Of banks, financial institutions and citizens – a strange morality tale

Roberto Savio argues, contra Gordon Gekko, that greed is not good.

ROME: It is a great pity that, besides opening the doors to ethics, social justice and peace, Pope Francis does not also give indications of updating traditional theology. The most urgent task is to update the Seven Deadly Sins.

The update should be done on their social impact and viciousness. How it is possible to equate, for example, sloth and gluttony with greed?

In the 1987 film Wall Street, Gordon Gekko, a wealthy, unscrupulous corporate raider played by Michael Douglas, says that greed, not gluttony, moves man. And it is very doubtful that all the people who are now moved by greed are also victims of gluttony, when they usually are on a diet!

According to the United Nations, throughout the world there are over 1.5 billion people who are obese or overweight compared with 842 million who suffer from undernourishment.

The problem is that the obese or overweight are not usually the result of overfeeding but of junk food marketing by large corporations (McDonald’s and the like) – and the poor are the most overweight because junk food is cheap.

And sloth is certainly not a social threat, even if urban legend has it that people are poor because they do not want to work.

So, let us concentrate on greed, and see why it is time for an update.

“Upholding standards”

We have reached a point where the preachers of ethics are central bankers. Speaking in London at the Conference on Inclusive Capitalism in the week of 2 June, Christine Lagarde, Managing Director of the International Monetary Fund (IMF), said that “some prominent firms have even been mired in scandals that violate the most basic ethical norms”.

And Bank of England Governor Mark Carney warned that “unbridled faith in financial markets” before the crisis, rising inequality and recent “demonstrations of corruption” have damaged “social capital”. This must have gone down well in the country of understatement.

According to Lagarde, the big banks are still being subsidized to the tune of $70 billion in the United States and $300 billion in the eurozone.

And in spite of this, regulators around the world have imposed $5.8 billion in penalties for attempting to manipulate market benchmark rates.

Carney solemnly told the London conference: “Ultimately … integrity can neither be bought nor regulated. Even with the best possible framework of codes, principles, compensation schemes and market discipline, financiers must constantly challenge themselves to the standards they uphold.”

And this is exactly the problem. James Dimon, the head of JP Morgan, the world’s largest bank, who pocketed a 74% raise in salary for 2013, considers regulations “un-American”. In 2013, the bank paid $18.6 billion in fines.

The US Attorney-General Eric Holder has just slapped a $2.6 billion fine on Credit Suisse for helping US citizens to evade taxes.

In December 2013, the European Commission levied fines totalling €1.04 billion ($1.42 billion) on Barclays, Deutsche Bank, RBS and Societe Generale for having manipulated the Euribor benchmark interest rate.

Are we therefore to think that this is “un-European”?

It is worth noting that, in this orgy of fines, none of those bankers responsible ever went to jail. They just received salary increases, as the case of Dimon shows. Banks are inanimate objects, they cannot go to jail.

The US Justice Department has gone to great lengths to guarantee that banks will not be treated like criminals because banks cannot be put out of business. These are “the standards they uphold”.

A new contribution to theology has been revealed in Stress Test: Reflections on Financial Crises, a recently published book by Timothy Geithner, President of the Federal Reserve Bank of New York, and US Treasury Secretary during the 2007-09 crisis.

Writing in the Financial Times of 28 May, Martin Wolf says: “Mr. Geithner argues not only that crises are sure to recur but that governments must react with overwhelming force ... the government must borrow more, spend more and expose taxpayers to more short-term risk – ‘even if it seems to reward incompetence and venality, even if it fuels perceptions of an out-of-control, money-spewing, bailout-crazed big government’.”

But Geithner “also offers a law of unintended consequences. The safer the visible financial system is made, he argues, the greater the danger that the fragility will emerge somewhere less visible, but possibly even more dangerous.”

So the new theology of the financial system is that because it is impossible to make it safe, let us not introduce regulations which, Geithner says, can “often be self-defeating.”

Yet, until 1999, when then US President Bill Clinton (culminating a process started by Ronald Reagan) repealed the Glass-Steagall Act which had separated commercial and investment banking for seven decades, we had nothing of what we see today.

Deposit banks were obliged to use citizens’ funds under tight regulations, and the money they raised through deposits was used to finance commercial and capital growth. Now, all the money goes into speculation, and as everybody knows, banks have little patience with small investors and citizens because returns are much smaller than from the various instruments of financial speculation. If anything goes wrong, states are obliged to bail the banks out.

Where does this logic lead? Obviously into taking many risks (the higher the risk, the better the return), taking home the highest possible salaries, and knowing that the collectivity is there to bail you out when needed. Clearly, this logic could not exist if it was not as a shining daughter of greed.

Absurd inequalities

It is a sign of the times that in her speech in London, Lagarde used the same language that Oxfam used at this year’s World Economic Forum in Davos. She reminded the audience that “the 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population – that is 3.5 billion people”.

Now, we know from French economist Thomas Piketty, author of the best-selling book Capital in the Twenty-First Century, that the growth of this concentration of capital is faster than that of general growth, which is a way to say that these 85 people will continue to suck money from the general market, and therefore the rich will become richer and the poor will become poorer.

In other words, what we are witnessing is a progressive reduction of the middle class, while we are rushing forward to the past, to the times of Queen Victoria, when an obscure German philosopher and economist by the name of Karl Marx was working in the British Library in London on his denunciation of exploitation and preparing his Communist Manifesto.

This trend is happening everywhere, and at every level. The increase in sales of giant US retailer Walmart fell from 5% in 2012 to just 1.6% last year. Under Walmart’s pay plan, pay increases would only take effect after growth of 2%. So what did its brilliant accountants come up with? They took into consideration only certain items, making sure to come up with a figure of 2.02% growth, permitting William S. Simon, president and chief executive officer of Walmart US, to receive a salary increase of $1 million, taking his total salary to $13 million. Meanwhile, the average full-time Walmart employee makes $27,000 a year.

Worse still is the case of restaurant chains, which are setting up a strong line of attack to US President Barack Obama’s idea of raising minimum wages (just like they did in Germany).

Ever heard of a chain called Chipotle Mexican Grill? Even if you have, the odds are that you did not know that last year, Steve Ellis, its co-chief executive officer, made $25.1 million while the other co-chief executive officer, Montgomery Moran, made another $24.4 million. They make even more than James Dimon.

The average salary at one of Chipotle Mexican Grill’s 1,600 restaurants is $21,000. Therefore, one employee with this salary would have to work for more than a thousand years to equal one year of the co-chief executive officers’ salaries.

By the way, Mr. Ellis has received more than $145 million in Chipotle stocks since 2011, and Mr. Moran at least $104.5 million.

Now, is it possible that it is the gluttony of Mr. Ellis and Mr. Moran that creates such a world of absurd inequalities? No, but greed certainly does.

Time to update the Seven Deadly Sins, Pope Francis ... (IPS)                   

Roberto Savio is founder and president emeritus of the Inter Press Service (IPS) news agency and publisher of Other News.

Third World Economics, Issue No. 571, 16-30 Jun 2014, pp6-7, 15