Key ethical issues in finance (Part 1)

We just ended the year on which we commemorated the tenth anniversary of the eruption of the financial crisis that led to the Great Recession of 2008 to 2012. I vividly remember that day of September 15, 2008 when the global economy was shocked with the collapse of financial behemoth Lehman Brothers. I was attending a business conference in London and stepped out of my hotel for lunch. My hotel was just a few blocks away from the headquarters of Lehman Brothers. Out came streaming the bank employees carrying their personal belongings, some of them tearful. They had just been summarily informed that their services were no longer needed by the Bank. They were instantly terminated. Such a scene has been permanently embedded in my mind as a stark symbol of the inhumanity of the wrong kind of capitalism, an economic system that has absolutely no interest in the “integral and concrete well-being of the human person.”

At the beginning of 2019, we still have time to commemorate this anniversary in a positive way by trying to digest the guidelines contained in a document issued by the Vatican’s Congregation of the Doctrine of the Faith and the Dicastery for Promoting Integral Development last May 17, 2018. Entitled “Considerations for an ethical discernment regarding some aspects of the present economic-financial system,” this document is a must reading for all bankers, CFOs, stockbrokers, Central Bankers and all concerned with the financial sector, both nationally and globally. It starts by recognizing the growing influence of financial markets on the material well-being of most of humankind. This trend makes necessary an appropriate regulation of the dynamics of the markets and, on the other hand, a clear ethical foundation that assures a well-being realized through the quality of human relationships rather than merely through economic mechanisms that by themselves cannot attain it. It reminds those working in the financial sector that as human beings they are obliged by the principle of solidarity to contribute to the common good, which is a social order that enables every human being to attain his or her human potential or integral human development.

Although the document refers to the entire irreplaceable social function of credit, I would like to focus on the globalization of financial markets which led to the subprime crisis that precipitated the collapse of entire economies during the Great Recession. The roots of this crisis can be traced to a legitimate desire of some financial institutions to help the building of homes especially in the markets of such developed economies as the US and Europe. In fact, I was residing in Spain in 2007 when the so-called financial derivatives started to rear their ugly heads. Home mortgages were securitized and sold outside the domestic markets in which they were issued. As these financial instruments were gobbled up in the speculative world of global finance, the real value of every further securitization was increasingly removed from the economic values of the original mortgages from which they were derived. As the Vatican document points out, every time unreliable economic-financial instruments are introduced and diffused, they put the growth and the diffusion of the wealth into serious danger creating systemic problems and risks that amount to the “intoxication” of the organism. I was witness to the way the real estate sector of Spain was one of the worst victims of this “intoxication.” The real estate bubble that occurred in Spain during the Great Recession rendered close to 50 percent of the workers below thirty unemployed.

It is a duty of the State institutions to provide a certification for every product generated by financial innovation, in order to preserve the health of the system and prevent negative collateral effects. To favor economic health and to avoid manipulation are an inescapable moral imperative for all the stakeholders engaged in the markets. From the experience with these toxic financial derivatives, we can deduce the urgent need for a supranational co-ordination among diverse structures of local financial systems. In fact, it has to be pointed out that the financial system is just a subset of the entire market system. What happened during the subprime crisis just highlighted the fact that the believers in the free market were extremely naive in assuming the selfsufficiency of the markets independent of any ethics. They ignored the fact that there is a need for an appropriate regulation that at the same time unites the freedom and protection of every person and operates to create healthy and proper interactions especially with regard to the more vulnerable. Under the social market system, which combined the principle of subsidiarity and the principle of solidarity, political and economic-financial powers must remain distant and autonomous and at the same time directed, beyond all proximate harms, towards the realization of a good that is basically common, and not reserve only for a few privileged persons.

The design of a global financial system that truly promotes the common good must take into account that there is such a thing as evil among some human beings. Even up to now, as in the case of Goldman Sachs in Malaysia, there is evidence that among the major reasons for the most recent economic crisis was the immoral behavior of agents in the financial world, where the supranational dimension of the economic system makes it easy to bypass the regulations established by individual countries. It is not an exaggeration to affirm that the extreme volatility and mobility of capital investments in the financial world permit those who control them to operate smoothly beyond every norm that does not aim at immediate profits, frequently unconscionable, and often blackmailing by a position of strength even legitimate political authority.

We should be grateful that we have one of the best monetary authorities in Southeast Asia. We can count on our Central Bank officials and other related financial authorities to regulate financial markets and to continuously update regulations that can respond to market flux. Prudential measures can guarantee a serious control of the quality and reliability of every economic-financial product, especially of those more structured. With a few exceptions, I can attest to the fact that our top bankers and financial executives in the private sector accept the obligations and limits that the common good demands without attempting to bypass or diminish their purpose, when the velocity of the innovative processes produces excessive systemic risk. (To be continued)

For comments, my email address is bernardo.villegas@uap.asia.