THE FINANCIAL crisis is being described as a crisis in the American housing market caused by imprudent lending to homeowners. This is true as far as it goes, but it doesn’t go far enough.
The sub-prime mortgage crisis is just the presenting issue. Any number of events could have precipitated this crisis. Rather, the crisis reveals the extent of and risks in the globalization of deregulated financial markets.
The German government has rescued three banks in the last year because of American mortgages. They probably wouldn’t be able to rescue Deutsche Bank, which is so large it has liabilities the equivalent of 80 percent of Germany’s Gross Domestic Product.
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The British government has now rescued two banks, Northern Rock and HBOS, because of their exposure to this debt. They probably wouldn’t be able to rescue Barclay’s Bank, whose liabilities are greater than Britain’s entire GDP.
The largest insurance company in the world, AIG, has needed rescue because it has been selling insurance against this kind of default. The American government has been forced to act not only because it is an election year, but also because it needs to satisfy Japanese and Chinese lenders.
Foreigners hold 45 percent of the debt issued by the U.S. Treasury with the largest investors being Japan (13 percent) and China (10 percent). If those countries start moving their money into Europe instead, the American dollar would fall rapidly – just as rapidly as interest rates would rise.
So, the world’s financial markets have expanded and integrated. But there has been no corresponding expansion and integration of regulation.
Instead, the dominant voice of the last 20 years has been one of deregulation. In consequence, the livelihood of the whole modern world is now at stake.
In the 17th century, Isaac Newton proposed three laws of motion. His third law states that “for every action, there is an equal and opposite reaction.”
In the 20th century, the economic historian Karl Polanyi proposed a similar kind of law. He said when market forces under capitalism expand, they are met by a counter movement aiming at the conservation of society, nature and production, using protective legislation and other instruments of intervention.
This double movement in the 19th century he called the Great Transformation. It was how modern industrial society was born, complete with trade unions, pension plans, social housing and health care.
We now desperately need another Great Transformation and it is timely to ask: by what values will this intervention be guided? Let me suggest four.
Matthew’s Gospel (7:26) reminds us to build our houses on a solid foundation. That means our financial systems, like our ecological systems, have to be sustainable.
For the system to be sustainable, we have to be clear about what is sufficient for our common life.
So far we have organized our affairs to achieve the maximum growth possible. What would “enough” look like?
Most people want some basic standards of fairness applied to income and employment. This is the principle of equity.
Finally, ordinary people are wondering why all the government money is going to rescue private investors when ordinary homeowners are under water. They are looking for some collective support. They are looking for solidarity.
We’ve had enough of moral hazards. It’s time we had a moral economy.
Christopher Lind has published widely in the area of ethics and economics. He is a Senior Fellow at Massey College, University of Toronto.
