubris to disgrace as it provides suggestions for an improved society.

Rooted in philosophical reflection, this book invites a critical reassessment of finance and its societal role in the 21st century. This book will be of interest to academics, politicians, central bankers and financial regulators who wish to improve the morality of finance.

1 Introduction

The nadir of 2008 and its aftermath

Patrick O’Sullivan

Plumbing the depths

The world of finance has known major crises before 2008 and bankers have been loathed and excoriated many times in the past but the seemingly never-ending financial crisis which exploded in September 2008,¹ together with the ever more unseemly series of revelations of arrogance, corruption, casual market manipulation and outright immorality which have piled one upon the other since then have brought the financial world to a nadir of disgrace never known before. The complete failures of the regulators (especially in the US) who should have seen the crisis coming and act to rein it back before it got out of hand; the obscenity of the huge sums (of taxpayers’ money or newly printed currency) which governments had to pump into the banking system to bail it out even as senior managers and traders took home fat bonuses; the casual arrogance of fraudsters such as Bernie Madoff² and of the Goldman Sachs traders who treat their clients openly as stupid “muppets” to be exploited;³ the rating agencies who pretend to run the world by dictating in effect economic policy to governments and who systematically set in motion speculative runs against an array of eurozone member state’s bonds on grounds which smack more of emotion and ancient prejudice than of real economics;⁴ more recently the revelation that a range of large banks have been deliberately manipulating the basic reference rates of interest known as LIBOR and EURIBOR to their advantage and, since these rates are used as reference for setting a vast gamut of other interest rates and mortgage rates, the implications and potential gains of the manipulation are of staggering proportions.⁵ Most recently (February 2015) there have been revelations of direct involvement of HSBC Private Bank Switzerland in aiding and abetting tax evasion by its clients on a grand scale.

Any one of these phenomena taken by itself is deplorable but no doubt reparable. The purpose of this book, however, is to look at this whole closely interrelated set of phenomena and more together as a systemic whole; if we do this, what emerges is a systemic picture far more serious and perturbing than many have perhaps as yet realised. It has been widely presumed that each particular excess and abuse can be met by this or that sticking plaster of reform whereas, when we look at the whole set of interrelated phenomena mentioned, what emerges is a picture of a financial system which harbours systemic level weaknesses and which is literally rotten to the core. In the face of such pervasive rot, one could be pardoned for asking a more radical question: does the financial system as we know it need to be entirely revolutionised and if so what can we put in its place? That is the question which this book will seek to tackle; given its radical nature and (we think) its practical importance we will present a range of diverse views and suggestions, ranging over those who think that the system as we know it is basically sound and may need a little more informed regulation, to those who would hold that finance as we know it is doomed as a system and needs to be entirely revolutionised. In other words, this book is not a political manifesto for one particular new vision of a revolutionised finance and economy but rather a contribution to a radical and informed discussion among impartial critical commentators about the most appropriate future design for money, banking, the financial sector in general and its regulation.

Given that what we will propose is a far-reaching critique aiming to get to the real roots of the multifarious contemporary problems of finance, this will require us not simply to explain for example the detailed workings of the markets and the various derivative products and their manner of regulation (although a real understanding of how these work will be a key prerequisite for the critique and so will be dealt with briefly in the book); it will also require us to look further into the economics of finance (to explain the supposed ultimate function of finance and of the financial system in the wider real economy); to look at the power relationships which underpin finance and its regulation and their manipulation by key actors (the politics of finance); and finally to probe into such fundamental questions as how money, initially designed to be a medium of exchange and so an instrument to serve humankind, has somehow evolved into a monstrous end-in-itself which crushes and destroys every other sort of value in its path (the philosophy of finance).

In short, our book, as well as offering some brief insights into the workings of contemporary finance and its regulation, will essentially be about the Philosophy, Politics and Economics of finance in the early twenty-first century.

Content and organisation of the volume

The book will treat these themes in roughly the reverse order of this tripos; it will begin with a discussion of some technical aspects of finance and statistical treatment of risk (Chapters 2 and 3) before initiating a detailed discussion of certain themes in the economics of finance (Chapters 4 to 12). Here we will encounter a rich harvest of often quite radical reflection on the part of past and present economists, much of it rather scandalously forgotten in the contemporary context. The basic economic role and functions of money and of banks will be outlined and some alternatives to the present system including Islamic or zero interest finance will be examined. Current discussions of the financial and debt crises have often been characterised by a reflection on the contrast between a financial sector which is seen as somehow increasingly unreal and out of touch with the economic reality of everyday trade, commerce and exchange: after all, despite all of the shenanigans and hysteria people are still buying food and clothing, travelling and taking holidays . . . .⁶ Of course the financial chaos has wrought havoc with some aspects of the real economy, most notably through unemployment, but there is a definite sense in which all of the chaos seems essentially unreal. There has been no war or great natural catastrophe such as would fundamentally undermine everyday commerce and supply chains; the pain and suffering seems therefore somehow unreal or at least artificial and so self-inflicted in nature and origins. This leads us into that great debate of classical macroeconomics: the veil of money. Is the financial sector merely a veil which hides (and perhaps distorts) the real economy of concrete production and consumption of commodities, services and activities and therefore essentially an unreal smokescreen which macroeconomics seeks to dispel to reveal the true workings of the real economy? Or are we to consider the financial sector as an integral part of the real economy producing real financial products or services and therefore as one sector among many others?

This discussion will inevitably lead into credit cycle theory and into the discussion of irrationality and emotion in the formation of expectations in financial markets.⁷ Surely one of the most striking features to any neutral observer of finance and money is the amazing regularity with which monetary and financial crises have been reproduced over centuries now; and since the essential mechanisms are not that different, as we shall see in these crises, one must be led to ask why as a race of supposedly intelligent beings we appear to be congenitally incapable of rooting out the problem (since no one questions the economic havoc and suffering they generate). Some attention will also be paid to the wider macroeconomic impact of interest rate setting (LIBOR and EURIBOR, etc.) and to the degree of hidden “abuses of dominant position” with which the financial sector appears to be replete. Finally, the impact of monetary policy announcements by regulators will be mentioned, in addition to the extreme difficulty of regulation of the financial sector due to the well-known tendency for financial firms rapidly to find loopholes or innovations to circumvent any proposed regulation imposed on the sector.

Discussion of the inevitable tendency of financial firms and institutions to outwit or to “run ahead” of any type of imposed regulation by the invention of ever newer types of financial instruments leads us into the discussion of what we may call the Politics or the Political Economy of finance (Chapters 12 to 16). We will show that sensationalist as it may sound at first expression, there is a real political question about who rules the world today: is it some shady ill-defined coterie of financiers and financial institutions or is it elected (or non-elected) politicians? At the very least we can ask is it the shady coterie of financiers and their henchmen, the rating agencies, who dictate the macroeconomic policy of states or is it their politicians? Events since 2010 in the eurozone⁸ suggest that very far from being a hypothetical or extreme conspiracy theorist question, it is one that is acutely real.⁹

In addition to detailing this contemporary stand-off between politicians and financiers, we will also note some of the consequences of the dominance of financial institutions and interests in the formation of economic policy. Most obviously in the midst of widespread recession in Europe and in many other parts of the developed world, a recession triggered very obviously by the financial crisis of 2008 associated with subprime mortgages and their derivative products, European governments whose public finances are in disarray due to high levels of debt are being urged, not to say forced, by various creditor/financial interests to impose severely deflationary “austerity” policies. These policies are patently not in what in political terms we would call the general or common interest of the states in question and they serve only to satisfy “markets” or “market forces”.¹⁰ Certainly many of the European states need to learn a little more about fiscal discipline (and about how to collect their taxes) but the present austerity policies are causing hardship on a monumental scale to large swathes of people who are in no way to blame for the mess, all to satisfy a distant ill-defined coterie of creditor interests and rating agencies.

If macroeconomic policy is one very obvious area of conflict between financial and general or common interest, it is also possible to identify other perhaps less obvious ones. The most obvious is the short-termist bias that is brought into play in the microeconomic investment appraisal of both public and private sector projects by a concentration on narrow financial return (without taking account of benefits to wider groups of stakeholders or to future unborn generations). It can often seem as though the financial concerns be it at micro or macro level trump or drown out political consideration of any other types of interest, so that that which was supposed to be a set of instruments of intermediation to serve mankind economically has become an all-dominating political end-in-itself. In that respect, the political dominance of finance may be an instance perhaps of a wider delusion in materialist dominated societies, whereby the acquisition of ever more material wealth becomes an end-in-itself rather than being seen as at most a useful means to secure a degree of happiness.

There is therefore a whole penumbra of political issues surrounding the contemporary role of finance in society and this volume will seek to bring these into focus in a manner which is all too rare and in some places perhaps even politically incorrect.¹¹ In addition to the quite specific conflicts mentioned above we will also in the final chapter reflect on the degree to which, if political authority is to be reasserted over the world of finance, this authority needs to be supranational in character; that is to say, that since the financial sector is today largely globalised in a world of huge free cross-border flows of funds, the requisite re-regulation of the financial sector may well need to be carried out at a level above and beyond the nation state to be effective.¹²

Certain of the themes which have emerged in the Politics of Finance will inevitably lead on to a deeper level of reflection on the whole role, purpose and power of finance in contemporary society and on the ethics of finance which we might reasonably label as the Philosophy of Finance (Chapters 17 to 23). It is true that finance and philosophy are strange bedfellows, but over the centuries they have occasionally encountered each other, for example, in the work of Aristotle and in the whole Islamic treatment of finance. Perhaps given some of the excesses of recent years it is time that philosophy and finance encounter each other again in a critical reflection of the role which the financial sector ought ideally to be playing in advanced contemporary societies. It is just such an encounter which these final chapters of the work attempt to facilitate.

Any discussion of the role which finance ought ideally to play in a society takes us of course into the realm of normative discourse or to be more precise into the realm of normative business ethics. Therefore bearing in mind that a truly critical business ethics must logically adopt a normative standpoint in relation to current business reality and how e...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• List of contributors
• 1 Introduction: the nadir of 2008 and its aftermath
• 2 Asset management: some considerations on performance
• 3 Risk in the age of crises
• 4 Financialisation
• 5 Is Islamic finance a complement to conventional Western finance? Underlying principles and viability
• 6 “We’re still dancing”: stakeholder expectation and its role in decision making in the financial sector
• 7 The impact of the subprime financial crisis on the Eastern European transition economies, and why Poland is an outlier
• 8 China as cause and victim of the US subprime crisis: the crisis and its impact on China and the Asian economies
• 9 Default invariance: a naïve category theory of law and finance
• 10 Europe needs the liberal Keynes
• 11 Neologism as theoretical innovation in economics: the case of “financialisation”
• 12 Ethics: from negative regulations to fidelity to the event
• 13 The bank, its societal functions and its practices: conflictual relationships between an economic agent and democracy
• 14 The sufficiency economy: a Thai response to financial excesses
• 15 Ethics should not cloud business or financial decisions: the enduring power of the neoclassical paradigm
• 16 Regulation and fraud: a critical assessment of accounting information, corporate governance and complex systems of business control
• 17 The psychology of unethical behaviour in the finance industry
• 18 Financial liberalism and new institutional environment: the 2007–08 financial crisis as a (de)regulatory deadlock
• 19 Naturalising techniques and naturalised discourses: thoughts on the media’s role in the Great Recession
• 20 The all-encompassing hijack
• 21 Heated debates and cool analysis: thinking well about financial ethics
• 22 Developing country perspectives: a look at the Nigerian banking sector crisis
• 23 Theological and historical perspectives on contemporary accounting
• 24 Whither finance now?
• Index