Part [part not set] of 4 in series "Finance and the Common Good"


This is the first chapter of the book Finance and the Common Good (2019, Amsterdam University Press), written by Jos van Gennip.


Five years ago, Dutch think tank Socires took the first steps in setting up its programme on ethics and finance. Some wondered why we – with no particular qualifications in this field – would enter an area that demands so much professional knowledge and expertise. We were aware of our shortcomings, yet all the same we forced ourselves from the very start to engage in intensive dialogue with academia, the financial industry, civil organisations, and politics.

This ‘diamond approach’ has proven very fruitful in the many areas where we promote the concept of a ‘responsible society’ (‘society and responsibility’ being the meaning of the acronym ‘Socires’). The domain of finance was the very place where an open dialogue was missing. Media and parts of public opinion considered the industry a Leviathan of greed. Being ‘too big to fail’, in combination with systems of subprime mortgages and other questionable financial products, simply meant that the winners took the profits of their own irresponsible and overly risky dealings. Meanwhile, others – clients and society as a whole – received the blows. Scores of books, journal publications, and opinion articles explicated this analysis and emphasised the feeling of injustice. The system seemed not only to encourage irresponsible behaviour, but was also changing characters and personalities.

It is no wonder that the ensuing mistrust and rift between the banking sector and society has led to an outcry for more regulation, stronger restrictions, and a ceiling on bonuses and salaries. A stricter regulatory regime was indeed imposed. This process is still continuing. However, it is doubtful whether this limited reaction will truly allow the system to avoid a new crisis. At the same time, the real risks of overregulation loom.

There is an alternative, ethics-based approach in which bankers and professionals in the finance industry promote awareness for a broad responsibility that surpasses the interest of their own pockets or shareholders of the company. Could this be a viable solution? It would mean a total conversion of the minds of bankers and big players in the finance industry. The financial sector would now assume the role of servant to the real economy, to the wellbeing of clients and their communities, to sustainability, and even to the protection of the earth. Is this a realistic perspective? The newly implemented banker’s oath points in this direction. UNIAPAC, the confederation of Christian entrepreneurs, has made strong pleas to frame banking as a ‘noble vocation’. However, one of our main advisors, former Minister and top banker Onno Ruding, has expressed doubts as to whether such symbolic gestures are effective. They may certainly contribute to the much needed change of culture, but more is needed. A strong reflection on and a far-reaching awareness of the role and function of the sector and the mentality of the individual banker are required. This must be combined with a strong institutional and collective adherence to high ethical and moral standards and behaviour. Granted, the role and mentality of the individual are indispensable. All the same, change in this regard is only effective in combination with a change of (and binding consequences for) the culture of the individual company.

But even all that will be insufficient if we do not manage to translate the complex causes of the 2008 banking crisis into consequences for all parties involved: the financial sector, the state, and society as a whole (i.e. business, academia, media, and the wider public). Every element in this triangle has to pursue an agenda of reform, and above all engage in a process of open and structural dialogue with the other elements. The central thesis of our discussions in Finance and the Common Good is that a realistic perspective for a structural solution must involve all three actors.

The financial industry

The first step in the process is for the financial sector to recognise the need to break with its current mentality. This mentality insists that whatever is not forbidden (or not regulated) is therefore permitted. This attitude has resulted in a notorious range of so-called ‘innovative’ products, most of which are not understood by clients and are hardly transparent. It was exactly the utilisation of this type of not-forbidden-but-very-hazardous products that caused the downfall and near-collapse of the entire financial system. One of the outcomes of the crisis should be a regular dialogue between banks and external and internal supervisory boards and authorities on how to deal with innovations, new technological opportunities, and this grey area in general. The role of the supervisor should include far more than simply checking the bank’s compliance with written regulations.

This goes much further. The financial sector should comply with new provisions for stronger buffers and extended internal risk reduction, but above all it should be more responsive to the real needs and demands of clients, stakeholders, the economy, society, and the earth. This means the sector can no longer perceive itself as an autonomous, self-propelling force that primarily serves its own interests. Is this a utopian vision? We discern hopeful signs of change in the way in which certain banks deal with their clients: they accept a broader responsibility. We also sometimes observe far-reaching change in vision and in investment criteria on the part of certain pension funds and life insurance companies. In their opinion, long-term value creation is fully compatible with promoting the common good of clients, society, the real economy, and ecology. As Carla Moonen, former President of pension fund PZFW, remarks in her contribution: ‘[Our nurses do not want] large differences to exist between ‘lucky’ and ‘unlucky’ generations; [they prefer] solidarity between generations’.

However, there is a strong tendency to return to ‘business as usual’ now that the worst of the crisis seems to have passed. It seems to have passed, because a new crisis (possibly worse than the previous one) is a very serious risk – and this time our means for repair and containment are nearly exhausted. A number of practices of the nineties and the early years of this millennium are reappearing: exuberance in bonuses and salaries, a sometimes inflated stock market and an ever-expanding financialisation taking place in our economies. Once again, the financial industry cherishes its semi-autonomous status and existence. It is detached from the real economy and from society as a whole.

Society

It is no surprise that society’s reaction to a financial crisis will be distrust, alienation, and a search for financial services provided by non-banking institutions. And there is more. Many share the opinion that populist movements in Western democracies have gained momentum because of this distrust and alienation, and because of the perception that the state and politics are unable to carry out a substantial and effective reform of the system. This combination of alienation and distrust, together with concerns about income inequality, loss of traditional jobs, the as yet unpaid societal and individual bills of the previous crisis, globalisation, concerns about illegal migration flows and the erosion of originally strong political parties, could completely destroy the broad post-war consensus of interdependence. It could even damage the value of democracy itself. This could be the ultimate outcome of irresponsible behaviour and a corrupted culture in a single sector of society. We therefore have no other choice than to find sustainable solutions and arrive at new perspectives for the financial industry. Meanwhile, we have to recognise that society (including academia) had a strong co-responsibility for the last crisis. One of the striking remarks in the Socires seminars was that immediately after the crisis, it was absolutely unheard of to refer to this co-responsibility. The sector alone was to blame. Perhaps politicians were too: they had been unable to control the sector.

Meanwhile institutions, social movements, media, and even the university stayed largely silent in the long, structural build-up to the 2008 disaster. When the IMF’s chief economic strategist and a top investor at Wall Street predicted the crisis and stressed the unsustainability of the system, their voices were largely ignored. Cognitive bias dominated publicity and favoured ignorance, over-optimism, and risk denial.

It goes even further, both in the US and in Europe. It is our very culture, our very civilisation that fuelled the crisis: a culture of overconsumption and spending, instead of saving and practising sobriety. In the words of a banker, speaking at one of the Socires seminars: the crisis is to blame on the ‘loan addiction’ of consumers and banks alike – a culture which seems hardly to have been changed by the experiences of the last ten years. Some religious leaders have called it a civilisation of hedonism and hyper-individualism, where fame and merit are defined by the pursuit of wealth and riches.

We cannot isolate a single incident – however severe it might be – from these underlying trends in our civilisation, a ‘civilisation of indifference’, that caused the 2008 banking crisis and subsequent Eurocrisis. We find a parallel with the ecological crisis, where individuals feel alienated from the natural environment. At the height of the crisis, Deputy Prime Minister of the Netherlands, Wouter Bos, was asked who was to blame for it. His stunning answer: ‘All of us!’ He hardly received recognition for this analysis, but he was right.

The state and politics

The state and politics should continue to develop a legal and institutional framework that fosters less risk for both clients and the system itself. This framework requires a better balance between rewards and punishment. The state and politics should also enable supervisory authorities to assume tasks that exceed mere compliance with existing regulations: they should be able to address the role of banks and financial institutions in promoting the social and common good. At the same time, politicians must become aware that rule-stacking in an effort to tame a single actor – the financial sector – is neither effective nor fruitful. Overregulation will hamper the entrepreneurial space required by the industry to take the lead in achieving effective reforms. It must be recognised that the financial sector is indispensable for a flourishing economy and the wellbeing of citizens.

In certain situations, we require self-restraint of the state. In others, we need the state to develop and implement new policies. The latter is particularly needed in situations where the state and politics bear a strong co-responsibility for ‘debt addiction’ in society and the state apparatus itself. How sustainable are policies that favour borrowing and punish saving? Politicians should question the consequences of their own appetite for borrowing and debt. They should also consider what might happen to a society that favours overbuying and overconsumption, notably with borrowed resources. What are the limits to the debt burden and to society’s capacity to earn back its expenses? What is the fall-out of the current artificially low interest rates and the ensuing, irresistible temptation of borrowing ever more money? What are the implications of the debt burden when it comes to aging populations, incidentally shrinking economies, and the competition between necessary collective public investments and individual consumption? And how do we finance the enormous cost of climate and environmental investments? Finally, how do we include in our spending behaviour the true cost to the environment? Perhaps this is where the central challenge for our democracy lies: at the point where long-term responsible measures appear to be completely at odds with electoral short-term gains. Who has the courage to address these new challenges, even if it means losing the next election? It is urgent that new policies are accepted that encourage saving and frugality; policies that replace the current ones stimulating spending and borrowing.

People

The fourth actor is the main element in the reform of the system: the individual. Although it is imperative to have an environment that enables personal changes in behaviour and attitudes, nothing will change without a personal will to reset. This is where ethics and moral convictions come in. This is the domain of education, of convictions, of culture and civilisation, and of one’s own personality. There are limited possibilities of outside interference in this regard. But some do exist. One of the contributors to the Socires programme works intensively on a reform of our secondary level economics education. Others plea for the introduction of a moral and ethical dimension in management schools. We follow with admiration the growing interest at the academic and even the students’ level for other considerations than fast profits. Socires contributes regularly to conferences, studies, and policy recommendations in which the relationship between the economy and the common good is made central. It is not helpful to only preach and blame. There is a growing awareness among new generations that certain parts of the current system have no future, because they have destructive consequences. This is a basis onwhich we can build. Young people’s desire to achieve a financial industry that serves the real economy, the well-being of society, and the Earth is even more promising. Particularly the reforms that are taking place in the pension and insurance sectors can have positive consequences for professionals’ job satisfaction and meaning of life.

Unfortunately, individuals in this case often have to function in an environment that is not very conducive to changes in attitude. Take for instance the developments in ICT, which foster more anonymity and detachment rather than the much-needed restoration of the personal relationship between banker and client. Meanwhile, the banker has to function in a cultural climate that is hardly conducive to the promotion of stakeholders’ interests and the common good. It is our shared responsibility as clients and as general public to applaud and endorse company policies which put long-term value creation above short-term profits, prudence above high risks, and precautionary principles above passing the bill to the next generation.

And there is more. What importance do job satisfaction and responsible, future-oriented behaviour have in a culture that prefers ranking high in terms of income and wealth, as well as exhibiting purchasing power and luxury spending? Again, the discussion on the reform of the financial system and its relevance and long-term security meets the sphere of culture and civilisation.

Next steps

In recent years we are fortunate to have observed an increasing sensitivity for this cultural and social dimension. In the Earth Charter, in the Papal Encyclical Laudato Si, at Davos, and in initiatives such as the Global Compacts and especially the Sustainable Development Goals (SDGs), we sense the need for a broader approach. Against this background, this study can only be a modest contribution to a very complex issue. But it is an essential contribution. We are convinced that this triangular dialogue is the only way to achieving a comprehensive perspective for necessary corrections and maybe even alternative arrangements in the financial sector.

During these past five years, in which we engaged critically with the topic at hand and joined discussions and studies, we came to a second conclusion. We even discovered a new frontier. For more than forty years, society, politics, and the economy have been tempted towards a specific interpretation of the market economy: the Anglo-Saxon interpretation. Some have referred to this type of market-dominated economy as ‘casino-capitalism’, others as ‘capitalisme sauvage’. This model stands in contrast to a different interpretation of the market economy, namely the Rhineland or social market model. The latter model has been characteristic to the reconstruction of a number of economies in Western Europe. There is no doubt that both systems have certain advantages, at the very least for some segments of the population. However, in the Rhineland model, the costs of the welfare state, certain forms of overprotection in the labour market, governmental regulations, and state interference became unbearable or caused considerable friction. Meanwhile, the Anglo-Saxon model could not contain its inherent excesses and its sometimes destructive consequences.

A logical question came up during our deliberations. Is there a system that can integrate the demands of the economy, society, ecology, and the stunning developments that have recently taken place in other areas? Globalisation demands more flexibility; digitalisation and robotisation demand a different organisation of the labour market; demographic developments require a different pension and life insurance system; and FinTech can affect dominant positions of the banking system with its unforeseen support for freeriding. FinTech also constitutes a serious challenge to the regulatory system that was developed in the wake of the 2008 crisis. For all of us concerned with the survival of the financial system and its relevance for the ‘real’ economy, it is indispensable to engage with the actualisation, or even the reinvention, of the Rhineland model. It is about time that those actors who deal with contemporary challenges in the financial sector also engage in this project of the future. A global, technologically updated and ecologically relevant system should be on the agenda for new studies, conferences, and programmes.

Our January 2018 conference ended with a plea to embed the financial discussion in the broader discussion on the reinvention of the Rhineland model. It also made a proposal to further internationalise the debate. Can we work to achieve consensus among a number of like-minded European countries, mostly members of the Eurozone and geographically located (in the broadest sense) around the Rhine? First of all, this is necessary because our interdependence makes separate national reforms of the financial or even the economic system futile and obsolete. Even more importantly, the necessary global and multilateral dimensions of these reforms demand a coordinated policy by a bloc of like-minded countries. This bloc must be as strong and as influential as possible. Is this wishful thinking? A paradoxical development is taking place today, where voters and leaders from the erstwhile pillars of the multilateral Anglo-Saxon system (the US and UK) are now distancing themselves from it. Some even seek to undermine and destroy it. This even applies to those who up to now were most reluctant to critically evaluate the Anglo-Saxon system. They admit that new alliances should take shape as soon as possible, along with a new architecture of the international financial system. This is because the international financial system plays an important role in defending multilateral mechanisms and forms of regulation and protection of the globalisation process for a considerable part of the world population.

A timely reflection

The publication of Finance and the Common Good comes at a strategic moment for the interconnected approach. A lot is at stake in the year 2019: the dependability of the system, the redefinition of a European model of economics, and the strength of multilateral and global financial and economic structures.

The Netherlands is the seat of a number of very important global financial players. It is key that a discussion on financialisation takes place in the country. However, the wounds of the crisis may have been too fresh five years ago. An objective and detached discussion about causes and responsibilities was not yet possible. In Europe, we were engaged in a struggle to save the Euro. At the multilateral level, there was a – misplaced – optimism about global cooperation and agreements. Today, the dependability of our national financial system is once again taken for granted. This is partly caused by what might well be the lowest interest rates in history. The worst of the Eurocrisis seems to have come and gone, which can be attributed at least in part to the leadership and guidance of a number of contributors to our programme: Herman Van Rompuy, Jan Peter Balkenende, and Wouter Bos. However, at the global level confusion and frustration prevail. New leadership and vision is needed. One thing is clear: we must utilise the current years to the utmost in order to achieve a structural reform of our own financial system and to consolidate the improvements that were made post-2008. Europe will receive a new Commission and a new Parliament in 2019, and it faces the task of bridging between the rescue phase and the phase in which a future-proof regime is achieved. Worldwide, we must develop a vision and build alliances that allow us to avert a collapse of the global cooperation structure. On top of all this, we must learn to handle the revolutionary developments and breakthroughs of technological innovations, which are shaking the traditional banking system to its very foundations as we speak.

At stake are the health and proliferation of our financial system, the relationship between an inclusive economy and the common good, and the survival of a financial world order of equity and justice.


Jos van Gennip is special advisor to the Socires Finance and the Common Good programme. He is a member of the Academic Council of the Wilfried Martens Centre for European Studies. In the past, he was Deputy Director General at the Ministry of Foreign Affairs in the Netherlands, Speaker on Foreign Relations for the Senate of the Netherlands, founder and first President of the Socires Foundation, and General Rapporteur for the political platform of the European People’s Party (EPP).