Economy and Morality
Published in Estadao
(Brazil) on 24 October 2011
by Editorial (link to original)
The demonstrations against Wall Street, as a symbol of contemporary capitalism in its financial aspect, expose actions that cast a special light on the nature — one could say "moral" (or immoral) — of certain current capitalistic practices. Capitalistic practices that, we should emphasize, run contrary to the very spirit of capitalism.
In the crisis of 2008-2009 what called attention to the issue of morality was the fact that executives of large financial corporations and banks reaped large dividends in the form of salaries, bonuses and different types of advantages. Please note that this is not an argument against dividends and bonuses, as long as they are based on responsibility. If an executive has merit, so much the better for him; let him reap the fruits of his labor. His profit is payment for his work. No argument is being made which begrudges or simply envies those who are successful. The problem is of another order. The executives who took their banks into failure because of extremely risky operations, using modern digital means, do not have merit. They charged for something that they did not deliver. Or better, delivered substantial short-term profits to a few, but for the long term, created pre-failure situations for their companies.
The financial profile of today's economic crisis has a strong moral component. The financial mechanism which led to the insolvency of credit, particularly in the housing bubble, was based on grants of loans repeated various times, based on real estate mortgage valuations which became fictitious. At that time, some analysts and economists sang praises of this new market mechanism, a financial merry-go-round that more resembled gambling, bloating the problem like a belly.
It happens, however, that this market was founded on the presupposition that loan payments would be used to pay for new loans, creating an illusion in which the loans would not in truth be paid. Debts would be paid with new debts — in agreement, which was in fact fictitious — between financiers and those who borrowed, in a contractual relationship that appeared correct. The problem was with the apparent correctness of this type of contract, because the moral component of it was vacant, as if it did not exist or did not count.
Consider this: If a loan is contracted but not paid, both lender and borrower must acknowledge the irresponsibility of their actions. The bank becomes irresponsible for having granted credit and the borrower for having taken the loan, even though their contract is perfectly legal. Loans are actions that presuppose, as with any such agreement, responsibility. But this type of financial operation is based on irresponsibility on the part of both lender and borrower.
The moment, however, when their moral failure bursts, both parties seek to transfer their respective responsibility to the government, as if it should be responsible for their lapses of responsibility. From the banks' point of view comes the supposed argument that they should not be allowed to go bankrupt or — translating this formula in moral terms — the banks have total rights to be irresponsible. Following the principle of irresponsibility, all taxpayers should be responsible for the banks whose directors and shareholders enjoy huge dividends and bonuses.
So it continues that the governments save their banks and seek to reduce the effects of insolvency, through stimulating the economy, through which the financial mechanism becomes functional again. The instrument used is the increase of public debt, or in other words, by assuming the responsibility of others, the government becomes still more irresponsible. They do this by transferring an unpayable debt to future generations, as if they did not, in fact, exist at that time and have to be responsible for what they did not do. In this context the maxim of Keynes that "In the long run, we're all dead," is a praise to irresponsibility, an ode to immorality. It is this ode to immorality that is cited by various economists as a form of wisdom — a wisdom of those who are irresponsible and who offer profits for their own irresponsibility.
It should be pointed out that after the crisis, the bankers and top executives continued to enjoy the same privileges, with the argument that it should be treated as a private practice of the free market. The argument is hilarious. When confronted with a situation of a virtual breakdown — in this case, failure as a result of bad business practices — the argument of the free market had no value; it is the State, and in fact, the taxpayers, who must pay for your bad business deals. Taxes must be sent to save them. The private, thus, became public. Not one person who previously gained from the situation returned their profits. After the storm passed, these bankers and executives returned to the same arguments as before, threadbare in the eyes of public opinion, that the market determines the amount of bonuses and dividends. The argument is especially vicious, showing, in truth, the "viciousness" of those who act in this manner. They pervert the spirit of capitalism to their own advantage. We should not, therefore, be surprised by the demonstrations against Wall Street.
In the crisis of 2008-2009 what called attention to the issue of morality was the fact that executives of large financial corporations and banks reaped large dividends in the form of salaries, bonuses and different types of advantages. Please note that this is not an argument against dividends and bonuses, as long as they are based on responsibility. If an executive has merit, so much the better for him; let him reap the fruits of his labor. His profit is payment for his work. No argument is being made which begrudges or simply envies those who are successful. The problem is of another order. The executives who took their banks into failure because of extremely risky operations, using modern digital means, do not have merit. They charged for something that they did not deliver. Or better, delivered substantial short-term profits to a few, but for the long term, created pre-failure situations for their companies.
The financial profile of today's economic crisis has a strong moral component. The financial mechanism which led to the insolvency of credit, particularly in the housing bubble, was based on grants of loans repeated various times, based on real estate mortgage valuations which became fictitious. At that time, some analysts and economists sang praises of this new market mechanism, a financial merry-go-round that more resembled gambling, bloating the problem like a belly.
It happens, however, that this market was founded on the presupposition that loan payments would be used to pay for new loans, creating an illusion in which the loans would not in truth be paid. Debts would be paid with new debts — in agreement, which was in fact fictitious — between financiers and those who borrowed, in a contractual relationship that appeared correct. The problem was with the apparent correctness of this type of contract, because the moral component of it was vacant, as if it did not exist or did not count.
Consider this: If a loan is contracted but not paid, both lender and borrower must acknowledge the irresponsibility of their actions. The bank becomes irresponsible for having granted credit and the borrower for having taken the loan, even though their contract is perfectly legal. Loans are actions that presuppose, as with any such agreement, responsibility. But this type of financial operation is based on irresponsibility on the part of both lender and borrower.
The moment, however, when their moral failure bursts, both parties seek to transfer their respective responsibility to the government, as if it should be responsible for their lapses of responsibility. From the banks' point of view comes the supposed argument that they should not be allowed to go bankrupt or — translating this formula in moral terms — the banks have total rights to be irresponsible. Following the principle of irresponsibility, all taxpayers should be responsible for the banks whose directors and shareholders enjoy huge dividends and bonuses.
So it continues that the governments save their banks and seek to reduce the effects of insolvency, through stimulating the economy, through which the financial mechanism becomes functional again. The instrument used is the increase of public debt, or in other words, by assuming the responsibility of others, the government becomes still more irresponsible. They do this by transferring an unpayable debt to future generations, as if they did not, in fact, exist at that time and have to be responsible for what they did not do. In this context the maxim of Keynes that "In the long run, we're all dead," is a praise to irresponsibility, an ode to immorality. It is this ode to immorality that is cited by various economists as a form of wisdom — a wisdom of those who are irresponsible and who offer profits for their own irresponsibility.
It should be pointed out that after the crisis, the bankers and top executives continued to enjoy the same privileges, with the argument that it should be treated as a private practice of the free market. The argument is hilarious. When confronted with a situation of a virtual breakdown — in this case, failure as a result of bad business practices — the argument of the free market had no value; it is the State, and in fact, the taxpayers, who must pay for your bad business deals. Taxes must be sent to save them. The private, thus, became public. Not one person who previously gained from the situation returned their profits. After the storm passed, these bankers and executives returned to the same arguments as before, threadbare in the eyes of public opinion, that the market determines the amount of bonuses and dividends. The argument is especially vicious, showing, in truth, the "viciousness" of those who act in this manner. They pervert the spirit of capitalism to their own advantage. We should not, therefore, be surprised by the demonstrations against Wall Street.