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

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.

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

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

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:

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

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”

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

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

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

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

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.

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.

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.

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