After Conceit: Recovering from the Credit Crunch

The Wealth of Nations...Wealth is created through an economic sleight of hand. All the money in circulation is a promise, not only of the value already in existence, but of the future value that people have promised to create.

When you pay for groceries with a credit card, you are making such a promise. You are declaring that, through the power of your effort, you will create sufficient value during the month ahead to earn an income. You do not earn your salary merely by showing up at a place of work. You earn it by applying your skill and time to performing a task that creates value. The more of the intellect and learning you bring to bear on that task, then (hopefully) the greater that pay-check.

Only once you have earned that money can you pay off the debts — the promissory notes — that you incurred. You, through your behaviour, have brought new value and new cash into the world.

Only with this ability to borrow money that does not yet exist can we overcome the inertia of needing cash to create new value. Without being able to borrow we are limited by what we already have. Debt creates real opportunities for equality.

Without debt, the impoverished could not better themselves. The only educated people would be those who are fortunate enough to have parents with sufficient cash to pay for their educations. Students who borrow money in order to improve their skills through an education are doing so in the knowledge that the value of their future work will be so much greater than the value of their current work that it will pay for both the debt, and their future lifestyle.

The average person would never be able to afford their own home without the opportunities that debt offers them. There are few who could afford, from a monthly salary, to pay for both a large rent and sufficient savings to eventually buy a house for cash. A loan allows you to live in the house you don’t yet own on the promise that you will eventually pay off the debt required to buy it.

When an individual consistently fails to pay back their debts — the promises they made about the value of their work — then they will lose the confidence of lenders and will be denied future opportunities to borrow.

When a lender consistently fails to make wise decisions about who may borrow then they lose the confidence of those who, in turn, have pooled their cash to lend to the lender to lend to another. Then all those promises — the confidence in the value of the future — collapses in one terrible mess.

Cash doesn’t require much from people who exchange it for goods. No one will question the authenticity of the motives behind a person with physical cash in hand. Dictators and tyrants go on shopping trips with as much aplomb as saints and benefactors.

Debt is different. It requires a moral code between the lender and the borrower. There has to be a degree of trust and honesty between them. If the borrower genuinely intends to fulfil on their promise, if the lender genuinely believes that the loan is within the grasp of the borrower to repay, then there can be a transaction. If the borrower suffers a misfortune then such a relationship must be renegotiated. The process of borrowing is founded on the honesty and integrity of the parties to the transaction.

The credit crunch was caused by a weakening of that morality; of lenders and borrowers who assumed that rapidly rising house prices would keep rocketing effortlessly upwards without any effort of their own. Lenders failed to check the abilities of borrowers to repay if the markets turned. Borrowers failed to remember that they will have to repay if the rising market does not.

Whatever else may come of the disasters playing out in the credit markets today, future value, and opportunities for the poor to invest in themselves and create meaningful wealth, will only come about from a robust and healthy credit market.

The Moral Bankruptcy of the Pope

Pope Benedict XVI has already declared where he stands in the world of sophisticated financial instruments. “The pursuit of money and success is pointless,” he said at a meeting of bishops in Rome at the beginning of October. “The word of God,” he said, “is the foundation of everything, it is true reality. And in order to be realists, we must count on this reality. We must change our ideas that the material, solid things, that which can be touched, is the more solid and more secure reality. … We see this today in the collapse of the major banks: this money is disappearing, it is nothing. … Only the word of God is the foundation of all reality, enduring like the sky, and even more than the sky, is reality. We must therefore change our concept of realism. The realist is the one who recognizes in the Word of God, in this apparently feeble reality, the foundation of everything. The realist is the one who builds his life on this foundation that remains forever.”

Those of us who are realists find this overt distortion of the definitions of reality disturbing. The claim that the immeasurable, improvable and unexplainable is a solid foundation for proof and reality is a step towards superstition and the tyranny of those who claim to have some special connection to the unreal over those who do not.

The Catholic Church has been rocked by its own scandals before. In 1498, the pope was Rodrigo Borgia, reigning as Pope Alexander VI. He had various children by various mistresses, including Cesare who was the model for Machiavelli’s The Prince, and a daughter, Lucrezia. And Lucrezia had a child. In 1501, the Pope acknowledged paternity of what would be known as the Infans Romanus. However, Lucrezia was never sure which of her various lovers had sired the child. Lovers who included both her father and her brother, Cesare.

This had little impact on the moral authority of the pope to dispense his version of justice, and to demand that those accused of infractions buy forgiveness from the church.

Psalm 104:5 says, “the Lord set the earth on its foundations; it can never be moved.”

“Eppur si muove,” said Galileo after his trial. “And yet it moves.” In 1633, over 100 years after Magellan had proven decisively that the earth was indeed round (despite papal assurances to the contrary), Galileo stood trial for promoting the theories of Copernicus, that the earth moved as part of a larger universe of which it was not the solid centre.

On 31 October 1992, Pope John Paul II formally recanted Galileo’s finding of guilt by the church and recognised that the earth does, indeed, move.

Despite all this collectivised and organised ignorance, the Catholic Church has not voted itself out of existence or been disgraced beyond return. Even the very real sex abuse cases levied against the organisation has done little to discredit the pope’s continual determination to act as an arbiter of morality.

Yet, that moral authority is supposedly sufficient for the pope to declare that it is satisfactory to stop making money.

If we do so, how else are we to improve the lives of the poor? Oh, that’s right, the meek shall inherit the world and so it is sufficient to keep the poor as submissive slaves to the awfulness of their lives, as long as it also keeps them submissive to the will of the church.

The requirement of Reason over Faith

Democracy, too, has had its share of abuses. Tyrants from Mussolini to Mugabe have traded slim parliamentary majorities into de facto rights to rule indefinitely. Military leaders, as occasionally the only possessors of guns, often trade this asymmetry into a snatch at power during political uncertainty. Pakistan, Thailand, Burma and even tiny Fiji are all dominated by their armies.

Across the world people continue to protest and die for the right to self-determination and self-expression. Even an experience of imperfect democracies, as in much of Africa, does not seem to put people off demanding democracy.

This too is the battle of reason over faith.

The belief that a single leader can have both the knowledge and moral authority to know and determine everything that every individual may need requires a concerted act of faith. It requires faith to believe that a central collective can manage the diverse and complex network of interrelationships between individuals and production. It requires that a leader who, after making a call to unreality, be trusted because of this call for faith rather than because he has reasoned his actions.

But democracy means that people approach each other as equals, with reason determining a mechanism for interacting and settling disagreements.

Capitalism is also an act of reason. All collective organisations require that one have faith in the leadership who claim to represent that collective. That they do not need to be directly answerable through voting or purchasing behaviour but that we take on faith our ability to trust them, because they act in the collective’s name.

Capitalism says that I buy the things I want; that I trade value for value. If you defraud me in some way, I make a call to reason through courts that are themselves independent and reasonable. And the act of offering credit within a capitalist system offers the ability for those who do not yet have cash and wealth and prestige to earn their way into it by leaping ahead of their immediate means.

Ending poverty through mechanisms other than free trade and debt instruments requires an act of faith. Where will the wealth come from to end starvation and deprivation? Trust me.

So even though credit is now difficult to come by; even though trust between institutions and individuals has weakened, there is still only one reasonable way for us to create a just and equitable economic system.

Credit must again provide an opportunity where a moral promise about the future becomes a valid and valued present benefit.

5 replies »

  1. An excellent and properly compelling bit of scholarship here. Still, I think my slam on the Pope is equally effective even if it uses a blunter line of attack. Great post, as always.

    Evangelically yours (in a completely heterosexual way)
    Super J.

  2. Great post. Could be an argument for smaller government, therefore requiring less faith in it to centrally govern and more reason on the part of the people to govern themselves, an Ammon Hennessy type of anarchy and truly free market. Could also be an argument for a more centrally powerful government with reasonable transparency, use of checks/balances, and responsive to the reason of the Consitution and citizens’ votes.
    Perhaps the Pope should have focused more on a message of checking greed at the door when exchanging wealth based on faith and the word of God, while acknowledging the reality of exchanging the material wealth necessary of our earthly lives.

  3. Excellent points, especially the argument for the necessity of credit.
    I’ve been trying to explain to lots of people why “Just print more money!” isn’t exactly a viable strategy, not that it’s done any good.

    As you said about democracy, any system can be corrupted, including capitalism.
    Due to savvy marketing an awful lot of people now believe a person’s entire worth is the sum of his or her goods.
    I’ve seen a lot of people driving a 40-50k dollar car that just *has* to be traded in every other year and living in a 400,000+ dollar house while making $30-40k.
    The reason they did this wasn’t entirely greed, it was because our culture now firmly believes that, instead of education to get a job that pays more, the way forward is to own more expensive stuff than other people.

    I was waiting for the pope to end his little lecture with “Money is not important, and in that spirit the church will now use its hoarded wealth to better the world and from here on all of us will take vows of poverty!” Good thing I wasn’t holding my breath.

  4. Great post. The act of making a loan creates money….which most people don’t realize. As with all economic cycles, this panic is as predictable as the full moon each month. Absent too much Intervention, we’ll probably withstand this storm


  5. Without a doubt, credit is the grease between the gears of our economic existence. But you know, everything in moderation.