The Common Good
June 2009

A Paper God

by Bob Goudzwaard | June 2009

How the out-of-control buying and selling of money led to our current crisis.

Commentators have frequently compared the credit crisis of today with the economic crisis of 1929, just before the Great Depression. Yet almost no one speaks about the deeper causes of the economic crisis: the eagerness of banks to give, year after year, huge amounts of credit to speculators and all kinds of speculative funds, with an enormous worldwide growth of financial markets and new financial products as an unavoidable consequence.

 


In recent years there has been a staggering increase in the amount of money being invested by investors worldwide—and most of it has been put in highly speculative markets in the financial, rather than the “real,” economy. What does this distinction mean? To oversimplify, the “real economy” is the part of the economy that involves making, selling, and buying goods and services, from groceries to shoes to doctors’ visits to garbage collection. The financial sector, in contrast, involves the buying and selling of money as a product in its own right.

 

 


On its simplest level, this involves the trade in loans or bonds (someone borrows money and pays back more money in the future), the buying and selling of foreign currencies, and the buying and selling of shares in the stock market.

 

 

But these money-for-money transactions didn’t stay simple. Year after year, speculators’ bank accounts grew enormously. And this new, financial-sector money—call it “debt money” or “credit money”—was mainly used for more speculation. One popular kind was options or “futures,” bets about the expected future price of a currency or commodity.

 


Other kinds of new, complicated financial “products” were also invented. You could, for instance, invest in large pools of mortgage loans (these “securities” sold so well that banks started handing out mortgages in an extremely reckless manner). Another example: credit default swaps, an insurance-like arrangement whose buyer gets money if a bond issuer can no longer pay his debt. These were not called “insurance” to avoid the sensible regulations placed on insurance.

 

 


Statistics about the growth of “debt money” are not public information (this is itself a telltale sign of how financialization has been hidden from public view), but recent estimates suggest that, for a full decade, the volume of debt money has increased four times faster than the growth of the so-called real economy. Economist Herman Daly recently calculated that the amount of paper exchanged for paper is now 20 times higher than the amount of paper exchanged for real commodities.

 

 


But now the enormous balloon of collective speculation has burst, people have lost confidence, and the real economy is deeply threatened.

Greed and magic

 


Underneath it all lies the driving power of greed, which motivated not only private speculators and investment funds but also the once-reliable banks. In the new order, banks fully engaged in speculation themselves, making huge profits.

 

 


But is greed the only factor? Consider that money and magic have something to do with each other. Making printed money—or now, electronic, “virtual” money—confers power, as if by Faustian magic. It opens doors, giving the money-maker more control over investments and the power to acquire ever-greater material wealth and luxury.

 

 


But money does something even more powerful: It can set people and markets in motion. Expectations climb higher and higher. Year after year, the financial markets have grown more rapidly than the “real economy.” Money turns into a kind of compass for all—a guide that seduces a society to follow wherever it leads.

 

 

 


Idolatry

 


In all this, one senses idolatry at work. The essence of idolatry is that high expectations, combined with fear, narrow your consciousness, restricting your focus down to pursuing the right interaction with your “god.” You delegate power to your idol, allowing it to take the lead, and it inscribes within you patterns of obedience to itself.

 

 


Compare this with how, in recent years, financial markets were given control over the real economy—and, indeed, public policy. At last, declared the president of the German Federal Bank some years ago, politicians had been brought under the “discipline” of the financial markets.

 

 


One way by which markets exert control over governments is by investors’ constant threat to leave: Global capital unceasingly ricochets around the world, driven by its quest for maximum short-term financial gain in a climate of changing expectations. In what is sometimes called “the new Big Brother syndrome,” governments lower their taxes on capital and burden their economies with huge social spending cuts, just to remain acceptable in the eyes of this new, ever-watchful overseer. But Big Brother is a fickle master: At the least rumor, such as a possible devaluation of a country’s currency, capital can abandon a particular country wholesale and do it literally overnight, like a herd of animals that has just heard a shot. Many countries, especially in the global South, live in constant fear of what a sudden speculative capital exodus might do to their economies.

 

 


And in the economies of the North, we can observe the harsh dominion of the financial markets in another way: in the rigorous demands of hedge funds and other entities looking for large, quick returns. Having used (usually borrowed) money to gain control of companies in the real economy, these speculators force those companies to merge, sell out, split, and restructure, with the sole purpose of increasing short-term financial rewards.

 

 


Clearly, an idol has arisen, bringing with it fear, even terror. We put our trust in the financial markets to save and guide our real economies. But now the idol has started to stagger and crumble, as idols usually do—and because of that the world is now pulled toward a deep recession. How profoundly Mammon, this financial god, has betrayed us!

 

 

 


Speculation and global warming

 


And that betrayal also extends to the planet’s ecosystem: What happens in the financial world helps drive, via its effects on the real economy, climate change and environmental degradation in our world. Rich countries’ drive to become ever-richer materially has caused us to intensively use fossil fuels and produce greenhouse gas emissions, to devastate landscapes, and to kill off biodiversity. And China and India increasingly are following the same model.

 

 


All of this is profoundly aggravated by the pressures financial markets exert, as they focus primarily on short-term profitability and shareholder gains, instead of on long-term investments. As a result, companies—and governments—have paid less and less attention to climate change and other environmental concerns, especially where environmental protection would reduce profits. If we live and move in a financial climate of money and greed, then the actual climate almost always suffers.

 

 


The financial world is also linked to environmental damage on a spiritual level: A superficial view of human well-being deeply hampers potential solutions to today’s problems. The assumption is that greater material prosperity, underlined by money, will give us all that we need. This modern understanding suffers from a profound lack of shalom, the Hebrew word meaning wholeness, well-being, and peace.

 

 


No wonder: The reduction of happiness to material goods, a reduction promoted by massive advertising campaigns, is a symptom of following a false shepherd in pursuit of seeming life. But Jesus is the Good Shepherd, and “the sheep follow him because they know his voice” (John 10:4). In this text, Jesus also uses the word “abundance”: “I came that they may have life, and have it abundantly” (John 10:10). On an environmental level, life must first be preserved for us to be able to enjoy it in abundance!

 

 


What then might following the Good Shepherd look like in the midst of today’s economic, environmental, and spiritual crisis?

 

 

 


A way forward

 

Citizens, banks, institutions, and other economic actors must assume, rather than renege on, their responsibilities—not only for fairness and transparency, but also for equity and sustainability. Governments must demand nothing less; in the short term, they must demand it of mortgage-holders, banks, automakers, and other economic actors as a condition of so-called bailouts.

 

 

Perhaps the most effective approach would be to begin where the problems began, namely banks and mortgage-holders. The main problem was that banks lent and gave credit in an extremely careless, speculative manner, without holding nearly enough money in reserve. Government support to banks should never be given without an agreement, in writing, that lending practices return to the principles of healthy banking. Bonuses for senior executives should be abolished or at least severely restricted. Banks and other mortgage-holders, including those who pushed relatively poor people into seemingly cheap mortgages, should get government support only if they eliminate adjustable-rate mortgages, in which interest payments escalate after an initial “teaser” period. If existing mortgages are also converted to fixed rates, at least a segment of homeowners would be able to keep their homes, and it could help to restore confidence in the economy.

 

 


In the middle and longer term, the national and international monetary system must change on a structural level. There has been an obvious failure of financial oversight by the U.S. Federal Reserve and the International Monetary Fund (IMF)—an almost complete lack of regulation of speculation, not to mention speculative movements of global capital. The IMF’s founding document still gives it the ability to regulate destabilizing international capital flows—although in recent decades its policies have actually encouraged, rather than discouraged, capital stampedes.

 

 


The primary task of a newly structured IMF should be to create and maintain stability and fairness in the world’s monetary order. The growth in the financial economy must serve the growth of the real economy, not the other way around, and heavy restrictions must be placed on speculation. Where today’s IMF is controlled by the world’s rich countries (in practice, it is run by the U.S. Treasury Department), in a restructured IMF the countries of the South need to have a real say in decision-making, and the United States must be subject to the same rules as other countries.

A new vision of shalom

Like all economic crises, the current one involves a slowdown in economic demand. But is there any reason to concentrate only on increasing consumption in wealthy countries? Of course not! Ever-higher levels of material consumption ruin the environment. More­over, many poor countries still suffer under enormous debt burdens which profoundly hamper their economic development. Why should we bail out Western banks but not assist poor countries in their efforts to rid themselves of these debt burdens and to increase public and private spending to meet basic needs? The IMF has the mechanisms to do this (by, for example, granting a special allocation of so-called Special Drawing Rights).

 

If the wealthy countries of the West support this effort by reorienting their own economies toward global solidarity and sustainability, then the current crisis could come to an end to the benefit of all—at least in terms of shalom.

 


Jesus calls us to preserve life in order to enjoy it in abundance. But in an already rich society, when maximizing material abundance itself becomes our goal, all of us lose life. Now we are increasingly aware of what is wrong—so now is the time to turn to a better way. What good is it to conquer the world but lose your soul? Is that not the message of the gospel for today?

 

 

 


Bob Goudzwaard, co-author of Hope in Troubled Times: A New Vision for Con­fronting Global Crises (Baker, 2007), is a former member of the Dutch Parliament and professor emeritus at the Free University of Amsterdam. Recently he chaired a two-year consultation between the World Bank, the IMF, and the World Council of Churches.

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