Good Customer Service versus Bad Regulation
Learning from Gandhi:
addressing the current
dilemmas in microfinance
Hinduism and Microfinance
The Financial Crisis
A Sketch of a Credible Explanation
Money Market Funds, Bank Runs and the First-Mover Advantage
The Morality of Money Lending
The Case for Central Bank Liquidity Facilities for Institutional Money Market Funds in the Offshore Market
Creating Sustainable Micro-lending in London
Darwin and Philosophy
David Hume's "Of Suicide"
Is God a democrat?
The Risk Premium
The global financial crisis started in August 2007, peaked in intensity during September and October 2008, and came to an end at some point in the first half of 2009. The crisis comprised an interconnected set of financial, economic and political events, which involved numerous individuals, private companies, public bodies, national governments and international organizations. A decade later its consequences remain with us, with impacts across the financial, economic, political and social sectors. Many of these impacts have been felt globally and most have been negative in the short-term, including: substantial falls in the value of wealth, significant reductions in economic activity, increases in unemployment and homelessness, reduced levels of social protection, growing distrust of politicians and policy-makers and a growing fearfulness about the future leading to a loss of hope.
Unsurprisingly, the breadth and depth of these negative impacts have led to the apportionment of blame. In the Western media, the blame process started well before the crisis was over and a simple but readily-accepted narrative has now become standard. According to this account, "bankers" -- a term that is used to denote anyone who works in the financial services industry -- were the principal culprits, with financial regulators playing a supporting role. In brief the standard account says that, motivated by greed and disregarding the likely results of their actions, bankers caused the financial crisis and must be blamed for its consequences; in addition, regulators, who previously lacked the tools to control the financial system, must now be given these tools, with new powers to intervene in banking activities and to punish those who misbehave. This standard narrative is well established in both the serious and the popular press, and in films, plays and novels about the financial crisis.
If the repetition of simple morality tales that appear to make sense of a complex and consequential recent event is a well-established tradition in our culture, so too is the debunking of such tales. Herodotus begins The Histories by listing popular contemporary accounts of why the Greeks and Persians fought each other, before setting out, at length, what he regarded as the real explanation: Homer could tell a good story but Herodotus would tell us the truth. In this spirit, I will argue that the tabloid -- or Hollywood -- version of the financial crisis is not a credible account. Instead, I suggest that the most plausible candidates for blame are the citizens of Western societies, who elected the governments that allowed the sources of financial instability to spread out of control. We are responsible and we should therefore blame ourselves.1
In general, blame is assigned to moral agents for the consequences of their actions: blameworthiness requires culpability, which in turn requires both causal responsibility and moral agency.2 There are exceptions to this general rule, but they are not relevant to my argument. Sometimes, in everyday speech, we blame natural forces for bad outcomes, but we do not really believe that the wind or the volcano was morally responsible for the damage it caused. Sometimes we blame moral agents for their dispositions as well as their actions and while it does seem right that we should hold moral agents responsible for some aspects of their character, it is not clear that this helps us to explain specific actions. The financial services industry might disproportionately attract and reward people who are greedy, in the same way that sport disproportionately attracts and rewards people who are competitive. These generalisations do not help to account for specific incidents of bad behaviour in finance or sport, because persistent influences are not predictive of singular actions. Specific events are best explained by specific causes, rather than by general dispositions.
To be blameworthy is to be guilty of moral failure: we are justly blamed when we have behaved badly although we could and should have done otherwise. Since blameworthiness requires moral agency it is not clear that we can hold corporate bodies blameworthy for outcomes. We consider corporate bodies to have legal standing, which allows them to be fined for non-compliance with laws and regulations, although we cannot send a corporation to jail. We hold corporate bodies responsible without holding them blameworthy. In addition, we might hold an individual accountable for the actions of a corporate body in which they occupy a position of authority, even if they had no direct involvement with the actions in question, and we might fine or jail this individual for a corporate failure. In some cases, we both blame and punish the responsible individual for their actions, but in other cases we punish the responsible individual without blaming them. Moral responsibility is not the same as legal liability.3
Unlike cases where we assign legal liability to a corporate body or an individual, when we assign blame to someone for causing an unwelcome outcome we implicitly acknowledge some form of emotional engagement with them. This emotion might take the form of anger, contempt or disappointment. Peter Strawson's claim (2003), that we cannot maintain wholly objective attitudes to other people, but rely instead on reactive attitudes that take account of the attitudes and intentions of others toward us, seems appropriate in this context. Blaming is a moral action, not a detached scientific or legal description: we blame because we care.
The act of blaming also raises questions of entitlement. Who is best placed to judge whether someone else is blameworthy or not? Who has the requisite standing to express blame attitudes and in what circumstances is it appropriate for these to be expressed? We might think that the character and integrity of those who make assignments of blame have some bearing on whether we should take these assignments seriously; likewise, we might think that when blame is assigned to someone for an action, their subsequent behaviour might mitigate the degree to which we think blame, while deserved, should be expressed. Context matters for appropriate assignments of blame.
Bringing these themes together, I make two suggestions regarding the conditions under which blame is justified.
1) Justifiably to hold agent A blameworthy for outcome X, we need to establish:
a. that A was (at least partially) causally responsible for X, which requires an explanation of the causal sequence that led to X, plus evidence that A played a materially relevant role in that causal sequence (which might include A's omissions as well as A's actions);
2) Justifiably to assign blame to A for X we would need to establish:
b. that A's responsibility for X was an example of moral failure (whether intended or not); and
c. that X was foreseeable such that that we can hold A culpable for the occurrence of X.
a. that the actual (or potential) consequences of X were (or would have been) sufficiently serious that blame should be assigned;
b. that there is someone of appropriate standing to make the assignment of blame in a morally credible way.
Blaming, I suggest, is a five-step process by which we establish that A is causally responsible for X, that A's acts or omissions implied moral agency, that A is culpable for X because the outcome was foreseeable, that X was sufficiently important to merit the assignment of blame, and that there is a person – the blamer – who has the credibility to assign blame to A. In the case of the global financial crisis I think that the first three steps are highly problematic; I will deal with these in section II. Nonetheless, given the magnitude of the impacts of the global financial crisis it seems important that we find a means to assign blame in a credible way, which will be the subject of section III. Some concluding thoughts, setting out my rationale for holding the citizens of Western democracies responsible, will be offered in section IV.
Causal explanations of major historical events are often problematic and frequently contested. For any given event, an account of what happened – the how – requires us to focus in detail on the particularities of the event, while an account of the causes of what happened – the why – requires us to step back to gain perspective on the generalities of the event.4 The origins of the Great War of 1914-18, for example, remain a matter of dispute among historians. There is widespread agreement that the assassination of Archduke Franz Ferdinand and his wife Sophie, in Sarajevo on 28 June 1914, by the Serbian nationalist Gavrilo Princip, was the trigger for a series of ultimata between the major European nations, followed by declarations of war. Nonetheless, no-one thinks that Princip alone was to blame for eight million fatalities and a further fifteen million injured. Moreover, at the time few foresaw the terrible consequences of the assassination and the subsequent military mobilisations: Kafka's diary entry of 2 August 1914 – "Germany has declared war on Russia. Went swimming in the afternoon" – sums up the mood of the day.5
If we consider the global financial crisis of 1929 we find not just disagreement among economic historians as to why it occurred, but puzzlement that it occurred at all. In the words of Harold James (2009, pp. 47-48),
The 1929 crisis is a substantial curiosity in that it was a major event, with truly world-historical consequences (the Great Depression, even perhaps the Second World War), but no obvious causes.
Equally puzzling is why economic crises happen so rarely. Youssef Cassis (2011) identifies eight financial crises that have occurred since 1890, although not all of these were global in scope, but as Hyman Minsky remarked in 1982, quoted in Ferguson (2009, p. 165).
The most significant economic event of the era since the World War II is something that has not happened: there has not been a deep and long-lasting depression.
These observations about the difficulty of explaining events (and non-events) of the past century, for which there is voluminous documentary evidence and testimony, are suggestive of the difficulty of assigning blame for the global financial crisis of 2007-09. If we lack a credible causal account,6 we cannot determine which agents made a material contribution to the outcomes; and if we cannot show that these outcomes were foreseeable to the participants, it is hard to establish culpability even if we could establish materiality.
This general problem of causal explanation can be broken down into four component parts. First, if we consider the chronologies of the financial crisis, such as have been produced in official government inquiries, they tend to assume that we already know the causes that led to the crisis, that we already understand the causal connections between the various events that comprised the crisis itself and that it was possible to foresee the systemic risks to the financial system. These chronologies reflect widely held assumptions, but do not provide evidence for them. Prior to the crisis, judging by the decisions and commentary provided by regulators and policy makers, it was not evident which parts of the financial system were the most systemically important and which were the most vulnerable to failure. If, in 2006, the leading financial regulators in the US and the UK had been asked to draw up a list of the top ten systemically-important banks, it is most unlikely that either Lehman Brothers or Northern Rock would have been included; nor, if the list had been systemically-important products, would mortgage-backed securities.
To illustrate this point, consider the first occasion that the term "too big to fail" was used to describe a bank rescue, which occurred in 1984 when the US Federal Deposit Insurance Corporation (FDIC) decided to cover all the losses of both depositors and bond-holders of Continental Illinois, then the seventh largest bank in the US. Continental Illinois bank's financial problems stemmed, in turn, from its exposure to Penn Square bank which failed in July 1982. Penn Square's small deposit holders had been protected by the FDIC, but its larger institutional creditors, such as Continental Illinois, had not.7 As loan-losses were passed up the chain of financial intermediation, what started as a small-bank collapse in Oklahoma City ended with a national bailout to stem the growth of systemic risk in the US banking system. Cornelia Woll (2014, pp. 69-71) notes that, given its size, few observers at the time would have considered Continental Illinois to be a candidate for a "too big to fail" policy. Nevertheless, the regulators judged that its degree of interconnectedness with other financial institutions elevated the risk sufficiently high that a bailout was justified. If few people thought that Continental Illinois was "too big to fail", nobody thought that Penn Square was systemically important, nor that loan participation deals for the energy sector would be the trigger for a national bail-out of the banking system. In hindsight, everybody was wrong.
The first problem can be summed up as uncertainty regarding the impact of small antecedent events in a lengthy causal chain. If the last straw is responsible for breaking the camel's back, as the English proverb claims, does this mean that none of the other straws are to blame? No individual straw is either a sufficient or a necessary cause of the camel's injury, because it is only when the straws are aggregated that they produce the unwelcome outcome, and because if the camel had been loaded with feathers rather than straws, the same undesirable outcome would eventually have occurred. All the straws, but especially the last straw, might think themselves unlucky to be blamed for the camel's distress.
Our second problem concerns the real, as opposed to the apparent, importance of the various elements of the causal process. Which events were material, in the sense that they had a determinate impact on the evolution of the crisis, as opposed to events that were visible, in the sense that they had a determinate impact on the public's perceptions of the crisis? The workings of the economy and of the financial markets are not easy to observe directly, especially for outsiders, and therefore some of the material elements of any given causal sequence might be inaccessible. Further, since some material elements of the causal sequence might be omissions rather than actions, we need a credible account of the likely counterfactual consequences if certain acts had occurred, when in fact they did not occur. What is evident is not always what is important and what is important might not always be evident, for which reason we need to think about the noumenal as well as the phenomenal features of the crisis.
An example of this second problem was the way in which television coverage of long queues outside branches of Northern Rock bank, in September 2007, was widely credited with causing a run on the bank, leading to its collapse. In fact, the bank had faced a wholesale-market funding crisis for several weeks, which it had reported to its regulator in mid-August, and attempts had been made behind the scenes to save the bank. The queues only formed after the Bank of England had publicly announced support for Northern Rock, having concluded that a private sector rescue was impossible.8 In other words, the queues of retail depositors did not cause the bank's collapse; on the contrary, they were themselves caused by the announcement of state support for the bank (and the failure of the retail depositors to understand that their savings at Northern Rock were now guaranteed by the state). Additionally, many similar financial institutions in the UK – Bradford & Bingley, Alliance & Leicester and Britannia – experienced the same problems as Northern Rock, but were dealt with differently by the regulators and policy makers in the wake of the Northern Rock bailout. In short, in standard accounts of the financial crisis, Northern Rock's problems are wrongly described, regarding both the causal sequence that led the bank to collapse and the uniqueness of the predicament that the bank found itself in.
Third, even if we could establish which events were determinate for the evolution of the crisis and even if we could establish the direction of cause and effect during the crisis, we still face the problem that some major events are by nature composites, the weighted-average outcome of numerous individual events. The US housing market provides a good example: many commentators believe that falls in the value of housing across the US made a significant contribution to the crisis, and that the principal conduit of risk from the housing sector to the banking sector was the market for mortgage-backed securities, which became illiquid. While this might be true in aggregate, it is not true in every case: not all houses fell in value, not all homeowners had over-borrowed, not all mortgage-backed securities were flawed in design, and not all lost their value. The average outcome disguises a wide variation of individual outcomes.
Many houses did fall in value (albeit after a decade of strong gains) but there was no individual transaction that caused all the others to fall; taken in isolation each house sale was the outcome of a negotiation between the buyer and the seller, based on their own judgement about the value of the house and their desire or need to complete the transaction. These individuals were not trying to push up or pull down the overall level of the Case-Shiller housing index, nor were they working in concert with other buyers and sellers to achieve some other collective outcome. Many mortgage-backed securities fell in value, some deservedly because they were poorly structured and were collateralised with riskier mortgages than should have been the case; but some mortgage-backed securities that were well constructed and well collateralised lost value for no other reason than that the market became illiquid. In the absence of buyers, prices were marked down. These market-wide falls in value had a significant impact on banks' balance sheets in the aggregate, and thus on the development of the financial crisis, but this collective outcome was not intended by any of the participants. Each bank was responsible for its own trading and pricing strategies, and market participants are forbidden by regulation from colluding in trading and pricing, for which reason it is hard to see how any given individual or institution could be said to be have intended or orchestrated the collective outcome.
The fourth problem concerns the relative importance of inaction (an echo of Minsky's remark, cited earlier, that events which didn't happen might be as important as events which did). While every house that sold at a price lower than its estimated value might be said to have contributed to the fall in value of the housing market, it is not clear whether the responsibility for this outcome lies with the person who bought the house or with the many other people who decided not to do so. Weak prices are often the consequence of a relative lack of demand, that is, of fewer participants in the market. We would not be justified, however, in holding individuals responsible for choosing not to buy a new house, or choosing not to re-mortgage an existing one, even if the net effect of their collective inactivity was a slump in prices. Likewise, the temporary falls in prices of many mortgage-backed securities could be said to be caused by the absence of new buyers. For markets to function effectively they require both buyers and sellers, and when the buyers deserted the market, owing to fears that some mortgage-backed securities were poorly collateralised, all prices fell and potential sellers were left without counterparties with whom to trade. It is not obvious that we should assign responsibility for this temporary market failure to those who were left owning unwanted assets, as opposed to those who decided they no longer wanted to buy them.
I have described a series of four problems that together point to the difficulty of developing a convincing causal account of the global financial crisis of 2007-09, or of any other major, historically important event (or non-event). These are: (i) the problem of knowing in advance which events, institutions and actions would later become systemically important without them being obviously important at the time; (ii) the problem of distinguishing events that appear to be causes, but are in reality the effects of other, less visible causes; (iii) the problem of composite outcomes, which are made up of numerous individual events some of which have the opposite character to the composite outcome; and (iv) the problem that many undesirable outcomes are the result of certain individuals or organisations doing nothing rather than doing something. On their own, each of these problems should raise a doubt about our ability to assign blame for the global financial crisis; collectively they should make us very sceptical.
If the likelihood of producing a credible, comprehensive causal account is low, then our ability credibly to assign culpability to individual actors and corporate bodies will likewise be reduced. Many of the individuals and institutions that have been blamed – notably in the popular narrative account of the global financial crisis, but also in some of the government sponsored inquiries – have been blamed unjustifiably. What they did was often immaterial in impact and, given their knowledge at the time of their actions, was not irresponsible.9
When Northern Rock was rescued by the British government in September 2007, who was to blame? Was it the wholesale-market funders, who stopped lending to Northern Rock because they worried that the slowdown in the US housing market would spread to the UK? Perhaps they were acting responsibly, seeking to protect the value of their investors' cash. Was it the management of Northern Rock who, with the apparent blessing of the Financial Services Authority, pursued a growth strategy that was widespread among smaller UK banks that were formerly building societies? Perhaps they were taking risks they considered to be properly understood and well-hedged. Was it the Bank of England which spent several weeks considering a private sector rescue for Northern Rock, but delayed until it was too late, and ended up issuing a guarantee of savers' deposits? Perhaps they were worried that state intervention would create the expectation that other banks would be bailed out if they got into difficulty (which, in due course, came to pass). Was it the retail deposit holders who queued up to take their cash out of Northern Rock after their deposits had been guaranteed by the state, thereby increasing febrile public sentiment at a time when cool, rational behaviour would have been more appropriate? Perhaps they misunderstood or distrusted the Bank of England's guarantee, which was not well explained in the media at the time.
When the US housing market started to fall in May 2006 who was to blame? Was it the borrowers who took on too much credit at a price they could not afford to repay, hoping that rising house prices would allow them to re-finance their loans the next year? Maybe they were desperate to secure a place for their families on the housing ladder, and took assurance from the willingness of lenders to fund their house purchase that the risks were manageable. Was it the mortgage lenders, who issued loans to people who were unlikely to be able to repay, collateralised by property in a market that had already tripled in price over the past decade? Maybe they were just responding to strong demand for new mortgages to be securitised by wholesale banks, who were better placed than they were to judge the fundamentals of the housing market? Was it the international policy makers who allowed banks to apply risk capital weightings of only 20% to their holdings of mortgage-backed securities? Maybe they thought that financial assets secured by property would lower the risk profile of the banking sector, a view supported by data on the performance of collateralised versus uncollateralised loans over recent periods of financial history. Was it the investment banking teams that created ever more complex mortgage-backed securities, whose risks were difficult to isolate and quantify, except by recourse to proprietary models that investors did not have access to? Maybe they were bringing together willing buyers and willing sellers, as market-makers always have done, with the implicit blessing of their regulators, the credit rating agencies and the international policy makers who assigned low risk weightings to their innovative new products.
We do not know the answers to these questions. Some of these individuals and institutions acted in good faith, others did not; some were motivated by personal greed, others were not; some were genuinely unaware of the possible consequences of their actions, others had better foresight but chose to ignore it; some of these actions were evidently immaterial to the development of the crisis, others were highly material; some took their wider social and moral responsibilities seriously, and some did not. Aside from a case-by-case assessment of each decision to act and each decision not to act, it would be impossible to establish an accurate account of the motivation, foresight and complicity of the various individuals and institutions involved, and impossible to determine the proportionality of the actions and outcomes for which they were (or were not) responsible.
Gavrilo Princip planned to kill two people and succeeded. He was blamed and punished for what he did but we should not hold him responsible for eight million deaths. No individual or institution aimed to cause the global financial crisis. Even though the actions of some individuals and institutions increased the likelihood of a crisis, it was neither the intended nor foreseeable outcome of any individual action (or inaction). Holding individuals responsible for what they did is justifiable; blaming them for an outcome which was neither expected nor foreseeable and to which their individual contributions were negligible, is not.
I recognise that this conclusion is highly unsatisfactory. The global financial crisis of 2007-09 was a major event with many deleterious consequences. If it turns out that we cannot justly blame anyone for the crisis, we are rightly dissatisfied. In this section I will consider our need to assign responsibility for events that cause significant social harm. First, I want to make two comments about the scale of the consequences of the crisis.
In the standard account, the financial crisis required that Western governments "bail-out" their failing banks, which cost taxpayers billions of dollars (or pounds, or euros) and led to significant reductions in public expenditure, often harming the most vulnerable in society. One reason why we might feel justified in pointing the finger of blame – and pointing it directly at well-paid employees in the financial services industry - is because we think the burden of outcomes was high, and fell disproportionately on the poor. The facts are less clear.
In the US, the money lent to the banking sector to provide support during the crisis has been paid back in full; and more. When fees and fines are included, the US Treasury made a substantial profit out of the financial crisis, although it took significant risks with taxpayers' funds to do so. The situation is different in the UK, where taxpayers face losses on investments made by the UK government in the Royal Bank of Scotland. In the light of the US experience, it is plausible to argue that this outcome was not inevitable, but is the result of inept management by the UK government. In other European nations, situations vary with some banking sectors more dependent on public subsidy than others.
The current budgetary problems of Western governments are primarily caused by state-spending on welfare and public services growing faster than state-income through taxation; and income through taxation has grown slowly in part because the financial sector has been less profitable in recent years. The taxes paid on banks' corporate profits and bankers' salaries made a significant contribution to public spending during the years before 2007. Today, bank profits and bankers' pay are lower and so too are tax receipts from finance. At the same time, new rules increasing levels of bank capital have reduced the amount and type of bank lending to the wider economy, which has reduced the rate of economic growth. Public opinion appears supportive of the imposition of new regulations on the banking sector, but appears less happy to accept the lower levels of public spending that are implied by such regulations.
The costs associated with the global financial crisis are small by comparison with the costs associated with other economic problems which, because their impacts will be felt over decades rather than months, attract less public attention. The cost of funding deficits in public sector pension schemes in the US, Japan, the UK and other European nations over the next fifty years is like to require public subsidy on a massive scale, far beyond the expenditure associated with the global financial crisis; so too the costs of responding to changes in the climate that are the consequences of the reckless over-consumption of fossil fuels. In these two examples, not only are the total costs to the public likely to be higher, but the causes of the problems are better understood, the likely outcomes have been evident for some time, and the connection between the actions of individuals and institutions and these outcomes is better established.
The consequences of the global financial crisis of 2007-09 were serious but they were not uniquely bad. Dealing with the financial crisis will not be the most expensive challenge for Western governments during the first half of the twenty-first century. Nonetheless, it remains true that many people believe the crisis to have been avoidable and its consequences material; therefore, they believe that those who were responsible should be made accountable. Providing some context on the real costs and their relative scale does not assuage the desire for someone to be blamed.
There are good reasons to welcome the desire of the public to hold individuals accountable for actions which have a significant negative impact on public life. While it is important to assign blame responsibly – as Angela Smith (2007) and Marilyn Friedman (2013) have argued - so too it is important for us as individuals – for our humanity, according to Strawson (2003), for our political subject-hood, according to Williams (1995), and for our sanity, according to Wolf (2003) – that we take responsibility not just for the actions we undertake, but also for the sorts of people we become through our actions. While there is a distinction between being a responsible person and being responsible for specific actions, it seems clear that one characteristic feature of responsible persons is that they take responsibility for their actions.
Our dilemma can be summarised in this way. The complexity of the global financial crisis makes it difficult for us to assign blame justifiably: we don't know enough about the causal structure of the event or the intentions of the participants to establish blameworthiness. Yet, we also recognise that for our own and our society's well-being it matters that those who are responsible for socially significant outcomes with negative consequences are held accountable for those outcomes. Is there a way to resolve this dilemma?
One possibility is to broaden our conception of responsible agency to include not just the specific acts that I have done but also acts done by others in my community or group – those with whom I associate or identify – for which I might assume some form of responsibility. That I might consider myself responsible – in a moral rather than a legal sense – in some way for certain actions and outcomes that were done by others "like me" rather than directly "by me", is a common experience, the ethics of which are discussed in different ways by Joel Feinberg (1968),W H Walsh (1970), Herbert Morris (1976), Larry May (1992), G A Cohen (2006) and Iris Marion Young (2006). We do not need to agree with the Dostoevsky character who says that "everyone is really responsible to all men for all men and for everything", to think that we share some responsibility for more than just those actions that we ourselves have undertaken.
This notion of collective responsibility appears to sit uneasily with contemporary moral thinking, which holds that we are responsible for our intentions and actions, and to a certain extent for the intentions and actions of others with whom we choose to associate, but that we cannot be held responsible for associations and identities that we inherit, or which are ascribed to us by others. Today, many of us doubt that we are our brother's keeper; we are sure that we cannot be the keeper for our wider community, let alone for our nation. Yet the idea of guilt by association - moral "taint" or "pollution" – has a long pedigree in human thought,10 and the suggestion that we share collective responsibility for large, complex social events might be a useful residual version of this idea.
In the final chapter of The Elementary Forms of Religious Life, Durkheim described a series of behaviours –piacular rites – common among the Aboriginal tribes of Australia, which included acts of sustained self-harm, that were performed in response to bad news, such as an illness, a death, or a bad harvest. The punishment of the living to atone for the dead appears to be irrational and unjustified. Durkheim argued, however, that these actions were demonstrations of social connectedness: they brought the group together after a traumatic event and re-energised those who remained with hope for the future. He wrote (2001, p. 307):
When society encounters circumstances that sadden, anguish, or irritate it, it exerts pressure on its members to bear witness to their sadness their anguish, or their anger through expressive acts. It imposes on them something like a duty to weep, wail, and inflict wounds on themselves or others, for these collective demonstrations and the moral communion they express restore to the group the energy that events were threatening to take away, and this enables the group to recover itself.11
Commentators have noted that Durkheim's book, first published in 1912, appears to have been written in response to the outbreak of anti-Semitism in France at the time of the Dreyfus Affair (1894-1906). To explain the harm that contemporary French society had inflicted on itself, Durkheim made recourse to his interpretation of older traditions of social behaviour.
More recently, Karl Jaspers proposed a modern version of collective social responsibility in The Question of German Guilt, first published in 1947. Jaspers (2000) suggests four distinct conceptions of guilt, which equate to four distinct human failings. Criminal guilt occurs when we fail to abide by the law; we can be held accountable by the courts. Political guilt occurs when the political leaders and citizens fail to govern themselves successfully; they can be held accountable by more successful political forces, either internal or external to their community. Moral guilt occurs when individuals carry out actions, sometimes under instruction from others, which, regardless of mitigating factors, they know to be wrong; they can be held to account by their conscience, and the consciences of their close friends. Metaphysical guilt occurs when individuals fail to act to help their fellow humans in need, especially when injustices are committed in our presence and we did nothing to prevent or to protest the injustice; in this regard, Jaspers says, we are accountable to God.
The purpose of these distinctions is to allow Jaspers to argue that citizens can be considered liable for the consequences of deeds done by their state without also being liable for the criminal and moral guilt of actions done by some citizens in the name of the state. That is, when a fellow citizen has broken the law, the court should hold them accountable, whether they acted on behalf of the state or not; and when someone has behaved badly (but not illegally) their friends and their conscience should hold them accountable, whether they acted on behalf of the state or not; but when things go badly for our society because of a series of decisions by the government and its agents, then we must all hold ourselves accountable for these failings because the deeds of the state are the deeds of the citizens. The concept of political guilt excludes the option of saying, "not in my name": we cannot absolve ourselves of responsibility for the way our society governs itself even if we are not criminally or morally liable for the worst excesses.
Jaspers' principal concern was, of course, the question of the responsibility of ordinary German citizens and soldiers in the aftermath of the Second World War. The International Court at Nuremberg had been established to punish major war criminals, but what about the rest of the German population? If they were not guilty of war crimes, did that mean they were innocent of any wrong-doing? Jaspers argued that he and his fellow German citizens were politically guilty:
…. the acts of states are also the acts of persons. Men are individually responsible and liable for them (p. 49);
…. all Germans without exception share in the political liability (p. 67);
…. we are politically responsible for our régime, for the acts of the régime, for the start of the war in this world-historical situation, and for the kind of leaders we allowed to rise among us (p. 72).
The courts would deal with the worst offenders, where clear evidence of law-breaking was available; and many other individuals would, in the solitude of their own homes, acknowledge their own part in the national tragedy. But this was insufficient. The German people needed to accept full political responsibility for the rise of the Nazi party and the terrible consequences for Germany, Europe and the rest of the world. In brief, "a people answers for its polity" (p. 55).12
If Durkheim's account seeks to provide an explanation in terms of function – "what is the purpose of these acts of self-harm?" – Jaspers' account seeks to provide an explanation in terms of justice – "why is it right that we hold ourselves accountable for what went wrong?". Both writers recognise that for society to recover after a crisis, the members of society need to come together to share the task of recovery and renewal. Acts of collective contrition are necessary not only to settle questions of responsibility for the past, but also to take responsibility for making a better future. This insight offers us the best solution to our dilemma concerning the global financial crisis.
The global finance crisis of 2007-09 had, as its name suggests, global causes and consequences, but its epicentre was located in financial institutions domiciled in the Western democracies. Not all the factors that contributed to the crisis were in the control of Western governments: the US dollar is the global reserve currency and US treasuries are the safe-asset of choice for investors all around the world, which means that in practice US policy-makers can influence but cannot fully control trading in their currency and national debt. That having been said, many of the factors that contributed to the crisis were under the control of Western policy makers (at least to a certain extent) and while they could not always control the growth of risk-taking in the private sector, they could have mitigated some of the consequences by implementing a range of fiscal and monetary counter-measures.
Further, and perhaps most importantly, most of the banks and other financial institutions that became engulfed in the crisis were authorised and regulated by public authorities in the Western democracies. As a general principle, idiosyncratic risk events can be blamed on the financial institution at the centre of the storm; recent examples might include Barings Bank (1995), Société Générale (2008) and UBS (2011). However, when systemic risk events occur it is less easy to assign blame because it is very hard to know in advance which events and which institutions might become systemically important. To the extent that anyone is responsible for preventing the growth and the spread of systemic risk, it is the regulators and policy-makers who have oversight for the system, considered as a whole. By analogy, in the legal system, if an innocent person is sent to jail in a miscarriage of justice, we might blame the judge or jury in the case; but if numerous innocents are jailed owing to recurrent miscarriages of justice, then we are more likely to blame the legislators and those responsible for the governance of the legal system.
There are, therefore, grounds for saying that significant responsibility for the impacts that followed the global financial crisis should be assigned to the regulators whose job – in some cases, explicitly defined - was to prevent the growth and spread of systemic risk. Yet, if we consider what they might have done in the years leading up to the financial crisis to reduce systemic risk – imposed tough restrictions on bank lending to home-owners, businesses and consumers, raised interest rates aggressively to burst the bubble in asset prices, tried to slow the rate of economic growth to make the West less attractive as a destination for savings from Asia – it quickly becomes obvious that these are not merely technical matters, but broader political questions about economic priorities. The regulators would probably not have been allowed to implement such policies (even assuming they had wanted to) because politicians in the West would not have dreamed of campaigning for slower economic growth, falls in asset prices and tough limits on the availability of credit, because there are few if any votes to be won by policy commitments of this kind.
Mortgage-borrowers, mortgage-lenders, mortgage-backed security originators, investment bankers, bond traders, bank treasury managers and other investors were all allowed to continue plying their trade, even as the level of systemic risk rose, because the regulators knew that the politicians would not countenance the economic and political consequences of a sharp slowdown in economic growth; and the politicians would not countenance a sharp slowdown in the economic growth because they knew that the voters would not tolerate lower asset valuations and higher rates of tax and unemployment. The regulators did nothing to mitigate risk, because they knew that the politicians would not support them; and the politicians would not support them because they would not risk becoming unpopular with the electorate.
Does this mean that regulators, politicians and voters are all equally negligent? Possibly, although it would be hard to establish the appropriate degree of reasonable foresight that should have been exercised by these different groups. Regulators, by virtue of their role, should be expected to be aware of the build-up of risk in the financial system; politicians, by virtue of their role, should be expected to listen to the warnings of regulators; and voters, by virtue of long experience, should be sceptical of politicians' promises. Nevertheless, as I have made clear in this paper, it would have been difficult for anyone to foresee clearly what was about to happen to the global financial system prior to the summer of 2007. By the time the risks were evident, it was already too late.
If we return to the conditions under which blame is justified, which I set out in section II, it is my view that it will always be very difficult for us to judge any specific individuals or institutions to be blameworthy for the global financial crisis. The causal sequence is too long, too complex and, at times, too obscure to be fully understood. Even where some elements of the causal sequence are known, it is not always possible to assign culpability because many of the outcomes were not foreseeable and the intentions of many of the participants remain unknown. In the solitude of their own homes, some individuals might acknowledge to themselves their role in irresponsible behaviour, but by the standards of evidence required for justifiable public blame it would be hard to say who these individuals are.
To be clear, where there is evidence that individuals have broken the law, I believe that they should be put on trial and, if found guilty, punished. This applies to the financial crisis of 2007-09 just as it applied to the International Court in Nuremberg in 1945. However, none of the most egregious recent cases of financial crime –for example, Bernie Madoff – were material causes of the financial crisis. For which reason, I suggest that we should acknowledge that the crisis was a collective failure to manage the governance of the Western economies in a responsible and sustainable way: such an acknowledgement might, as Durkheim thought, allow society to renew itself. The only serious candidates for blame are the voting publics of the Western democracies: it is we who listened, credulously, when politicians promised year-upon-year of economic growth, rising house prices, improved public services, generous welfare and lower taxes. Occasional dissenting voices raised doubts about the sustainability of this policy mix, but mostly we declined to listen. Despite the risks, we voted for these policies again and again and again.
Jaspers wrote that a people answers for its polity. It must also answer for the behaviour of the financial sector which operates within a framework of rules that are set by the polity. We have no-one to blame but ourselves.
1 Thanks to Jonathan Wolff and Jake Richards for comments on an earlier version of this paper. All blame for any residual deficiencies should be directed solely at the author.
2 For a recent survey of philosophical approaches to blame, see Coates & Tognazzini (2013).
3 Hart (2008), Ch. IX.
4 See Sarotte (2014), pp xvii-xxvi, and especially endnotes 5 and 6 (p.198).
5 See also Zombory-Moldován (2014).
6 I have written more about this, at Hannam (2013).
7 Details can be found here: https://www.fdic.gov/bank/historical/history/235_258.pdf
8 Shin (2009).
9 On the role of ignorance in the financial crisis, see Robb (2013).
10 For a recent discussion of this idea, see Appiah (1986).
11 Durkheim noted that fasting can sometimes be considered a form of piacular rite, which might explain the function of some of Gandhi's celebrated public fasts, for example Gandhi (2008, pp. 224-5).
12 Compare Albert Camus (1972), speaking in New York in 1946: "I have always believed that a nation is accountable for its traitors as well as for its heroes."
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