The (im)morality of financial capitalism

Deep in the recesses of New Zealand’s political history lies the A-plus-B theorem. United States Federal Reserve Board chair Ben Bernanke could be mistaken for a disciple.

The theorem was central to the social credit doctrine, which took hold in the 1930s depression among farmers hit hard by the slump and among some professionals not trained in economics. It postulated a gap between what people produced and what they could afford to buy which the central bank or the government should bridge by creating credit.

Regular economists said there was no gap. Bernanke, an economist by trade, would agree. But he is creating credit on a scale that would make a social crediter look a tightwad.

In common parlance Bernanke is printing money, around $US1 trillion. Normally, a central banker would fear printing money would generate inflation — too much money chasing too few goods, driving up goods prices. But Bernanke thinks he is arresting deflation — that is, stopping a downward spiral of prices which might be caused by consumers not consuming, thereby pushing down production, killing jobs and further reducing consumption, as happened in the 1930s.

The United States Treasury is pumping out money, too, to capitalise banks and insurers made insolvent by reckless lending and to ameliorate the havoc wreaked by those firms in the real economy where people make and do things.

This is digging an enormous hole in the American budget: the latest estimate of this year’s deficit is 13 per cent of GDP. Someone has to fill this hole and the Chinese, who funded Americans’ binge to the tune of about $US1 trillion, have lost their enthusiasm: Bernanke’s binge printing of money threatens the value of China’s holdings. Besides, China needs to prop up its own suddenly softer economy.

Draw your own conclusions about international savers’ willingness to fund New Zealand’s own whopping increase in debt over the next three to five years as government spending is slowly brought into line with the economy’s capacity to pay.

There is also a moral dimension to the Americans’ desperate attempts to avoid a real readjustment.

Bernanke believed, with his predecessor, Alan Greenspan, that the best regulation of financial (and other) markets is self-regulation. (The government’s replacement of Paula Rebstock with Mark Berry as Commerce Commission chair reflects a version of this belief.)

But, as Greenspan has confessed, self-regulation failed. Self-regulation would have meant self-denial, which is not an uppermost character trait of those in financial services outside core banking and old-fashioned insurance — as the Alex cartoon reminds us.

Now Americans who have paid taxes to rescue financial firms that were too big to fail, no matter how bad, find they have rewarded with large bonuses the very people who created the need for the bailouts. The same goes for British taxpayers, where huge bailouts and printing money are also in vogue.

Last week an angry United States House of Representatives approved a 90 per cent tax on bonuses paid to executives of financial firms rescued by taxpayers.

Longer-term, what does this hands-in-the-till behaviour say to ordinary folk about market capitalism?

Some argue that market capitalism is moral: it rescues people from poverty through productivity-lifting innovation to a degree no other economic system has got near. To improve the poor’s lot is a moral act. Moreover, it is argued, market capitalism is moral because it rests on and promotes trust. True, mostly.

It is safer to argue that market capitalism is amoral: willing sellers doing deals with willing buyers are pursuing their self-interests, not pursuing a great good or a great bad.

But scoffing large bonuses from the very taxpayers you have betrayed and harmed is neither moral nor amoral. It is immoral. It destroys trust. The Alex cartoon characters are deeply unlovable because they are immoral and untrustworthy.

A few criminals do not unmake society. A few miscreants do not invalidate market capitalism. But in the 1920s and 2000s a wild-west mentality spread widely and undermined trust within the system and, as a result, trust in the system.

To undermine trust is to unstick the glue in the market capitalist system. This loss of trust is the deeper crisis under the credit crisis and the real economy slump at which Bernanke and Co are throwing imaginary money.

The response to this deeper crisis is political. First, angry and hurt voters demand regulation in place of failed self-regulation. The risk in that is over-regulation, which undermines market-capitalism’s capacity to lift the poor out of poverty and the working class into the middle class.

There is a bigger risk if this slump goes too deep for too long: that voters reach for unorthodox, imaginary or populist solutions (1930s social credit was a low-key example). If that takes hold widely, it wrecks sensible politics.

The moral in this affair? Market immorality can do great damage.