The British banking scandal reveals—again—just how wrong-headed our assumptions about finance are. Morality and self-interest are hopelessly at odds; add planetary crisis to the picture, and we’re "lost," said one former JPMorgan executive I had a chance to interview last month.
Are banksters redeemable? The British rate-rigging scandal has been lying in plain sight. City of London bankers, upper crust, chummy types, were supposed to tell the truth about their own bank’s borrowing power and every day, based on those estimates, the London inter-bank borrowing rate or LIBOR was set. Now that regulators have spoken, it’s come to seem absurd that private bankers were expected to play fair, act responsibly and act in anything other their own self-interest—without oversight. But that’s just how the inter-bank lending rate setting worked.
As one former senior trader close to the scandal put it to The Economist, “There is no reporting of transactions, no one really knows what’s going on in the market…” The implications? “You have this vast overhang of financial instruments that hang their own fixes off a rate that doesn’t actually exist.”
Sans transparency, soaked in incentives, the bankers had every reason to hide their institution’s weaknesses, and that (it turns out), is all too often what they did. Now regulators have woken up, criminal investigations are about to start and Barclays chief Bob Diamond is likely to be only the first, not the last, chief executive hit. But what about the bigger story?
The LIBOR scandal itself will soon shift to courts and public inquiries, boring, complex and long enough for most regular people to lose interest. The bigger morality tale is already slithering down the details-tube.
Before it does, it’s worth seizing the opportunity to ask some bigger questions—like what are bankers for? What are banks for? If banker self-interest conflicts with the public world interest, what regulator on the planet can cope with that?
John Fullerton is a former managing director at JPMorgan. Finance drives economics, he says, and economics largely determines the fate of the planet, yet the resources of the planet are finite. “The notion that exponential growth can go on indefinitely in a finite planet is in violation with arithmetic and basic physics.” As long as growth is the sine qua non of market economic ideology: “We are lost.”
If we don’t redefine self-interest, said Fullerton, in this conversation recorded in New York in late June, “I think we will look back, and our grandchildren will ask us, What were you thinking?”