Review: 'The Credit Crunch' by Edward Hadas

This sixty-odd page booklet from the CTS is written to explain how a moral failure has led to the current financial crisis. An interesting and informative study, definitely worth its cost of £1.95 and cheaper than some Sunday newspapers.

The author first of all points out that our financial system has brought great benefits. Then he contrasts the liability of financial systems to repeated crashes against the reliability of air transport, where the techniques for recognising and managing risks in large and complex systems are well understood. He then asks why finance should be so accident prone. First he gives a quick definition of finance, and emphasises the need for trust. He then introduces two “lies”, which when linked to greed are the causes of the breakdowns.

The first lie, oddly called “noble”, is that resources claimed by two parties are regarded by each party as belonging to themselves alone. When I deposit money in a bank I still regard myself as owning it, although it has in most cases been loaned out to a borrower who regards it as for his own use (at least for the time being). Without this lie it would be very hard to borrow money for large projects. Greed causes this lie to give rise to trouble when the lender asks for too much interestor when the borrower exceeds his means to repay.

The other lie, the “ignoble” lie, is that one should strive for the highest possible returns. But beyond a certain level one man's gains are another man's losses, and so this form of greed leads to a wealth gap, and also to disappointment for most people, since there must be an upper limit on what one can expect without increasing genuine wealth creation.

The author then discusses the corrosive psychology of greed. It disrupts rational thought, and also deceives the conscience into not seeing that one is being greedy. The effects of greed spread into the community. The government starts to encourage greed, and even the regulators, the majority of whom own shares and property, love to see their wealth increase without effort. Even economists may be tempted not to upset the apple-cart by issuing warnings! Academics produce a strange concept of “economic man”, and set up models where greed (known as self-interest) leads to the build-up of wealth for all! The concept of morality takes up a very low place.

In the final section the author proposes a plan for minimising the human tendency to be greedy, with themes such as education in virtue, warnings against excessive financial gains, restrictions on financial gambling, and a control of “usury” both as excessive interest on the one hand, and excessive borrowing on the other. He is quite an optimist!

Some aspects of the financial system were perhaps inevitably omitted. For instance one number, the share-price, summarises the total human endeavour in a company and takes little account of the environmental damage caused by the company. Then again, although the system has greatly benefitted most people in the “developed” nations, a great proportion of the human population is left poverty-stricken. And finally the pollution of the atmosphere caused by the striving for ever greater wealth may bring on disastrous changes in the climate which make the dream of recovery from the slump a fantasy.
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Tags: Edward Hadas, The Credit Crunch, William Chambers

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