The events of the past few months have shown with stark clarity that the financial models pursued in the sub-prime mortgage industry were so deeply flawed that they call into question the economics on which they were based. Yet to date there is precious little evidence of any fundamental rethinking taking place, either in the financial industry or by the economics profession, much of which still seems in denial about the gravity of the present crisis. With few exceptions, the argument from all sides – and from most in politics, too – seems to be for a return to business as usual as quickly as possible. But is continuity in how markets operate what we want? Or even what we can afford? Or are the costs of doing business this way – and the moral and social, as well as financial, costs – more than we should be asked to bear?
Consider this story. It concerns the collapse of Northern Rock in 2007. The tale is by now well known (it was first uncovered by the financial analyst Richard Murphy), but it still bears repetition. Here is Iain Macwhirter's version from the New Statesman of 20 October 2008: "The Treasury minister Yvette Cooper discovered to her dismay that Northern Rock didn't own half its own mortgages: £50bn had been hived off to a Jersey-based company, Granite, registered as a charity benefiting Down's syndrome children in the north-east of England." The arrangement was sanctioned at the highest levels of the company.
The story should be an acute embarrassment for an industry which, only a few months ago, was hailed by Gordon Brown as perhaps a more significant force for creating prosperity than the Industrial Revolution. But it is more than an embarrassment. Whether it is technically illegal or not (though it is clear that the Down's Syndrome Association North-East was at least subject to identity theft), most of us would say that what happened at Northern Rock was, at minimum, a serious moral crime. Instinctively and surely correctly, we feel there is something fundamentally unforgivable in using a charity for Down's syndrome children as a tax-evasive park for distressed mortgages.
Not only is it a moral crime: it is a step too far towards the criminal per se. Like with Enron and many others before it (a litany that is now getting much too long for comfort), Northern Rock's act is in danger of blurring the line between business and crime. We are all aware that this is a line crossed with increasing frequency. Corporate scandals of the past few years have involved many, if not most, of the world's major global accounting firms as well as major corporations and financial institutions.
Caribbean tax havens run on tax evasion and money-laundering, as do their British counterparts, something their governments no longer bother to deny. (Barack Obama had a telling line in one of his campaign speeches: "By the way, did you know that there's a building in the Cayman Islands that supposedly houses 18,000 corporations? That's either the biggest building or the biggest tax scam on record. And I think we know which one it is.")
In Europe as a whole, crime is now one of the largest single sectors of business, with the Mafia alone controlling, through "legitimate" companies, roughly 15 per cent of Italy's GNP (worth as much as $800bn a year). We know this, but we pretend - along with our governments - that the institutionalisation of crime within the "mainstream" economy does not matter; that it doesn't come with acute costs. This is nonsense. The global cost of tax evasion and avoidance is estimated, conservatively, at roughly $500bn. When more than 40 per cent of the value of African bank accounts is in Swiss banks, we know that looting and corruption - the politics of spoil, as Oswald Spengler named it nearly 80 years ago - has taken place on a huge scale. The (failed) reconstruction of Iraq, with almost no new infrastructure or working institutions to show for it, will be recorded as probably the largest site of embezzlement in history.
One could go on. This should merely serve to remind us that crime is indeed a redistribution of wealth, but there is nothing of Robin Hood about it. It is the most regressive form of "taxation" and the one most debilitating, in all its consequences, to social well-being. It is also - though we tend to forget this - economically destructive, and even incompetent. After all, crime is nothing but theft; by definition it does not make, it takes. It leeches monies out of the economy and it erodes the conditions for real economic life, because these are dependent on the structures of trust that crime destroys.
To slip towards crime, therefore, is to slip into an economic model in which wealth is no longer created in any real sense but only extracted from what already exists. In fact, the much-vaunted "creativity" of the financial markets since 2001 boils down to little more than the invention of extraordinary mechanisms which increase the circulation of capital through the system (enabling revenue to be skimmed from each stage in the process) but which do not actually create wealth.
Derivatives are the most famous of these inventions, but in the sub-prime mortgage market it was the creation of complex devices for enabling the packaging and perpetual selling-on of securitised loans. For the companies that deployed them, these models permitted a whole new model of banking in which a bank's profit comes not from deposit-and-lend in the old sense, but from its ability to generate increasing flows of capital by packaging and selling on loans, these made possible by leveraging the banks' deposits at ever higher ratios. If you can leverage deposits in this way (at ratios of up to 30:1) it allows for astonishing short-term profit. The downside is enormously extended and intensified longer-term risk.
For all their apparent mathematical sophistication, the models that Northern Rock and others used are considerably closer to pyramid selling rackets – or to the fantasy of perpetual-motion machines – than their operators would like to admit. The simple proof of this is that, as Paul Volcker (chairman of the Federal Reserve under Jimmy Carter and Ronald Reagan and now chairman-designate of Obama’s Economic Recovery Advisory Board) and others have noted, these models failed their own test. That is to say, they failed in the market – and they did so not just marginally, as a result of adverse circumstances, but spectacularly, as a result of their own internal contradictions.
If you believe that markets can be accounted for almost wholly by their internal mechanisms, it is a short step to begin to say that this is how they should operate in the world. It is then an even shorter step to thinking that these models can be transposed directly to messy and impure reality.
If you also believe that equilibrium is now equivalent to perpetual growth, and if you then believe, or create, a model which says that there is spare capital in the economy to which you can gain access (even if it is essentially through debt that you will create), if you add to this an ethos in which high-level risk is acceptable (because you have found a profit incentive for passing it on endlessly), you have three of the conditions for the sub-prime debacle.
All that is additionally required is an industry-wide consensus on leveraging bank deposits at previously undreamt-of ratios, and the political labour of defending non-interference in the operation of markets. The lure of almost unimaginable returns (collectively as profits, individually as "bonuses") secured the first. It took no work at all to secure the second, because 30 years of market deregulation had eviscerated what few provisions for oversight had survived. Add to this governments on both sides of the Atlantic disposed to believe that financial markets can do no wrong, and you have all the essential institutional frameworks ready to set your market in operation.
Almost all that there is left to do is the (enjoyable) task of allocating the rewards of ingenuity to those who have laboured so hard to create these models.
It was, of course, all an impossible dream: the lure of profit overrode the intelligence judgement. There is a comment from Marx (from Capital) that is salutary here:
Capital is said by a Quarterly reviewer to fly turbulence and strife, and to be timid; but this is very incompletely stating the question. Capital eschews no, or very small profit . . . with adequate profit, [it] is very bold. A certain 10 per cent will ensure its employment anywhere; 20 per cent will produce eagerness; 50 per cent positive audacity; 100 per cent will make it ready to trample on all human laws; 300 per cent and there is not a crime at which it will scruple, nor a risk it will not run, even to the chance of its owner being hanged. If turbulence and strife will bring profit, it will freely encourage both. Smuggling and the Slave Trade have amply proved all that is here stated.
In the sub-prime crisis, criminality and irresponsibility come into play because no one who believes in market equilibrium can also believe in what the models proposed: a world of perpetually increasing returns. In fact, it may be that no one really did. One characteristic that will become dramatically clear when the whole debacle is eventually analysed and properly understood is the degree to which the companies involved from the beginning eschewed accountability and displaced risk.
Certainly no one appears to have believed in the long-term viability of the models. The rate of reward that was demanded was, from the beginning, unsustainable. Desperate to take what short-term profits they could, companies acted like mine-owners determined to extract the last ton. Unable to resist the mortgage-industry equivalent of digging out the pillars of coal that hold up the roof, they made collapse inevitable.
Perhaps the most telling statistic in the story is the one that shows how, at its height, more than half of every dollar of revenue (that is to say, profit) earned on Wall Street went on salaries and, above all, bonuses. What does this tell us? It tells us that these models were dependent in their operation on what drove them, and what drove them was, ultimately, greed.
So often cited as the necessary driver of the economy, greed is the adrenalin of the financial industry. It is what is evoked (as motivator), celebrated (through the culture of the bonus) and sometimes even denied – at least in public. (Remember the embarrassment that the financier Ivan Boesky – one of the models for Michael Douglas’s greed-is-good character Gordon Gekko in the film Wall Street – caused the University of California, Berkeley in the mid-1980s with his “greed is healthy” speech to MBA graduates a few months before his indictment and conviction on fraud charges.)
But perhaps it is more true to say that greed is simply the axiom on which Wall Street and the City operate - the necessary and beneficent basis on which their drive, innovation and creativity are based. Yet the presupposition that greed delivers wealth can be countered by the present crisis. The sub-prime disaster is, in essence, the Treasure of the Sierra Madre writ large - only with a bill for close to $2trn to repair the damage.
This might make us think a bit. The sums that the financial crisis will eventually cost are by an order of magnitude larger than anything we could have imagined even a few months ago. The question might then be: can we any longer afford greed? Can we any longer continue, in effect, to subsidise its pursuit?
There are two linked economic arguments for greed. The first is that it is necessary; the second is that it can be isolated and transformed into a virtue. They amount to the proposition that accumulation is the necessary subjective dynamic for the virtue of wealth creation. This carries the implicit rider that accumulation is the goal with which the economy is principally concerned.
So axiomatic is this understanding that it has no theoretical place in economics. But it is, of the essence, what we need to address if we are to begin to think seriously again about markets and wealth creation (rather than leaving it to the economics profession and the financial industry, both of which are naturally delighted to be left alone to think of such matters).
In fact, neither premise stands close scrutiny. Greed is scarcely necessary for motivation. We work to secure our livelihood; we work as part of a process of exchange; we work sometimes for fulfilment. But while most of us would like to have some accumulation at the end of our working life, greed is simply not our motivation. Society would be unsupportable if it were.
As for the idea that greed can be isolated and transformed into a virtue, the world religions would argue vehemently - as one on this issue as on no other - that it cannot.
Here, for example, is what Hinduism has to say on the matter. The extract comes from the Mahabharata. Bhishma says:
Hear, O King, what the foundation is of sin. Covetousness alone is a great destroyer of merit and goodness. From covetousness proceeds sin. It is from this source that sin and irreligiousness flow, together with great misery. This covetousness is the spring also of all the cunning and hypocrisy in the world. It is covetousness that makes men commit sin . . . it is from covetousness that loss of judgement, deception, pride, arrogance and malice, as also vindictiveness, loss of prosperity, loss of virtue, anxiety and infamy spring.
The early Christian writers give an even more graphic picture of the impossibility of isolating greed and transforming it into a virtue. The poet Prudentius offers a particularly compelling image. In an allegory, he has the sins engage in battle with the virtues. Greed enters the tale at the point where, as Phyllis Tickle tells us in her book The Seven Deadly Sins - Greed: "Luxury has been defeated by Sobriety, Lust has fled . . . dropping her bow and poisoned darts . . . Vanity has been stripped naked and her robes dragged off, Allurement's garlands . . . shredded; Strife's gold ornaments and jewels scattered . . . and the battlefield . . . is littered with all the garments, appointments, abandoned weapons and apparel that such a violent contest would occasion." Stepping on to the field, Greed "sets out to harvest the scene of battle and its dead for all their trinkets". As she does so - and this is the key image - she "is accompanied in this endeavour by Care, Hunger, Fear, Anxiety, Perjury, Dread, Fraud, Fabrication, Sleeplessness and Sordidness . . . As this unholy company does its work of salvage, it is joined by all the crimes that are, as Prudentius says . . . 'the brood of their mother Greed's black milk'. Murder, pillage, scavenging of the dead, civil war, pride of possession . . . the list goes on and on . . . 'like ravenous wolves, her young prowl across the field'."
This is a magnificently powerful critique. To anyone who has followed, for example, the greed-fuelled "wars" in eastern Congo over the past decade, Prudentius's description, for one, is not merely allegorical, but an accurate description of unfettered greed acting in a world where it can exploit iniquity and force with impunity.
But then, as we have already seen in the little story from Northern Rock, greed inevitably comes onstage accompanied by a phalanx of sins and social evils. It is, so to speak, never alone. And it is significant, too, perhaps, for what it excludes - as in the splendid question that a Sikh text rhetorically asks: "Where there is greed, what love can there be?"
All this might make us want to ask about the costs of greed. The risk that greed tends to translate (long-term) processes of wealth creation into (short-term) schemes of wealth extraction that are destructive of the real economy could scarcely be more nakedly expressed than in the current economic crisis. Behind the crisis, however, behind even the slippage towards irresponsibility and criminality that greed induces – and besides the social and environmental costs of greed – there is a still deeper cost that comes in how we conceive what an economy is and what it is not.
There are two problems here. The first is that while greed and accumulation are infinitely less significant in relation to the totality of material and economic life than economics presupposes, the force of the drive towards accumulation inverts the real relations involved and gives it undue prominence.
This problem has been compounded by a second one. Over the past 30 years we have allowed the question of what the economy is and what it should be to become the exclusive province of economics and the financial industry. They have, not surprisingly, defined it predominantly in terms of accumulation.
More seriously, we have grown dependent on eliding accumulation with what we collectively, if indistinctly, define as the common good. As we have institutionalised this elision, accumulation has become the principal virtue that determines us and defines who we are. However, in so doing, we discover that we have put the extraction of wealth at the heart of what defines our common good. This was the basis of Rosa Luxemburg’s observation that capitalism will end on the day that it consumes the last meadow. Today, it explains in a single sentence the “problems” we have with unsustainability.
It is worth thinking about the potential cost of this stress on accumulation. If it will cost $700bn (a figure no one thinks sufficient: it has risen almost every day) to "solve" the crisis we are now dealing with - the failure of a tiny marginal market, substantively irrelevant to the real economy - what will be the real cost of dealing with unsustainability? What will be the price that we will have to pay for defining our "common good" as accumulation?
Greed matters, we can now realise, much more than we might have thought. It matters economically - the long-term costs of the meltdown in the financial industry will have generational and global impacts, let alone the immediate economic and human costs of repair and recession. It matters in terms of the future. It matters ethically - do we really want a global, national or local economy that stresses accumulation at any cost? And it matters conceptually - how we conceive and understand what an economy is, and what it should be.
So, the crisis that is upon us is a challenge, not just for economic management, but also in terms of how we think about the economy as a whole. What it challenges in the short term is the adequacy of our understanding of what we call the economy. What it challenges in the longer term is how we can devise the kind of economy (meaning also the kind of moral and social economy) we would like to see in a mature world. That means a very serious act of thinking. However, the definition of our common good - which is the real basis of an economy - is far too important to be left to economists.
Perhaps the only virtue of the tawdry little tale of Northern Rock is that it puts such questions back on the agenda, if only we can summon the will to ask them.
Clive Dilnot teaches at New School University in New York