Volume 12.2 – Financial crisis and conscience


Adam Smith’s Wealth of Nations is considered by many to justify the greed and selfinterest which has led to the current financial crisis. On the contrary, as Michael Smith points out, Adam Smith considered it essential that capitalists behave with conscience, and his outlook may well have relevance to our predicament.

Never has a financial crisis had such a potential to affect so many people so quickly. As stock markets fell like dominoes around the world, the crisis has affected every one of us. As governments poured billions of dollars, pounds, euros and other currencies into supporting ailing banks, at taxpayers’ expense, public sector borrowing has risen, without which there would be diminished resources to invest in hospitals, schools, public infrastructure, development aid, environmental and energy saving projects. And unemployment is rising, hitting families and communities. Investors – from individuals and pension holders to charities – have suffered.

Even the world’s fastest growing economies, China and India are affected, despite huge trade surpluses and financial reserves. Growth in the world economy is taking a big hit and the IMF predicts a global recession. As Dominique Moisi, author of the forthcoming book The Geopolitics of Emotion, wrote in The Financial Times (6 October 2008): ‘When the rich become less rich, the poor tend to become even poorer.’ Never before has a financial crisis focussed so starkly on fundamental moral, ethical and spiritual issues. Words used by commentators include gambling and greed, dishonesty and fear, panic replacing confidence, risk and hubris versus prudence, and faith in the banking system or lack of it. Never have the values of trust and integrity been more needed in the global economy. The whole recent edifice of bank lending was built on maximising profit, an arguably dishonest assessment of individual borrowers’ creditworthiness, and competitiveness between the banks in meeting shareholder demand.

US banks that invested heavily in the sub-prime mortgage market did so knowing that many borrowers were not creditworthy and might have no way of meeting the interest, let alone the premium, on their loans. It was a house of cards waiting to collapse. As Christopher Hart, writing about such ‘predatory’ loans in The Sunday Times commented as long ago as last March (23 March 2008): ‘The sub-prime crisis has arisen because the restraints on prudent behaviour broke down…. Some of the trades being made have been simply lunatic, with no conceivable rationale other than to ramp up the risk to create the chance of making a killing now.’ As soon as one US bank defaulted, other banks froze their intra-bank lending and liquidity in the markets seized up. There was an evaporation of trust between banks in their lending to one another. Where was the regulation? Where were the banks’ auditors in the first place?

The full article is available for download here