What is Wrong with the Global Financial System?

Philip Goodchild

In a recent speech, governor Elizabeth Duke of the Federal Reserve told an anecdote from just after the failure of Lehman Brothers last September. Ben Bernanke, chairman of the Federal Reserve, was asked, ‘Well, what if we don’t do anything?’ To which he replied: ‘There will be no economy on Monday.’ (cited in Wolf 2009)

The global financial system has been constructed to serve three economic imperatives: the need for growth; the necessity for efficient allocation of resources; and the maintenance and enhancement of credit, grounded in stability. The current financial crisis demonstrates a failure in each of these tasks (Mason, 2009). Common wisdom about the significance of the crisis is that it is a Keynesian moment: individual states have had to step in to maintain growth, allocate resources, and provide stability. Once the global financial system has been repaired through tighter regulation and rebuilt balance sheets, then it may take up the strain once more, leaving states the opportunity to rebuild their own balance sheets.

I shall argue here that this common wisdom entirely misses the apocalyptic significance of the current financial crisis. What is wrong with the global financial system is that it threatens us with a live and devastating weapon: the possibility of its own implosion. Such an implosion matters for three essential reasons: banking networks are scarce resources – we can no longer buy and sell without our current network; banking networks hold and preserve nearly all our liquid wealth in the form of deposits – we would lose all this wealth if they went bankrupt; the global economy is a complex network of interlocking liabilities: the failure of Lehman Brothers placed many others at risk of being forced into default, threatening to unravel the entire system of liabilities, and preventing any institution from evaluating the net worth of any other – we would lose all knowledge of the creditworthiness of all institutions. Major financial institutions are at once players within the financial system as well as conditions for the survival of the system: this is why taxpayers have been forced to


offer a free insurance policy to underwrite them. It is a matter of economic survival, not of political ideology. So the financial crisis is also ‘apocalyptic’ in the ancient, biblical sense:1 it is a disclosure of underlying powers. Political decisions have been shaped by economic forces. Far from a return to state sovereignty over economic affairs, the current crisis discloses the submission of the state to economic forces, often in complete opposition to the ideology of the state leaders involved. The global financial system exercises its power of coercion through its own fragility. It is this predicament which discloses the problem I wish to consider here: what is the significance of this strange power of coercion that is exercised through weakness?


A philosophical analysis of the crisis

This problem is a matter for philosophy, not for economics. Economic theory is caught in a dilemma in its treatment of human agency. On the one hand, it assumes that human beings are autonomous rational actors intent on maximising their own self-interests and exercising free choice;2 on the other hand, it attempts to determine the laws that govern actual economic behaviour as though people behave entirely like fully determined particles (Lawson, 1997: 8-11). This dichotomy can be resolved only if the laws governing behaviour are also explicit reasons for free action: for example, seeking economic growth, allocating resources efficiently, and preserving creditworthiness seem to be criteria of rational conduct that apply to individuals, businesses, and governments alike. These reasons for economic conduct become selfreinforcing to the extent that they are conditions for prosperity and influence; those who are not rational actors, in this specific sense, will not remain significant actors. Nevertheless, while economic theory can seek to advise us on how to pursue such ends – with a disappointing degree of success – the recommendation of these ends as ethical imperatives belongs to ethics. Where economics is the science of means, ethics is the science of ends (Collingwood, 1926). Philosophy is the study of reason as such, and a reason is what motivates us: it is a form of feeling; ‘a reason is just a thought or perception that moves or engages us’ (McGhee, 2000: 28-29). Yet being
1 2

See Rowland 1982 for this sense of apocalyptic. ‘Economics is all about how people make choices.’ Duesenberry’s famous distinction of economics from sociology is cited in Lawson 1997.


2000: 21). Alan Greenspan was asked by the chairman of the American Congress Committee of Government Oversight and Reform. but we determine our conduct in line with reason. was not right – it was not working?’ To which he replied. that all information is reflected in the price. how we conduct ourselves in the world. For reason is a form of ascetic self-determination: not only do we express our reasons in speech and writing. your ideology. precisely. 4 One should note that there are also widespread financial practices of speculation that consist in practice of rejecting the efficient market hypothesis. the ‘objective thinker’. there are also widespread financial practices of buying and selling based on the assumption that the price is correct. as the British philosopher Michael McGhee has explained: It is not that the ‘objective thinker’ does not ‘reflect’ upon their life or has no self-awareness. do not merely structure reason: they condition our thinking. and trust have proven to be false.reasonable alone is insufficient for truthfulness. 4 3 On 23 October 2008.cspa-narchives. and how we trust the world to be. grammatical constructions. and if sovereign states become subordinate to economic forces. who is concerned with a critical examination of how we think. There is even a morality which consists in thinking that the market 3 . If rational actors are to behave according to determinate economic laws. of which they thus become the creature (McGhee. and a philosopher. The terms in which they reflect upon their life simply reduplicate the established way of thinking.’ Available at http://www. presuppositions. concepts.3 Established ways of thinking. conduct. our reasons also determine what we overlook. We become creatures of our reasons to the extent that they determine what we see of the world. ‘You found that your view of the world. just as there are entire economic theories based on the ‘efficient market hypothesis’. If the current global crisis is an occasion for philosophical reflection. that is what they fail to reflect upon.org. For example. this is because it demonstrates that many reasons underlying our perception. the totality of the established way of thinking itself. insofar as they attempt to predict future price movements ahead of the market. this will be due to the selection and application of reasons. they move and engage us. Our reasons determine what we perceive and count as significant. embedded in habits. disciplinary norms and genres of academic writing. Here we may observe the difference between a rational actor. ‘Absolutely.

then. preserved and institutionalised principles. For ever since the invention of stamped coinage. is the self-determination of conduct in line with recorded. becomes a medium through which we think. Our liabilities and obligations underlie our economic reasons. possible prices. For a refutation of the relevance of the Efficient Market Hypothesis. Whenever we take the most profitable course of action. a promise to receive: money holds value because it is acceptable as a means of payment by some issuing authority. Money only holds value as a liquid asset because there are liabilities. Far from being a neutral object entirely under human control. see Seaford. The entire world of money. Is it more reasonable to invest than to speculate? Philosophy is never far from being needed. All our modern knowledge has been constructed from the perspective of advising sovereign states. Indeed. whether that payment is for taxation or to pay interest (Wray. as a unit of account. and such quantities become reasons when our conduct is determined by them. monetary transactions record repeated and comparative evaluations. 2005: 358). 2004. while speculative interventions are forms of gambling that distort the true price. 4 . the value of promised contracts. or perhaps more accurately. Money. 5 For the origins of stamped coinage and its philosophical significance as the condition of abstract thought. graphs and charts. Rational conduct is expressed in determinate acts of sale or purchase at determinate prices. and creditworthiness are expressed as quantities. Now the value of money is not empirically evident: no one has ever seen or touched a dollar (Innes. 1998). Cooper 2008 and Lawson 1997. 2009. a significant difference between such economic reasoning and purely linguistic reasoning.Reason. Philosophers have largely focused on the recording of reasons expressed in the form of language. see Taleb 2007. and through which we evaluate the world. efficiency. So not only does money differ from language insofar as it records quantities. ordered. corporations and individuals on their possible courses of conduct. There is. Such autonomy is an illusion because our material needs and social price is somehow ‘just’. growth. comparative evaluations. prices and accounting is a medium of expression for liabilities. we evaluate the world in terms of money. however. For just as language records repeated and comparative meanings. They have almost entirely overlooked a purely quantitative recording of reason in the form of account books. money expresses a network of social obligations and liabilities that controls us. and actual transactions.5 money has itself consisted in a promise to pay.

In general. There is therefore scope for a maverick philosopher of religion to assess the hidden economic powers that are themselves the reasons for human conduct. 5 . spirits. sovereign powers. And just as we may suspect that an extortionate price is not reasonable.’ Keynes is cited in Lawson. And human conduct itself becomes reasonable and worthy of trust when it can become predictable. Of course. human conduct is made predictable when it can rely on the blessings of unseen powers. the underlying reasons that have shaped it. account books. 2. balance sheets and price charts have been essential because they record temporal expectations and promises. let alone that of others. gods. 1997: 30. credit ratings. The significance of the current crisis is way in which such exceptional circumstances remove the veils and disclose the nature of the social reality in which we live. foreign currency reserves. but also on the cooperation of other powers. that is. so does a decision to invest or not to invest. our illusion of autonomy keep these veiled beneath human agency: it is difficult to read from one’s own thought and conduct. remain human choices: but if the alternative includes failure to survive. Human civilization has been constructed on the basis of faith in promises. bank statements. financial derivatives or even the national debt. divine providence. to buy or not. At last we see the financial system exercising naked coercion upon supposedly sovereign states and supposedly autonomous individuals alike. paper currency. human authorities. in terms of powers that are not demonstrable and cannot be subjected to experimental proof. For the fulfilment of a promise depends not merely on the virtue of the one who promises. liabilities. It has also been built upon promises. contracts. we may also suspect that an extortionate reason may not be truly reasonable.6 and to bailout or not.liabilities pre-exist us. to invest or not. fates. then any ‘free’ choice is made under conditions of extortion. Markings on coins. bonds. Three narratives of the current crisis 6 ‘A decision to consume or not to consume truly lies within the power of the individual. Whether these powers have been conceived as ancestors. So our modern world has not been built upon knowledge alone.

6 . with massive changes of temperature. but does not determine which journeys will be taken. Positive feedback processes in the Earth’s climate system imply the possibility of ‘runaway’ or abrupt climate change: while the trigger that causes the climate to leave its stable state may be anthropogenic. such management is conducted through hedging and insurance. the consequent course of climate change is not – the climate will return to its more common condition of instability. or in human habits of consumption. is a kind of runaway train. so embedding economic processes within a wider political economy. 1997): a railway infrastructure enables train journeys. could it be the case that the economy has crashed precisely because Ben Bernanke and others sought to gently apply the brakes? There is a widespread view that human agency is correlated with and supported by structure (see Lawson. or in the global economy itself to make instability inevitable.7 There is something counter-intuitive here: surely euphoria and fear.How can economic forces escape human control? Climate change offers an instructive parallel. confidence and mistrust are human emotions. the collapse in confidence and fall in asset values becomes inevitable. Yet if our railway analogy is to effectively model coercion. Then we must confront the fundamental question: could it be that the global financial system. See further Crotty 2009. where the points are already set preventing certain journeys. While political efforts are currently attempting to ward off such a possibility by limiting the temperature rise to a further 2 degrees. and where the downhill slope on the remaining route may become progressively steeper so that the brakes can 7 See Gowan 2009 for a good explanation of the deleveraging processes in the current crisis. even in its periods of growth. While economic decisions are free. a machine built by humans but no longer under human control? Could it be that we cannot switch off the power or pull the brakes because the economy holds a hand grenade to our heads. precisely the conditions for extending leverage and instability. the possibility of its own implosion? Indeed. an economic infrastructure is shaped by political decisions. capable of management by reason and effective institutions and regulations? In practice. Economic crises have a similar logic of self-reinforcing or positive feedback processes: once triggered. in reality we do not know if there is already sufficient momentum in the positive feedback processes already underway. and positive feedback processes. then the railway system may be one where nearly all routes are dead ends. natural selection.

selling it on to the next NINJA. but with property inflation running at 10% per annum. Suppose such a person takes out a 100% mortgage on a property priced at $100k. we know where you will end up. After the subsequent 10 years. such loans may have seemed entirely rational. and a lump sum in capital of $167k.no longer cope with the speed. so maintaining the demand for property that keeps prices rising. the mortgage $148k. to someone with no income. with an interest rate of 4%. unless one has reason to question expectations of continuing property inflation and reasonably low interest rates. there will be no shortage of capital to buy property. Even in the worst case scenario of a recession. But perhaps the banks should know better: is it rational to offer such a loan? If the borrower defaults. Our NINJA has nothing to lose. leaving outright ownership of the first property worth $672k. and continues to refinance the interest payments as before. natural selection. leaving equity of $111k. It will be necessary to provide narratives of three aspects of the current crisis in order to disclose how autonomous processes operating through positive feedback. by the spread of risk through the financial system by selling 7 . Many commentators and journalists attribute the crisis to the rash issuing of sub-prime loans. Supposing this canny investor releases half the equity in the house as a deposit for a second. nevertheless. and coercion have become the reasons for taking disastrous decisions. the property will be worth $110k. businesses and individuals are subject to economic constraints – they do not have a monopoly of wealth. After 10 years. The investment seems entirely rational. and so no need for prices to fall. After the first year. in theory if not always in practice. Is there a risk that prices will fall? Well. Let us examine a hypothetical NINJA loan. paying off the total outstanding debt of $505k. States. the property would be worth $259k. one can rely on the Federal Reserve to reduce interest rates and open up the money supply. sub-prime lending was an entirely rational phenomenon. Leveraged loans continue to pump up asset prices. the bank can re-possess the property and recover the loss. Yet until the crisis. identical property worth $259k. leaving equity of $6k. no job or assets. effectively secured by the real asset of property. if banks continue to offer such NINJA mortgages. In short. and insured. You may be free to travel where you please. and the interest of $4k can be refinanced and added to the mortgage. but rely on credit from others – and so operate within the guidance of economic forces. the second property can be sold for $672k. lets the second property for a rent that covers the new mortgage. with no significant loss.

the one-child policy. China’s foreign currency reserves have been a necessary insurance against financial crises. even if the risks posed by de-leveraging were so severe. This brings us to the second narrative of the crisis.on CDOs and further insured by CDSs. China’s extraordinary economic growth has resulted in and been fuelled by a ‘savings glut’ by Chinese individuals and corporations. of the unsustainable imbalance between consumer and producer nations. meaning that four grandparents must share a single grandchild. Of course. and state-owned enterprises do not redistribute profits through dividends. which is made out of … risk. although to my mind they amount to much the same:8 that interest rates were held artificially low for too long by central banks in order to engineer a recovery from the bursting of the Dot. as opposed to low yielding Treasury bonds (Skidelsky. see Cooper. so long as the entire financial system advanced together and in step. Here we have a positive feedback mechanism that creates a virtuous circle of wealth creation. where money is made out of money which is made out of money. For dollars found their way back into deposits in Western financial institutions. 2009). 8 . 2008: 65-66. This ‘savings glut’ view is sometimes countered by the ‘money glut’ view. At a national level. where they could function as reserves for leveraged loans at official rates approaching 40:1. especially the US and China. and amount to the need to provide for insurance: the disappearance of collective farms and the reduction of state corporations leads to a loss of security provided by these. 2009). Leveraged growth through asset price inflation was a sustainable model of economic growth.com bubble and the subsequent decline of the stock market. In either 8 For a simple explanation of the historical linkage of the ‘money glut’ and ‘savings glut’ since the establishment of the Bretton Woods system. Such low interest rates were then responsible for a speculative bubble in property. The glut of savings in emerging markets has been a key factor in the decline of long-term interest rates. making credit readily available for speculative leverage Schularick. Some of the reasons for this are specific to China. has meant that the current generation cannot look to the younger for security in old age. 2009). and the attractions of higher rates of return from securitization. and so are biased towards over-investment (Hausmann. the entire system is dependent upon a fresh supply of credit for leveraged growth. one told by economists. a lesson demonstrated by the East Asian crisis of 1998 and confirmed by the global crisis of 2008.

such global imbalance is a repetition of the class system on an international level where resources. 9 . 10 Ann Pettifor also predicted the crisis accurately. alongside a money-glut. is why did this imbalance. although perhaps climate change shocks have not become as severe as they will. In essence. secured against speculative bubbles in property and securities. the Asian countries had a vested interest in maintaining the value of the dollar in order to maintain the value of their own dollar-denominated savings and reserves. On this account. wheat. a house price crash. copper. interest rate rises. With rapidly rising inflation in the basics of living. 15060). commodities. then. Plater College. 2009: 823). the acquisition of resources through printing money. the natural resources that power the economy are finite.9 While economic growth is geometric. one that I have been giving since 2002: the crisis expresses the first major collision between exponential economic growth and ecological finitude. This rise in interest rates was the trigger:10 with high inflation and a high rise in mortgage repayments. The global financial system was driven by the printing of money in the US. defaults quickly 9 Paper presented at ‘An Inter-Faith Perspective on Globalisation’. and therefore the first trigger: interest rate rises responded to the oil price shocks and prevented the dollar from collapsing. 2003. corn all more than doubled rapidly in the mid-2000s. the US has been enjoying the privilege of seigniorage. suggesting five possible triggers: climate change shocks. platinum. and oil price shocks (Pettifor. while the other is forced to produce because it lacks security. a collapsing dollar. One class can afford to consume because it can afford to pay for security. Prices for oil. Dollar hegemony is sustained by the need for insurance against further financial crisis. Yet the question here. See further Goodchild. suddenly become unsustainable? At this point we need to turn to a third narrative of this crisis. Oxford. The oil price shock is the one factor independent of the others. the central banks raised interest rates. and skilled labour is transferred from the developing to the developed world: one class produces while the other consumes. June 2002. leading to a future repetition of the crisis – all this being the effect of impersonal economic forces. No doubt the effect on rising prices of increased demand was amplified by speculative investment in futures (Wray. which had been sustained for so many years. rice. zinc. specifically in the coincidence of high oil prices and a debt bubble. silver. then. Moreover. specifically in the form of imported consumer goods and the ability to deploy a large military force overseas.case. capital. Each of these has had effects. placing an increased burden on those with sub-prime loans. in a positive feedback loop. current plans to fix the global financial system will merely sustain this imbalance.

structural trigger. The introduction of a market for asset-backed securities in January 2007 was a significant structural change that should have enabled more efficient pricing. the crash itself must have resulted from defaults on the underlying mortgages. since there would have been cheap securities to buy in a depressed market. given the absolute scarcity of an essential commodity such as oil. It is important to notice in this account of the crisis that the critical ingredients for economic growth – readily available energy. In the first place. Only then did the securities based on sub-prime loans. we can observe a range of positive feedback processes that have driven the economy as a runaway train: There is the speculative asset price inflation caused by the issuing of credit at high rates of leverage. On this account. in a paper presented at the Critical Finance Studies conference in Brussels in August 2009. with the profits functioning as an increased reserve for further borrowing and speculation: a combined asset price and leverage bubble. Asset-backed mortgage securities were issues over the counter. and the supply of credit – are not entirely within human control. Could this structural change have produced the crash in the value of asset-backed securities that it was designed to prevent? While it certainly increased volatility. the only way to reduce consumption is by a rise in prices leading to demand destruction – in other words. lose their value. with risk priced according to the level of correlation between defaults on corporate bonds. For. Efficiency savings have the opposite effect: they lower prices. there is a tendency to over-compensate.11 triggering the defaults with their knockon effects throughout the system of highly leveraged assets. Nevertheless.rose beyond the level necessary to sustain the speculative bubble in property prices. in two-way agreements. a rise in unemployment. The purpose of outlining these narratives of the crisis was to disclose the operation of underlying forces in the global financial system. Yet when demand destruction involves rapid deleveraging. Increasing regulation for banks will achieve very little. such as oil. and the drop in demand leading to recession. anxieties about insufficient pricing of risk led to shorting the market as a form of further insurance. 10 . and so increase overall consumption. recession. then instead of returning to an equilibrium price set by supply and demand. which had previously been valuable speculative assets. The historical data on defaults for asset-backed securities was insufficient. offered an account of an internal. The recession was caused by limits to energy production and by the lack of availability of credit. the global economy will receive repeated shocks each time that demand exceeds supply for an essential resource throughout the current century. 11 Donald MacKenzie. with the drying up of credit. the failure of weak businesses.

What we have here. between creating risks and rating risks. and enables the possibility of undertaking more kinds of risk. There are the ‘perverse incentives’: the bonuses paid to bankers who seek short-term profits by using higher rates of leverage and taking higher risks. the ‘efficient pricing hypothesis’) and financial models had a direct influence on human behaviour (see Zamagni. 2009). so that economic theory (eg. there is always a counterparty: one party seeks to insure against risk. Risks taken are merely moved elsewhere in the financial system rather than removed. 2009: 809). As Hyman Minsky pointed out. and between the banking sector as a major player within financial markets and banking as the infrastructure of all markets. there is a feedback mechanism between an economic activity and the structural mechanism that makes it possible: between speculating with money and the creation of money. therefore.Furthermore. while the counterparty takes on the risk. derivative or insurance transaction. between rational models of the market and actual behaviour in the market. and the consequent free fall in prices. stability increases risk (see Wray. the ability to insure against all kinds of financial risk produces stability. is a level of reflexivity qualitatively different from the herd behaviour of financial markets described by George Soros (2009): there is a reflexive amplification of economic behaviour and 11 . and the financial system as a whole has no counterparty – until it demands free insurance from the state. likewise. The prices of options and derivatives were formed according to models that only used recent data on price fluctuations. In each of these cases. and hedging against further declines leads to a rapid drop in prices. The use of reserves to cover losses leaves the banks still heavily leveraged (see Leijonhufvud. There is also the downward spiral of de-leveraging. 2009: 565). For in every securitization. between speculating in assets and asset values. the drying up of liquidity. the incentives for credit rating agencies who were paid by banks who themselves required far smaller reserve requirements for triple-A rated securities (see Crotty. where selling assets. requiring more margin. 2009). between insuring against risk and taking risks.

while the managers of money retain their bonuses and speculative profits. As a result. speculative asset inflation. by contrast. Without increasing consumption. the loss in value of conventional investment assets leaves pension and mutual funds to struggle.economic structure. and through the rise in actual interest rates needed to rebuild balance sheets. the fall in demand leads to a loss of revenue in production. leverage. and consumption. there are less resources available to the population as a whole. the problem of scarcity of resources has been exacerbated by over-consumption. defaults on mortgages leaves the financial institutions as the owners of property. If these forces have been unleashed in our era of financial globalisation and consumer-driven credit capitalism. we can observe a gradual transfer of wealth and power to those who already have wealth and power. find themselves unable to refinance their loans. and so concede their market share to larger competitors who are too big to fail. In the third place. and the global economy slips into recession. In creditor countries. and scarcity. There is a transfer of wealth from individuals to large institutions. then the remedy would appear to be a return to the Golden Age of 12 . In the second place. All of this echoes the net transfer of resources. In order to limit their effects. there is a lack of effective demand. increasing inequity. intensifying the recession. The result of the financial crisis in debtor countries is the transfer of resources from the taxpayer to the major financial institutions through the bailout programme. subordinating economics to politics. one might suppose that what is needed is the subordination of the power of finance to the power of democracy. highly educated personnel. and so an overall loss in wealth. and from large institutions to an elite class of managers and investors. while individuals remain in perpetual debt bondage. These positive feedback processes turn the global financial system into an unstable runaway train. Yet accelerating the consumption of finite resources leads to commodity price inflation and demand destruction. Small businesses have cash flow problems. Similarly. manufactured goods. Moreover. and money from developing to developed nations that occurs when economic growth is driven by seigniorage. The underlying economic forces that control human decision-making are positive feedback loops.

For state redistribution via taxation and welfare merely makes the economy much more efficient and effective. it leads to a lack of purchasing power among the wider population who need to act as consumers to make those businesses profitable. without which production and distribution for profit would scarcely be possible. 12 See the report of the UK-based Green New Deal Group. 2009). a lack of available credit. and thus a growth in consumption. 13 . and continued economic growth is impossible (see Jackson. For at the heart of all commercial activity is the issuing of credit. and reduced employment – until confidence re-emerges. The paradox of growth: economic growth is necessary to make profits. since wealth accrues to those businesses which are best able to make use of it. The redistribution problem: if people are remunerated according to their market value. so boosting both economic growth and the potential for inequality. While economic and population growth are geometric. the production of natural resources is cyclical. and tight regulation of financial capital. to pay dividends. So a capitalist economy without growth is impossible. since one has to purchase before one sells. and the vicious cycle of reduced demand. then wealth will accumulate with those who are creators of wealth. Our bubbles of speculative assets and leverage have been necessary as a solution to the problem of over-production. and to repay loans. While this apparently results in efficiency. related to their contribution to production.Keynesianism. 1. 2008. 2. the same underlying economic forces are at work. Nevertheless. whether the economy is driven by the private sector or by the state. Yet economic growth means a growth in purchasing power. Our economic crisis will start to become serious in 2011 as a result of the next oil price spike that will arise when the depletion of production from existing wells is no longer compensated for by the production of new wells. with a Green New Deal to generate new sources of energy. For the problems that have led to the current crisis are merely extreme manifestations of much more deeply rooted economic dilemmas. A shortage of growth leads to a shortage of profits. reduced production.12 massive public spending to boost employment and demand.

3. and many individuals are in competition for credit. the alternative is the threat of economic failure. for credit is a relation. Insofar as others fail to notice that which matters. only taxation has achieved that. the distribution problem is felt in the moral imperative to increase efficiency. In each case. If such dilemmas are rarely acknowledged as such in public discourse. each business. as the US did in the early 1970s. These dilemmas constitute the underlying reasons for our coerced political and economic decisions. there may be nothing to stop one privileged nation from unilaterally deregulating. without which there would be no creation of wealth.The historical alternative to excess consumption to address this problem has been warfare. will appear blind and irrational to the philosopher – who in turn will probably seem. here. not a possession. and economic apocalypse is inevitable. and most other philosophers. 3. The threat of capital flight: each nation. often at the cost of social unrest. this does not make them any less effective. Politics remains subordinate to economic forces since credit is an inherently collective phenomenon. mad. bad and dangerous to know. Theology of money The task of a philosopher is to establish a way of thinking through which that which matters can be taken fully into account. like Lord Byron and neo-classical economics. is 14 . Each must therefore return a profit to capital. Political decisions are taken to maximise short-term profit at the expense of long-term stability and survival. do not entirely remove freedom of allocation of capital or credit. then all other rational actors. What matters. Even in an international regime of tight regulation. or capital investment. The paradox of growth is felt in the moral imperative for economic growth. and the threat of capital flight is felt in the moral imperative to maintain credit. as enforced in the past. There is no sovereign control over the creation of credit. Nevertheless. Tight regulations over capital movements. and the confidence it appeals to is the confidence of those with sufficient wealth who seek to maximise returns. the dilemmas are insoluble in liberal capitalism and state socialism alike.

2007: 15). and efficiency is the sole rational criterion that it admits. independence from political or moral interference is what a self-regulating market means. Our attempt to construct a system to regulate economic behaviour and guide choices has amounted to a subordination of all other reasons to efficiency. If this much is obvious. 1992: 336. Our global financial system bears little relation to barter in a village market for three fundamental reasons: 13 ‘I formerly used to regard the human understanding in general merely from the point of view of my own understanding. Pope Benedict XVI. then they might be rejected. The paradigm of such an immanent order in the practical sphere is the self-regulating market. 2009)? While a free thinker may hold any perspective they are capable of constructing. One may make any demand one wishes.the way in which a perspective is formed – and perhaps nothing is more insane than attempting to form one’s perspective by seeing things as others see them. 15 . but unless they are supported by legal tender. The purpose of understanding such an immanent order of nature is to eliminate contingency and insure against risk: conduct must be regulated by reason. 2009). This is what an economy achieves. but unless these contracts are recognized and legally enforceable. Yet reason is a means to an end. whose working could be systematically understood and explained in its own terms (Taylor.13 Nevertheless. a significant perspective has to be externally validated. One may write IOUs and offer them as payment. and regard my judgements. One may enter into private contracts at will. which is independent of myself and external to me. Money is the social delegation of effective demand. not an end in itself (Zamagni. it is such a celebration of the blind leading the blind that has constituted the modern world. For the modern attempt to restructure the world in accordance with reason has been an attempt to discover an immanent order of nature. but unless this demand is backed up by money. they will have no binding power. why is it that calls to subordinate economic to ethical ends have no practical impact (such as the new Papal encyclical. as money that is recorded by banks. a market which regulates itself by the efficient allocation of resources. This amounts to a formation and selection of a perspective that excludes all others. from the point of view of other people. Indeed. Now I put myself in the position of someone else’s reason. wilfully making itself morally blind. it will be ineffectual.’ Kant. along with their most secret causes.

insofar as the economic system measures efficiency in terms of profits. If money is essentially a promise. being more commonly contracts that endure. then its value rests in external confidence or validation. economic conduct is entirely regulated by what is profitable. or given away. Economic transactions are rarely simple two-way exchanges. assets and money hold value through confidence. and result from enduring obligations. Then. so breaking with the paradigm of Newtonian mechanics as a model for economic law. individual ethical evaluations are reduced to a choice of pleasures. to work towards its own end (Ravaisson. Economic value is not grounded in utility but in reflexivity. 1996: 6-7). introducing a temporal delay (Alliez. 2008: 29-31). nor are they free: contracts determine the obligations as to how intervals of time are due to be spent. in turn. This interval prevents a direct linear causal relation between action and reaction. Since money can only be spent. Since money only circulates to those who contract to engage in profitable activities. essentially credit. As soon as there is a measurable time between receiving money and spending it. rent and interest have to be paid in the form of money.Money splits the acts of selling and buying. Taxes. then there is scope for an individual character. so that economic value is confidence in confidence. and philanthropy based on sympathies. that is. Exchanges are not instantaneous. invested. It is entirely blind. This validation. Free. the perspective of an anonymous third party. Money is a condition of freedom. is validated by external confidence. the value of money is the promise of the assets that may be exchanged for it. between receptivity and spontaneity. The value of an asset is the promise of the money that may be exchanged for it. except insofar as consumers can be found to pay for it. salaries. each in competition with 16 . The assetleverage bubble reveals the true nature of economic valuation: it does not touch down in reality at any point. Money only measures money. and only subsequently by what is worthwhile. human political and moral evaluation is excluded. in terms of money. a potential or virtual power. While consumption goods may hold value through utility. a balancing of profits against risks. the only free perspectives and decisions that are validated externally by money are those which aim at profit.

Hutchinson. selling them before purchasing. Yet money is largely created by banks lending in excess of reserves. see Rowbotham. but flows back to the banks.’ (Cooper. Banks do not need to borrow in advance a large proportion of the money they lend. Speculators can create valuable paper assets by selling and buying them. The reserves need never be transferred. 1998. Of course. 2003. Mellor and Olsen. Money circulates around the economy. In the clearing system as a whole. What is decisive. not communities. The entire productive economy is dependent upon and driven by the reflexive value of money. here. corporations and governments who have money to spend. most exchanges will cancel each other out. so that the money is simply created as a new asset and liability. 2008: 118-119) 14 For the significance of this. leaving only a small net flow of reserves in relation to total transactions. Conversely. if there is a large default on loans.14 In a similar way. As George Cooper puts it: ‘There is no more powerful mechanism for the short-term amplification of corporate profits than to persuade some element in the economy – government. then reserves may need to be sold in order to cover liabilities. the recipient lends the money to the borrower. There is one more vital phenomenon to consider. 17 . is the ability to write credible paper assets. there is a certain privilege held by the banks: when customers borrow money and spend it. While any economic agent might undertake a high degree of leverage by borrowing money. because it simply returns to them the same day as deposits. an economic system which measures only the creation of profits will necessarily result in the destruction of wealth. The perspective from which the world is seen is that of the individuals. household or corporation – to spend above its income. the recipient might have an account with the same bank and so deposit the money once more. and Cooper. This has a significant consequence. assets can be created by shorting them. In effect. 2008. Since it is more profitable in the short-term to consume inherited and accumulated assets than to produce them. increasing the degree of leverage. there is no surer way to erode corporate profits than to permit any of these groups to save their income. or might lend money.the others. and by securitization and the construction of derivatives. The ability to create economic value is a privilege accorded only to those with the ability to create economic value.

the economy as a whole cannot operate without an adequate supply of fresh credit. and only realized to the extent that this faith is acted out in practice in contractual exchange. In this respect. Yet financial value. yet also being the pivot around which material and social reality is continually reconstructed. an increasing quantity of the world’s physical resources 18 . Since money is the means by which all other social values may be realized. forcing the economy to oscillate between these two. measured by money. the economic apocalypse has already happened. financial value is essentially religious. rather than a cause. 4) The entire monetary system has its own intrinsic logic of growth. taken on faith. for we have become either blind or impotent. Being transcendent to material and social reality. If our era has seen the financialisation of culture. the pivot around which the world is reconstructed. 2) Money is the supreme value because it is both the perspective through which we value the world and our means of making what we value real. such a culture is the effect of an autonomous economic process. by default and inflation. so that we all learn to see the world from the perspective of money. without there being a stable equilibrium point. Overall. in the end. it posits itself as the supreme value. 2007). The underlying and invisible force that operates through the human will has four principles that I call the theology of money (Goodchild. is our underlying reason. and to achieve this. transferring wealth from the prudent to the reckless. While it is theoretically possible for central banks to ensure some stability by controlling credit. This drive for growth is a separate engine of the global economy in addition to the individual acquisition of necessities and the individual pursuit of self-interest. There are three relevant components here: A logic of appropriation: speculative profits can only be made on the basis of profits extracted from production and consumption.The economy is driven either by Minsky’s ‘paradox of gluttony’ or by Keynes’ ‘paradox of thrift’. the discipline for our conduct. These are: 1) The value of money is transcendent: it is a promise. any engineered stability remains within a longer-term credit bubble. 3) Financial value is essentially a degree of hope. expectation. Excess credit can only be removed. trust or credibility.

A logic of intensification: increased production and profits require increased investment. To learn to regulate our perspectives and conduct by such a system may require the invention of an entirely new way of accounting. In contrast. Here. at last. exchange and consumption. This is. possess a model for such a system in the global ecosystem. and a new way of trusting. 19 . credit and debt. instead of aiming at growth in asset value? We do. at least. a new way of reasoning. The economy tends towards inequality and oligopoly. perhaps. instead of propagating a global monoculture of monetary gain. diversifying and fostering heterogeneous perspectives and conducts in life. instead of consuming scarce resources. and only the powerful and wealthy shape the world. A logic of natural selection: wealth brings access to power. constrained to seek further profits. efficiency and credit.as well as an increasing quantity of the world’s moral ends must be appropriated for production. intensifying the richness of human culture and quality of life. the most challenging yet urgent task of critical finance studies. in a colonization and commodification of the world that intensifies scarcity. It is a bubble of speculation and leverage. and always dependent on future expansion. is the ultimate power of coercion towards growth. The entire global economy is driven by a spiral of debt. what would a financial system look like that aimed primarily at: conserving and reproducing existing resources through their natural reproductive cycles.

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