What is Wrong with the Global Financial System?

Philip Goodchild

In a recent speech, governor Elizabeth Duke of the Federal Reserve told an

anecdote from just after the failure of Lehman Brothers last September. Ben
Bernanke, chairman of the Federal Reserve, was asked, ‘Well, what if we
don’t do anything?’ To which he replied: ‘There will be no economy on
Monday.’ (cited in Wolf 2009)

The global financial system has been constructed to serve three economic
imperatives: the need for growth; the necessity for efficient allocation of resources;
and the maintenance and enhancement of credit, grounded in stability. The current
financial crisis demonstrates a failure in each of these tasks (Mason, 2009). Common
wisdom about the significance of the crisis is that it is a Keynesian moment:
individual states have had to step in to maintain growth, allocate resources, and
provide stability. Once the global financial system has been repaired through tighter
regulation and rebuilt balance sheets, then it may take up the strain once more, leaving
states the opportunity to rebuild their own balance sheets.

I shall argue here that this common wisdom entirely misses the apocalyptic
significance of the current financial crisis. What is wrong with the global financial
system is that it threatens us with a live and devastating weapon: the possibility of its
own implosion. Such an implosion matters for three essential reasons:
 banking networks are scarce resources – we can no longer buy and sell
without our current network;
 banking networks hold and preserve nearly all our liquid wealth in the form of
deposits – we would lose all this wealth if they went bankrupt;
 the global economy is a complex network of interlocking liabilities: the failure
of Lehman Brothers placed many others at risk of being forced into default,
threatening to unravel the entire system of liabilities, and preventing any
institution from evaluating the net worth of any other – we would lose all
knowledge of the creditworthiness of all institutions.
Major financial institutions are at once players within the financial system as well as
conditions for the survival of the system: this is why taxpayers have been forced to

1
offer a free insurance policy to underwrite them. It is a matter of economic survival,
not of political ideology. So the financial crisis is also ‘apocalyptic’ in the ancient,
biblical sense:1 it is a disclosure of underlying powers. Political decisions have been
shaped by economic forces. Far from a return to state sovereignty over economic
affairs, the current crisis discloses the submission of the state to economic forces,
often in complete opposition to the ideology of the state leaders involved. The global
financial system exercises its power of coercion through its own fragility. It is this
predicament which discloses the problem I wish to consider here: what is the
significance of this strange power of coercion that is exercised through weakness?

1. A philosophical analysis of the crisis

This problem is a matter for philosophy, not for economics. Economic theory is
caught in a dilemma in its treatment of human agency. On the one hand, it assumes
that human beings are autonomous rational actors intent on maximising their own
self-interests and exercising free choice;2 on the other hand, it attempts to determine
the laws that govern actual economic behaviour as though people behave entirely like
fully determined particles (Lawson, 1997: 8-11). This dichotomy can be resolved
only if the laws governing behaviour are also explicit reasons for free action: for
example, seeking economic growth, allocating resources efficiently, and preserving
creditworthiness seem to be criteria of rational conduct that apply to individuals,
businesses, and governments alike. These reasons for economic conduct become self-
reinforcing to the extent that they are conditions for prosperity and influence; those
who are not rational actors, in this specific sense, will not remain significant actors.
Nevertheless, while economic theory can seek to advise us on how to pursue such
ends – with a disappointing degree of success – the recommendation of these ends as
ethical imperatives belongs to ethics. Where economics is the science of means,
ethics is the science of ends (Collingwood, 1926). Philosophy is the study of reason
as such, and a reason is what motivates us: it is a form of feeling; ‘a reason is just a
thought or perception that moves or engages us’ (McGhee, 2000: 28-29). Yet being

1
See Rowland 1982 for this sense of apocalyptic.
2
‘Economics is all about how people make choices.’ Duesenberry’s famous distinction of economics
from sociology is cited in Lawson 1997.

2
reasonable alone is insufficient for truthfulness, as the British philosopher Michael
McGhee has explained:

It is not that the ‘objective thinker’ does not ‘reflect’ upon their life or has no
self-awareness. The terms in which they reflect upon their life simply
reduplicate the established way of thinking; that is what they fail to reflect
upon, the totality of the established way of thinking itself, of which they thus
become the creature (McGhee, 2000: 21).

Here we may observe the difference between a rational actor, the ‘objective thinker’,
and a philosopher, who is concerned with a critical examination of how we think. If
rational actors are to behave according to determinate economic laws, and if
sovereign states become subordinate to economic forces, this will be due to the
selection and application of reasons. Our reasons determine what we perceive and
count as significant; our reasons also determine what we overlook. We become
creatures of our reasons to the extent that they determine what we see of the world,
how we conduct ourselves in the world, and how we trust the world to be. If the
current global crisis is an occasion for philosophical reflection, this is because it
demonstrates that many reasons underlying our perception, conduct, and trust have
proven to be false.3

Established ways of thinking, embedded in habits, concepts, presuppositions,

grammatical constructions, disciplinary norms and genres of academic writing, do not
merely structure reason: they condition our thinking; they move and engage us. For
reason is a form of ascetic self-determination: not only do we express our reasons in
speech and writing, but we determine our conduct in line with reason. For example,
just as there are entire economic theories based on the ‘efficient market hypothesis’,
that all information is reflected in the price, there are also widespread financial
practices of buying and selling based on the assumption that the price is correct. 4

3
On 23 October 2008, Alan Greenspan was asked by the chairman of the American Congress
Committee of Government Oversight and Reform, ‘You found that your view of the world, your
ideology, was not right – it was not working?’ To which he replied, ‘Absolutely, precisely.’ Available
at http://www.cspa-narchives.org.
4
One should note that there are also widespread financial practices of speculation that consist in
practice of rejecting the efficient market hypothesis, insofar as they attempt to predict future price
movements ahead of the market. There is even a morality which consists in thinking that the market

3
Reason, then, is the self-determination of conduct in line with recorded, ordered,
preserved and institutionalised principles. Philosophers have largely focused on the
recording of reasons expressed in the form of language. They have almost entirely
overlooked a purely quantitative recording of reason in the form of account books,
graphs and charts. For just as language records repeated and comparative meanings,
monetary transactions record repeated and comparative evaluations. Indeed, growth,
efficiency, and creditworthiness are expressed as quantities, and such quantities
become reasons when our conduct is determined by them.

There is, however, a significant difference between such economic reasoning

and purely linguistic reasoning. Whenever we take the most profitable course of
action, we evaluate the world in terms of money. Money, as a unit of account,
becomes a medium through which we think, and through which we evaluate the
world. Rational conduct is expressed in determinate acts of sale or purchase at
determinate prices. Now the value of money is not empirically evident: no one has
ever seen or touched a dollar (Innes, 2005: 358). For ever since the invention of
stamped coinage,5 money has itself consisted in a promise to pay, or perhaps more
accurately, a promise to receive: money holds value because it is acceptable as a
means of payment by some issuing authority, whether that payment is for taxation or
to pay interest (Wray, 1998). Money only holds value as a liquid asset because there
are liabilities. Our liabilities and obligations underlie our economic reasons. So not
only does money differ from language insofar as it records quantities, comparative
evaluations, possible prices, the value of promised contracts, and actual transactions.
The entire world of money, prices and accounting is a medium of expression for
liabilities. Far from being a neutral object entirely under human control, money
expresses a network of social obligations and liabilities that controls us.

All our modern knowledge has been constructed from the perspective of
advising sovereign states, corporations and individuals on their possible courses of
conduct. Such autonomy is an illusion because our material needs and social

price is somehow ‘just’, while speculative interventions are forms of gambling that distort the true
price. Is it more reasonable to invest than to speculate? Philosophy is never far from being needed.
For a refutation of the relevance of the Efficient Market Hypothesis, see Taleb 2007, Cooper 2008 and
Lawson 1997, 2009.
5
For the origins of stamped coinage and its philosophical significance as the condition of abstract
thought, see Seaford, 2004.

4
liabilities pre-exist us. So our modern world has not been built upon knowledge
alone. It has also been built upon promises. Markings on coins, paper currency,
account books, bank statements, credit ratings, balance sheets and price charts have
been essential because they record temporal expectations and promises. Human
civilization has been constructed on the basis of faith in promises, that is, in terms of
powers that are not demonstrable and cannot be subjected to experimental proof. For
the fulfilment of a promise depends not merely on the virtue of the one who promises,
but also on the cooperation of other powers. Whether these powers have been
conceived as ancestors, spirits, fates, gods, divine providence, human authorities,
sovereign powers, contracts, bonds, liabilities, foreign currency reserves, financial
derivatives or even the national debt, human conduct is made predictable when it can
rely on the blessings of unseen powers. And human conduct itself becomes
reasonable and worthy of trust when it can become predictable.

There is therefore scope for a maverick philosopher of religion to assess the

hidden economic powers that are themselves the reasons for human conduct. In
general, our illusion of autonomy keep these veiled beneath human agency: it is
difficult to read from one’s own thought and conduct, let alone that of others, the
underlying reasons that have shaped it. The significance of the current crisis is way in
which such exceptional circumstances remove the veils and disclose the nature of the
social reality in which we live. At last we see the financial system exercising naked
coercion upon supposedly sovereign states and supposedly autonomous individuals
alike. Of course, to buy or not, to invest or not,6 and to bailout or not, remain human
choices: but if the alternative includes failure to survive, then any ‘free’ choice is
made under conditions of extortion. And just as we may suspect that an extortionate
price is not reasonable, we may also suspect that an extortionate reason may not be
truly reasonable.

2. Three narratives of the current crisis

6
‘A decision to consume or not to consume truly lies within the power of the individual; so does a
decision to invest or not to invest.’ Keynes is cited in Lawson, 1997: 30.

5
How can economic forces escape human control? Climate change offers an
instructive parallel. Positive feedback processes in the Earth’s climate system imply
the possibility of ‘runaway’ or abrupt climate change: while the trigger that causes the
climate to leave its stable state may be anthropogenic, the consequent course of
climate change is not – the climate will return to its more common condition of
instability, with massive changes of temperature. While political efforts are currently
attempting to ward off such a possibility by limiting the temperature rise to a further 2
degrees, in reality we do not know if there is already sufficient momentum in the
positive feedback processes already underway, or in human habits of consumption, or
in the global economy itself to make instability inevitable. Economic crises have a
similar logic of self-reinforcing or positive feedback processes: once triggered, the
collapse in confidence and fall in asset values becomes inevitable.7 There is
something counter-intuitive here: surely euphoria and fear, confidence and mistrust
are human emotions, capable of management by reason and effective institutions and
regulations? In practice, such management is conducted through hedging and
insurance, precisely the conditions for extending leverage and instability. Then we
must confront the fundamental question: could it be that the global financial system,
even in its periods of growth, is a kind of runaway train, a machine built by humans
but no longer under human control? Could it be that we cannot switch off the power
or pull the brakes because the economy holds a hand grenade to our heads, the
possibility of its own implosion? Indeed, could it be the case that the economy has
crashed precisely because Ben Bernanke and others sought to gently apply the brakes?

There is a widespread view that human agency is correlated with and

supported by structure (see Lawson, 1997): a railway infrastructure enables train
journeys, but does not determine which journeys will be taken. While economic
decisions are free, an economic infrastructure is shaped by political decisions, so
embedding economic processes within a wider political economy. Yet if our railway
analogy is to effectively model coercion, natural selection, and positive feedback
processes, then the railway system may be one where nearly all routes are dead ends,
where the points are already set preventing certain journeys, and where the downhill
slope on the remaining route may become progressively steeper so that the brakes can

7
See Gowan 2009 for a good explanation of the deleveraging processes in the current crisis. See
further Crotty 2009.

6
no longer cope with the speed. You may be free to travel where you please;
nevertheless, we know where you will end up. States, businesses and individuals are
subject to economic constraints – they do not have a monopoly of wealth, but rely on
credit from others – and so operate within the guidance of economic forces. It will be
necessary to provide narratives of three aspects of the current crisis in order to
disclose how autonomous processes operating through positive feedback, natural
selection, and coercion have become the reasons for taking disastrous decisions.

Many commentators and journalists attribute the crisis to the rash issuing of
sub-prime loans. Yet until the crisis, such loans may have seemed entirely rational.
Let us examine a hypothetical NINJA loan, to someone with no income, no job or
assets. Suppose such a person takes out a 100% mortgage on a property priced at
$100k, with an interest rate of 4%, but with property inflation running at 10% per
annum. After the first year, the property will be worth $110k, and the interest of $4k
can be refinanced and added to the mortgage, leaving equity of $6k. After 10 years,
the property would be worth $259k, the mortgage $148k, leaving equity of $111k.
Supposing this canny investor releases half the equity in the house as a deposit for a
second, identical property worth $259k, lets the second property for a rent that covers
the new mortgage, and continues to refinance the interest payments as before. After
the subsequent 10 years, the second property can be sold for $672k, paying off the
total outstanding debt of $505k, leaving outright ownership of the first property worth
$672k, and a lump sum in capital of $167k. The investment seems entirely rational,
unless one has reason to question expectations of continuing property inflation and
reasonably low interest rates. Our NINJA has nothing to lose. But perhaps the banks
should know better: is it rational to offer such a loan? If the borrower defaults, the
bank can re-possess the property and recover the loss, selling it on to the next NINJA,
with no significant loss. Is there a risk that prices will fall? Well, if banks continue to
offer such NINJA mortgages, there will be no shortage of capital to buy property, and
so no need for prices to fall. Leveraged loans continue to pump up asset prices. Even
in the worst case scenario of a recession, one can rely on the Federal Reserve to
reduce interest rates and open up the money supply, so maintaining the demand for
property that keeps prices rising. In short, sub-prime lending was an entirely rational
phenomenon, effectively secured by the real asset of property, and insured, in theory
if not always in practice, by the spread of risk through the financial system by selling

7
on CDOs and further insured by CDSs. Leveraged growth through asset price
inflation was a sustainable model of economic growth, so long as the entire financial
system advanced together and in step, even if the risks posed by de-leveraging were
so severe. Here we have a positive feedback mechanism that creates a virtuous circle
of wealth creation, where money is made out of money which is made out of money,
which is made out of … risk.

Of course, the entire system is dependent upon a fresh supply of credit for
leveraged growth. This brings us to the second narrative of the crisis, one told by
economists, of the unsustainable imbalance between consumer and producer nations,
especially the US and China. China’s extraordinary economic growth has resulted in
and been fuelled by a ‘savings glut’ by Chinese individuals and corporations. Some
of the reasons for this are specific to China, and amount to the need to provide for
insurance: the disappearance of collective farms and the reduction of state
corporations leads to a loss of security provided by these; the one-child policy,
meaning that four grandparents must share a single grandchild, has meant that the
current generation cannot look to the younger for security in old age; and state-owned
enterprises do not redistribute profits through dividends, and so are biased towards
over-investment (Hausmann, 2009). At a national level, China’s foreign currency
reserves have been a necessary insurance against financial crises, a lesson
demonstrated by the East Asian crisis of 1998 and confirmed by the global crisis of
2008. The glut of savings in emerging markets has been a key factor in the decline of
long-term interest rates, making credit readily available for speculative leverage
Schularick, 2009). For dollars found their way back into deposits in Western
financial institutions, where they could function as reserves for leveraged loans at
official rates approaching 40:1. This ‘savings glut’ view is sometimes countered by
the ‘money glut’ view, although to my mind they amount to much the same:8 that
interest rates were held artificially low for too long by central banks in order to
engineer a recovery from the bursting of the Dot.com bubble and the subsequent
decline of the stock market. Such low interest rates were then responsible for a
speculative bubble in property, and the attractions of higher rates of return from
securitization, as opposed to low yielding Treasury bonds (Skidelsky, 2009). In either

8
For a simple explanation of the historical linkage of the ‘money glut’ and ‘savings glut’ since the
establishment of the Bretton Woods system, see Cooper, 2008: 65-66.

8
case, the US has been enjoying the privilege of seigniorage, the acquisition of
resources through printing money, specifically in the form of imported consumer
goods and the ability to deploy a large military force overseas. Moreover, the Asian
countries had a vested interest in maintaining the value of the dollar in order to
maintain the value of their own dollar-denominated savings and reserves. Dollar
hegemony is sustained by the need for insurance against further financial crisis, in a
positive feedback loop. The global financial system was driven by the printing of
money in the US, secured against speculative bubbles in property and securities. On
this account, current plans to fix the global financial system will merely sustain this
imbalance, leading to a future repetition of the crisis – all this being the effect of
impersonal economic forces. In essence, then, such global imbalance is a repetition of
the class system on an international level where resources, commodities, capital, and
skilled labour is transferred from the developing to the developed world: one class
produces while the other consumes. One class can afford to consume because it can
afford to pay for security, while the other is forced to produce because it lacks
security. Yet the question here, then, is why did this imbalance, which had been
sustained for so many years, suddenly become unsustainable?

At this point we need to turn to a third narrative of this crisis, one that I have
been giving since 2002: the crisis expresses the first major collision between
exponential economic growth and ecological finitude, specifically in the coincidence
of high oil prices and a debt bubble.9 While economic growth is geometric, the
natural resources that power the economy are finite. Prices for oil, copper, zinc,
silver, platinum, wheat, rice, corn all more than doubled rapidly in the mid-2000s. No
doubt the effect on rising prices of increased demand was amplified by speculative
investment in futures (Wray, 2009: 823). With rapidly rising inflation in the basics of
living, alongside a money-glut, the central banks raised interest rates, placing an
increased burden on those with sub-prime loans. This rise in interest rates was the
trigger:10 with high inflation and a high rise in mortgage repayments, defaults quickly

9
Paper presented at ‘An Inter-Faith Perspective on Globalisation’, Plater College, Oxford, June 2002.
See further Goodchild, 2003.
10
Ann Pettifor also predicted the crisis accurately, suggesting five possible triggers: climate change
shocks, a house price crash, interest rate rises, a collapsing dollar, and oil price shocks (Pettifor, 150-
60). Each of these has had effects, although perhaps climate change shocks have not become as severe
as they will. The oil price shock is the one factor independent of the others, and therefore the first
trigger: interest rate rises responded to the oil price shocks and prevented the dollar from collapsing.

9
rose beyond the level necessary to sustain the speculative bubble in property prices.
Only then did the securities based on sub-prime loans, which had previously been
valuable speculative assets, lose their value,11 triggering the defaults with their knock-
on effects throughout the system of highly leveraged assets, with the drying up of
credit, the failure of weak businesses, a rise in unemployment, and the drop in
demand leading to recession. For, given the absolute scarcity of an essential
commodity such as oil, the only way to reduce consumption is by a rise in prices
leading to demand destruction – in other words, recession. Efficiency savings have
the opposite effect: they lower prices, and so increase overall consumption. Yet when
demand destruction involves rapid deleveraging, then instead of returning to an
equilibrium price set by supply and demand, there is a tendency to over-compensate.
On this account, the global economy will receive repeated shocks each time that
demand exceeds supply for an essential resource throughout the current century.
Increasing regulation for banks will achieve very little. It is important to notice in this
account of the crisis that the critical ingredients for economic growth – readily
available energy, such as oil, and the supply of credit – are not entirely within human
control. The recession was caused by limits to energy production and by the lack of
availability of credit.

The purpose of outlining these narratives of the crisis was to disclose the
operation of underlying forces in the global financial system. In the first place, we
can observe a range of positive feedback processes that have driven the economy as a
runaway train:
 There is the speculative asset price inflation caused by the issuing of credit at
high rates of leverage, with the profits functioning as an increased reserve for
further borrowing and speculation: a combined asset price and leverage
bubble.

11
Donald MacKenzie, in a paper presented at the Critical Finance Studies conference in Brussels in
August 2009, offered an account of an internal, structural trigger. Asset-backed mortgage securities
were issues over the counter, in two-way agreements, with risk priced according to the level of
correlation between defaults on corporate bonds. The historical data on defaults for asset-backed
securities was insufficient. The introduction of a market for asset-backed securities in January 2007
was a significant structural change that should have enabled more efficient pricing. Nevertheless,
anxieties about insufficient pricing of risk led to shorting the market as a form of further insurance.
Could this structural change have produced the crash in the value of asset-backed securities that it was
designed to prevent? While it certainly increased volatility, the crash itself must have resulted from
defaults on the underlying mortgages, since there would have been cheap securities to buy in a
depressed market.

10
  Furthermore, the ability to insure against all kinds of financial risk produces
stability, and enables the possibility of undertaking more kinds of risk. For in
every securitization, derivative or insurance transaction, there is always a
counterparty: one party seeks to insure against risk, while the counterparty
takes on the risk. Risks taken are merely moved elsewhere in the financial
system rather than removed, and the financial system as a whole has no
counterparty – until it demands free insurance from the state. As Hyman
Minsky pointed out, stability increases risk (see Wray, 2009: 809).
 There are the ‘perverse incentives’: the bonuses paid to bankers who seek
short-term profits by using higher rates of leverage and taking higher risks;
likewise, the incentives for credit rating agencies who were paid by banks who
themselves required far smaller reserve requirements for triple-A rated
securities (see Crotty, 2009: 565).
 The prices of options and derivatives were formed according to models that
only used recent data on price fluctuations, so that economic theory (eg. the
‘efficient pricing hypothesis’) and financial models had a direct influence on
human behaviour (see Zamagni, 2009).
 There is also the downward spiral of de-leveraging, where selling assets,
requiring more margin, and hedging against further declines leads to a rapid
drop in prices, the drying up of liquidity, and the consequent free fall in prices.
The use of reserves to cover losses leaves the banks still heavily leveraged
(see Leijonhufvud, 2009).

In each of these cases, there is a feedback mechanism between an economic activity

and the structural mechanism that makes it possible: between speculating with money
and the creation of money, between speculating in assets and asset values, between
insuring against risk and taking risks, between creating risks and rating risks, between
rational models of the market and actual behaviour in the market, and between the
banking sector as a major player within financial markets and banking as the
infrastructure of all markets. What we have here, therefore, is a level of reflexivity
qualitatively different from the herd behaviour of financial markets described by
George Soros (2009): there is a reflexive amplification of economic behaviour and

11
economic structure. These positive feedback processes turn the global financial
system into an unstable runaway train.

In the second place, we can observe a gradual transfer of wealth and power to
those who already have wealth and power. The result of the financial crisis in debtor
countries is the transfer of resources from the taxpayer to the major financial
institutions through the bailout programme, and through the rise in actual interest
rates needed to rebuild balance sheets. Moreover, defaults on mortgages leaves the
financial institutions as the owners of property, while individuals remain in perpetual
debt bondage. Similarly, the loss in value of conventional investment assets leaves
pension and mutual funds to struggle, while the managers of money retain their
bonuses and speculative profits. In creditor countries, by contrast, the fall in demand
leads to a loss of revenue in production, and so an overall loss in wealth. Small
businesses have cash flow problems, find themselves unable to refinance their loans,
and so concede their market share to larger competitors who are too big to fail. There
is a transfer of wealth from individuals to large institutions, and from large institutions
to an elite class of managers and investors. All of this echoes the net transfer of
resources, manufactured goods, highly educated personnel, and money from
developing to developed nations that occurs when economic growth is driven by
seigniorage, leverage, speculative asset inflation, and consumption.

In the third place, the problem of scarcity of resources has been exacerbated
by over-consumption. Without increasing consumption, there is a lack of effective
demand, and the global economy slips into recession. Yet accelerating the
consumption of finite resources leads to commodity price inflation and demand
destruction, intensifying the recession. As a result, there are less resources available
to the population as a whole.

The underlying economic forces that control human decision-making are

positive feedback loops, increasing inequity, and scarcity. In order to limit their
effects, one might suppose that what is needed is the subordination of the power of
finance to the power of democracy, subordinating economics to politics. If these
forces have been unleashed in our era of financial globalisation and consumer-driven
credit capitalism, then the remedy would appear to be a return to the Golden Age of

12
Keynesianism, with a Green New Deal to generate new sources of energy,12 massive
public spending to boost employment and demand, and tight regulation of financial
capital. Nevertheless, whether the economy is driven by the private sector or by the
state, the same underlying economic forces are at work. For the problems that have
led to the current crisis are merely extreme manifestations of much more deeply
rooted economic dilemmas.

1. The paradox of growth: economic growth is necessary to make profits, to pay

dividends, and to repay loans. For at the heart of all commercial activity is the
issuing of credit, without which production and distribution for profit would
scarcely be possible, since one has to purchase before one sells. A shortage of
growth leads to a shortage of profits, a lack of available credit, and the vicious
cycle of reduced demand, reduced production, and reduced employment –
until confidence re-emerges. Yet economic growth means a growth in
purchasing power, and thus a growth in consumption. While economic and
population growth are geometric, the production of natural resources is
cyclical. So a capitalist economy without growth is impossible, and continued
economic growth is impossible (see Jackson, 2009). Our economic crisis will
start to become serious in 2011 as a result of the next oil price spike that will
arise when the depletion of production from existing wells is no longer
compensated for by the production of new wells.
2. The redistribution problem: if people are remunerated according to their
market value, related to their contribution to production, then wealth will
accumulate with those who are creators of wealth. While this apparently
results in efficiency, since wealth accrues to those businesses which are best
able to make use of it, it leads to a lack of purchasing power among the wider
population who need to act as consumers to make those businesses profitable.
Our bubbles of speculative assets and leverage have been necessary as a
solution to the problem of over-production. For state redistribution via
taxation and welfare merely makes the economy much more efficient and
effective, so boosting both economic growth and the potential for inequality.

12
See the report of the UK-based Green New Deal Group, 2008.

13
 The historical alternative to excess consumption to address this problem has
been warfare.
3. The threat of capital flight: each nation, each business, and many individuals
are in competition for credit, or capital investment, without which there would
be no creation of wealth. Each must therefore return a profit to capital. There
is no sovereign control over the creation of credit, for credit is a relation, not a
possession. Tight regulations over capital movements, as enforced in the past,
do not entirely remove freedom of allocation of capital or credit; only taxation
has achieved that, often at the cost of social unrest. Even in an international
regime of tight regulation, there may be nothing to stop one privileged nation
from unilaterally deregulating, as the US did in the early 1970s. Politics
remains subordinate to economic forces since credit is an inherently collective
phenomenon, and the confidence it appeals to is the confidence of those with
sufficient wealth who seek to maximise returns. Political decisions are taken
to maximise short-term profit at the expense of long-term stability and
survival.

These dilemmas constitute the underlying reasons for our coerced political and
economic decisions. If such dilemmas are rarely acknowledged as such in public
discourse, this does not make them any less effective. The paradox of growth is felt
in the moral imperative for economic growth; the distribution problem is felt in the
moral imperative to increase efficiency; and the threat of capital flight is felt in the
moral imperative to maintain credit. In each case, the alternative is the threat of
economic failure. Nevertheless, the dilemmas are insoluble in liberal capitalism and
state socialism alike, and economic apocalypse is inevitable.

3. Theology of money

The task of a philosopher is to establish a way of thinking through which that which
matters can be taken fully into account. Insofar as others fail to notice that which
matters, then all other rational actors, and most other philosophers, will appear blind
and irrational to the philosopher – who in turn will probably seem, like Lord Byron
and neo-classical economics, mad, bad and dangerous to know. What matters, here, is

14
the way in which a perspective is formed – and perhaps nothing is more insane than
attempting to form one’s perspective by seeing things as others see them.13
Nevertheless, it is such a celebration of the blind leading the blind that has constituted
the modern world. For the modern attempt to restructure the world in accordance
with reason has been an attempt to discover an immanent order of nature, whose
working could be systematically understood and explained in its own terms (Taylor,
2007: 15). The purpose of understanding such an immanent order of nature is to
eliminate contingency and insure against risk: conduct must be regulated by reason.
The paradigm of such an immanent order in the practical sphere is the self-regulating
market, a market which regulates itself by the efficient allocation of resources.
Indeed, independence from political or moral interference is what a self-regulating
market means, and efficiency is the sole rational criterion that it admits. Yet reason is
a means to an end, not an end in itself (Zamagni, 2009). Our attempt to construct a
system to regulate economic behaviour and guide choices has amounted to a
subordination of all other reasons to efficiency. This amounts to a formation and
selection of a perspective that excludes all others, wilfully making itself morally
blind. If this much is obvious, why is it that calls to subordinate economic to ethical
ends have no practical impact (such as the new Papal encyclical, Pope Benedict XVI,
2009)?

While a free thinker may hold any perspective they are capable of
constructing, a significant perspective has to be externally validated. This is what an
economy achieves. One may make any demand one wishes, but unless this demand is
backed up by money, it will be ineffectual. Money is the social delegation of
effective demand. One may enter into private contracts at will, but unless these
contracts are recognized and legally enforceable, they will have no binding power.
One may write IOUs and offer them as payment, but unless they are supported by
legal tender, as money that is recorded by banks, then they might be rejected. Our
global financial system bears little relation to barter in a village market for three
fundamental reasons:

13
‘I formerly used to regard the human understanding in general merely from the point of view of my
own understanding. Now I put myself in the position of someone else’s reason, which is independent
of myself and external to me, and regard my judgements, along with their most secret causes, from the
point of view of other people.’ Kant, 1992: 336.

15
  Money splits the acts of selling and buying, introducing a temporal delay
(Alliez, 1996: 6-7). This interval prevents a direct linear causal relation
between action and reaction, so breaking with the paradigm of Newtonian
mechanics as a model for economic law. As soon as there is a measurable
time between receiving money and spending it, between receptivity and
spontaneity, then there is scope for an individual character, a potential or
virtual power, to work towards its own end (Ravaisson, 2008: 29-31). Money
is a condition of freedom.
 Economic transactions are rarely simple two-way exchanges, being more
commonly contracts that endure. Taxes, salaries, rent and interest have to be
paid in the form of money, and result from enduring obligations. Exchanges
are not instantaneous, nor are they free: contracts determine the obligations as
to how intervals of time are due to be spent. Since money only circulates to
those who contract to engage in profitable activities, the only free perspectives
and decisions that are validated externally by money are those which aim at
profit.
 Economic value is not grounded in utility but in reflexivity. The value of an
asset is the promise of the money that may be exchanged for it; the value of
money is the promise of the assets that may be exchanged for it. While
consumption goods may hold value through utility, assets and money hold
value through confidence. If money is essentially a promise, essentially credit,
then its value rests in external confidence or validation, the perspective of an
anonymous third party. This validation, in turn, is validated by external
confidence, so that economic value is confidence in confidence. The asset-
leverage bubble reveals the true nature of economic valuation: it does not
touch down in reality at any point. It is entirely blind.
Then, insofar as the economic system measures efficiency in terms of profits, that is,
in terms of money, economic conduct is entirely regulated by what is profitable, and
only subsequently by what is worthwhile. Money only measures money. Free,
human political and moral evaluation is excluded, except insofar as consumers can be
found to pay for it. Since money can only be spent, invested, or given away,
individual ethical evaluations are reduced to a choice of pleasures, a balancing of
profits against risks, and philanthropy based on sympathies, each in competition with

16
the others. The perspective from which the world is seen is that of the individuals,
corporations and governments who have money to spend, not communities. Since it
is more profitable in the short-term to consume inherited and accumulated assets than
to produce them, an economic system which measures only the creation of profits will
necessarily result in the destruction of wealth.

There is one more vital phenomenon to consider. Money circulates around the
economy, but flows back to the banks. While any economic agent might undertake a
high degree of leverage by borrowing money, or might lend money, there is a certain
privilege held by the banks: when customers borrow money and spend it, the recipient
might have an account with the same bank and so deposit the money once more. The
reserves need never be transferred. In effect, the recipient lends the money to the
borrower, so that the money is simply created as a new asset and liability. In the
clearing system as a whole, most exchanges will cancel each other out, leaving only a
small net flow of reserves in relation to total transactions. Banks do not need to
borrow in advance a large proportion of the money they lend, because it simply
returns to them the same day as deposits. Of course, if there is a large default on
loans, then reserves may need to be sold in order to cover liabilities, increasing the
degree of leverage. Yet money is largely created by banks lending in excess of
reserves.14 In a similar way, assets can be created by shorting them, selling them
before purchasing, and by securitization and the construction of derivatives.
Speculators can create valuable paper assets by selling and buying them. What is
decisive, here, is the ability to write credible paper assets. The ability to create
economic value is a privilege accorded only to those with the ability to create
economic value. The entire productive economy is dependent upon and driven by the
reflexive value of money.

This has a significant consequence. As George Cooper puts it: ‘There is no

more powerful mechanism for the short-term amplification of corporate profits than to
persuade some element in the economy – government, household or corporation – to
spend above its income. Conversely, there is no surer way to erode corporate profits
than to permit any of these groups to save their income.’ (Cooper, 2008: 118-119)

14
For the significance of this, see Rowbotham, 1998, Hutchinson, Mellor and Olsen, 2003, and
Cooper, 2008.

17
The economy is driven either by Minsky’s ‘paradox of gluttony’ or by Keynes’
‘paradox of thrift’, without there being a stable equilibrium point. While it is
theoretically possible for central banks to ensure some stability by controlling credit,
forcing the economy to oscillate between these two, the economy as a whole cannot
operate without an adequate supply of fresh credit. Overall, any engineered stability
remains within a longer-term credit bubble. Excess credit can only be removed, in the
end, by default and inflation, transferring wealth from the prudent to the reckless.

If our era has seen the financialisation of culture, so that we all learn to see the
world from the perspective of money, such a culture is the effect of an autonomous
economic process, rather than a cause. In this respect, the economic apocalypse has
already happened, for we have become either blind or impotent. The underlying and
invisible force that operates through the human will has four principles that I call the
theology of money (Goodchild, 2007). These are:
1) The value of money is transcendent: it is a promise, taken on faith, and
only realized to the extent that this faith is acted out in practice in contractual
exchange.
2) Money is the supreme value because it is both the perspective through
which we value the world and our means of making what we value real. Since money
is the means by which all other social values may be realized, it posits itself as the
supreme value.
3) Financial value is essentially a degree of hope, expectation, trust or
credibility. Yet financial value, measured by money, is our underlying reason, the
discipline for our conduct, the pivot around which the world is reconstructed. Being
transcendent to material and social reality, yet also being the pivot around which
material and social reality is continually reconstructed, financial value is essentially
religious.
4) The entire monetary system has its own intrinsic logic of growth. This
drive for growth is a separate engine of the global economy in addition to the
individual acquisition of necessities and the individual pursuit of self-interest. There
are three relevant components here:
 A logic of appropriation: speculative profits can only be made on the
basis of profits extracted from production and consumption, and to
achieve this, an increasing quantity of the world’s physical resources

18
 as well as an increasing quantity of the world’s moral ends must be
appropriated for production, exchange and consumption, in a
colonization and commodification of the world that intensifies scarcity.
 A logic of natural selection: wealth brings access to power, and only
the powerful and wealthy shape the world. The economy tends
towards inequality and oligopoly.
 A logic of intensification: increased production and profits require
increased investment, credit and debt. The entire global economy is
driven by a spiral of debt, constrained to seek further profits, and
always dependent on future expansion. It is a bubble of speculation
and leverage.
Here, at last, is the ultimate power of coercion towards growth, efficiency and credit.

In contrast, what would a financial system look like that aimed primarily at:
 conserving and reproducing existing resources through their natural
reproductive cycles, instead of consuming scarce resources;
 diversifying and fostering heterogeneous perspectives and conducts in life,
instead of propagating a global monoculture of monetary gain;
 intensifying the richness of human culture and quality of life, instead of
aiming at growth in asset value?
We do, at least, possess a model for such a system in the global ecosystem. To learn
to regulate our perspectives and conduct by such a system may require the invention
of an entirely new way of accounting, a new way of reasoning, and a new way of
trusting. This is, perhaps, the most challenging yet urgent task of critical finance
studies.

19
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