The 2008 financial crisis has been treated extensively in numerous books, articles, and even blockbuster movies such as The Big Short and Margin Call. They all show the madness of excessive risk-taking and unbridled greed. However, these accounts ignore that which may be the most important aspect the 2008 financial crisis exposed: there are not only structural weaknesses in our financial system but also in our collective imagination.
Who is to blame… or what?
What got into the minds of those bankers that drove the international financial world nearly off the cliff? Anthropologist Joris Luyendijk’s Swimming with Sharks (Dit kan niet waar zijn in Dutch) tries to answer this question. He argues that financial institutions are not necessarily led by greedy individuals. The behavior of their employees is mostly shaped by the incentive structures that are in place within the institutions.
An example of these incentive structures is ‘culling’. This is a periodical firing of employees who have performed (slightly) below average. Culling should motivate employees to work harder, but it promotes excessive risk-taking to get higher yields. Also, since employees know their career at the bank could be over at any moment, they are not too invested in the long-term risk of the company. Another well-known example of these incentive structures is bonuses. Employees are incentivized to increase the bank’s profits to its maximum, where the risk taken is of secondary importance.
The working of our real economy is dependent on this unsustainable system. One would imagine that governments would recognize the danger this poses and act accordingly. The opposite seems true. Governments have deregulated banks since the 1980s and watched as excessive risk-taking became the norm. Anticipating that deregulation would increase efficiency, governments allowed banks to extend their activities. ‘Boring’ but safe business- and mortgage loans were substituted partially by riskier real estate and securities investments. In their now allowed search for high returns, banks became entangled and grew to such a size that they alone could endanger the stability of the whole financial system. Governments thus allowed the development of a system that shapes people functioning in it to act irresponsibly.
We should not blame individuals for the crisis but the system. This creates a problem since it is not clear what constitutes the system. In feudal times, you could blame your lord for his failing protection or exploitative ways. However, who is to blame right now, a set of abstract institutions?
Mark Fisher raises this point in his essay, Capitalist Realism. Fisher writes that since the harmful acts are committed so structurally and universally across the system, it’s impossible to point out a single culprit. In the case of the financial system, there is not one king who abuses his power and suppresses his people. There are countless executives throughout hundreds of banks who do exactly what the shareholders ask of them: make as much profit as they can. These shareholders also do what is expected of them: act in their self-interest. In this light, it seems absurd to demand bank directors to be jailed, as they have done exactly what was expected of them. However, the demand is understandable since we cannot bring justice upon something as abstract as a system.
Our loss of imagination
Fisher’s essay raises another interesting point; we simply cannot imagine another system. ‘It’s easier to imagine the end of the world than to imagine the end of capitalism’, Fisher quotes Slavoj Žižek. Fisher is an outspoken Marxist and anti-capitalist, which may not be for everyone. However, his critique of capitalism is also useful for those who do believe in capitalism, or those who simply do not see a viable alternative. The current system does not allow the thought of an alternative since it supposedly is the result of the ‘natural way of things’. As Fisher says: “Capitalism seamlessly occupies the horizons of the thinkable”.
To apply this to our financial world, the dominant ideology is free-marketism, where less regulation and more market mechanisms supposedly create more efficient outcomes. This ideology is ever-present in banking regulation and is uncontested. There have been ample periods in history where banking was conducted fundamentally different and successfully so. However, the thought of these systems is incompatible with the notion of the ‘natural’ market, which dominates now. Therefore, no new theory has emerged, as nothing can enter the restrained realm of the imaginable. Even though the current theory of free-marketism is discredited, it still dominates.
Paradoxically, this supposedly ‘naturally functioning system’ needs unprecedented public support to function. This was most clearly exposed by the 2008 financial crisis. The measures that were taken (higher capital requirements, stricter restrictions on loans) were merely for protection of the system. Central banks created extended lending facilities and aggressively expanded the liquidity in the markets through Quantitative Easing programs. Governments used public funds to provide capital to banks in trouble, which led to high budget deficits and subsequently, the Euro crisis. None of these measures rethink the role of banks or structurally restricted their activities. They were meant to prep up a system that had collapsed under its own weight.
Compare this to the aftermath of the 1929 financial crisis. The Roosevelt administrations implemented some of the largest and still lasting financial reforms. One of the best known is the Glass-Steagall Act, which separated commercial and retail banking. This act ushered in an era of financial stability. Roosevelt later initiated the Bretton Woods conference in 1944, which took the brave aim of reforming the complete international monetary system and succeeded. The mighty financial system was brought down simply because it was needed. Never should it be allowed to cause a crisis like 1929 again.
Today, such a severe structural change is unimaginable. Not because economists and policymakers do not want to protect the public from more crises, but they simply do not see an alternative. However, if nothing changes, the boom-bust cycle will continue. Economic policy has entered an age of perpetual crisis management.
Is there an alternative?
It would be too easy to write off mainstream economists as unimaginative or even ‘brainwashed’ because they see no alternatives. Economists tend to be very pragmatic, and Bretton Woods-sized reforms seem unattainable at this time. In our heavily globalized world, governments do practically anything to attract and hold large companies, including banks. Capital is also very internationally mobile, and since capital is instrumental to economic wealth, conditions are set to meet its demands. This leads to a ‘race to the bottom’ for governments, where they must compete with each other for the lowest tax rates and most lenient regulations.
This cycle can be broken by making international agreements like Bretton Woods did. However, the world has changed a lot since 1944. Bretton Woods consisted mainly of the western (allied) powers, who also controlled most of the world’s economy. Now, however, emerging markets have made their way up the economic rankings. How will China, with its state-run banking system, react to proposals for worldwide financial reforms? How will the numerous tax havens respond? Will countries like the United States or the United Kingdom be willing to participate, since they are the system’s main beneficiaries?
Also, economic growth is increasingly the result of increased credit in the economy, not increased productivity. Real wages are not increasing because company profits are extremely internationally mobile and cannot be caught with fiscal methods for competitivity reasons. Hence, wealth inequality has grown massively since the 1980s while most people saw little of the economic growth. The answer was to increase these people’s ability to borrow money, which boosted consumption but increased the size of the financial sector in the process. Any structural reform would address this since it was the main cause of the housing bubble of pre-2007 and will be the source of credit bubbles to come. But how do politicians explain this to their electorate? People already barely profit from economic growth. How could the politicians take away the only way left to buy cars, houses and luxury goods, namely lending money?
I have often found myself in discussions with young, hopeful people, where I had to defend the status quo. Not because I liked it, but because every alternative they posed had some element why it just could not work. The response to the 2008 crisis broke us by showing that hope for a better future is futile. Even if a system we created ourselves brings us such ruin, we cannot imagine something better. It is no wonder the current generation of students is deeply pessimistic about the future. Perpetual crisis and uncertainty are no healthy condition for a human to live in, but we do not seem to have any choice.
Special thanks to René Kamerich for proofreading my draft.