The Intellectual Origins of the Global Financial Crisis

INTRODUCTION

The Burden of Our Times

::   ROGER BERKOWITZ

A crisis becomes a disaster only when we respond to it with preformed judgments, that is, with prejudices.    —HANNAH ARENDT, BETWEEN PAST AND FUTURE

An accomplished businessman, one deeply involved in the housing industry, wrote me when I solicited his views on the intellectual causes of the financial crisis. The cause of the crisis is really quite simple he said: Cheap money—the combination of low interest rates, lax regulation, financial innovation, and excess leverage—led to unprecedented speculation.

From an economic point of view, the cheap money hypothesis is unassailable. But in a volume on the intellectual origins of the financial crisis, we need to go further. For starters, we might ask: What is cheap money?

Cheap money means money that can be borrowed at little cost. When interest rates are low, those with money have no incentive to keep it in the bank. When low interest rates are combined with lax regulations, the chances of successful investments are increased, and incentives for risky speculation are increased. In an era of cheap money, saving is discouraged, and speculation is encouraged.

If cheap money is behind the bubble, what is behind cheap money? And when did the era of cheap money begin?

Some, like Charles Morris, say it began in the aftermath of 9/11 and the bursting of the technology bubble, when the Federal Reserve reduced the federal funds rate to 1 percent and kept it there until 2004, financing the bubble in housing prices that lasted until 2007.¹

Others, like George Soros, say that it began with the free-market fundamentalism of the 1980s. Globalization, deregulation, and financial innovation led to an unprecedented increase in leverage and speculation. Credit market debt in the United States exceeded 350 percent of GDP in 2007. Limitless and unregulated credit creation helped create a superbubble in asset prices.²

Still others argue that the epoch of cheap money began on August 15, 1971, the day that the United States abandoned the gold standard. As a fiat currency, the dollar is not backed by hard assets, and the potential supply of dollars is limited only by the imagination and demand of the citizenry. For William Fleckenstein, the loss of the gold standard in a democratic political system that rewards politicians for their largess cannot but lead to an ever-increasing supply of dollars. In a social democracy with a fiat currency, he writes in his motto that was long emblazoned on his website, all roads lead to easy money.³

Another chorus of experts—like Hunter Lewis in his essay in this collection—argues that the rise of easy money is rooted in government policies developed in response to the Great Depression in 1929. When governments flood markets with easy money in times of economic contraction, well-meaning intervention encourages a moral hazard, incentivizing speculators to employ ever-greater amounts of leverage with the expectation that they will profit in good times and be bailed out in bad times.

Yet still others would say that the era of cheap money is much older, that it began on May 5, 1716, the day that John Law founded Law and Company, as the national bank of France. Law’s radical innovation was that paper money—as opposed to silver and gold coin—could be printed, and thus the supply of money could exceed the amount of gold and silver on which its value was based.

What this little tour of the last three hundred years tells us is that if cheap money is the economic cause of the financial crisis—and my friend is right in at least a strict economic sense that it is—it is an answer that tells us very little.

John Stuart Mill, writing amid the great financial crisis of 1826, argued that cheap money will expand irrationally in times of speculative optimism, inaugurating a vicious cycle of boom and bust. Some booms are longer. Some busts are deeper. But the boom-bust cycle of cheap money is part of the speculative nature of capitalism itself. In his essay Paper Currency and Commercial Distress, Mill argues that the factual unavoidability of economic crises generated by speculation was an adequate defense of cheap paper money against those who would use the crisis to criticize it. For Mill, cheap money and the speculative frenzies that cause cheap money are simply unavoidable parts of a capitalist economy.⁴

Mill is certainly not the only defender of cheap money who points to the inevitability of boom-bust cycles. On the contrary, most economists see booms and busts as simply part of the capitalist system, predictable and necessary crises that cannot be avoided. Thus, Joseph Schumpeter has written that business cycles are not like tonsils, separable things that might be treated by themselves, but are, like the beat of the heart, of the essence of the organ that displays them.⁵ And Arthur F. Burns, the great student of business cycles, wrote back in 1947: For well over a century business cycles have run an unceasing round. They have persisted through vast economic and social changes; they have withstood countless experiments in industry …; they have confounded forecasters without number, belied repeated prophecies of a ‘new era of prosperity’ and outlived repeated forebodings of ‘chronic depression.’ ⁶ For Burns and Schumpeter, as for Mill, cheap money and the crises it engenders are part and parcel of capitalism. We have no choice, they suggest, but to accept the inevitability of crises.

The impulse to normalize the recent financial crisis by pointing to the realist inevitability of easy money, booms, and busts, harbors a danger. By familiarizing, analogizing, and making understandable the 2008 crisis in global finance, the easy money thesis also reconciles us to the crisis. It is all too easy for us today to simply shrug and say that crises are part of capitalism. To do so, to say that the crisis was caused by cheap money, is to say that there is nothing more to say. To explain the 2008 financial crisis as an inevitable by-product of capitalism is to forestall further inquiry, to overlook personal and corporate fraud, to refuse to judge individual and collective wrongs, and to abandon ourselves not simply to the vagaries of the market, but also to the misdeeds of miscreants. Above all, such an approach risks thoughtlessness.

When this crisis hit, I happened to be teaching Hannah Arendt’s The Origins of Totalitarianism. Two of Arendt’s insights struck me as having particular relevance to our present situation. First, Arendt confronted a similar phenomenon in which the crisis of totalitarianism was being normalized. The world has long known dictators. Hitler and Stalin, so it was said, were proof positive of the continuity of human frailty. Against this view, Hannah Arendt argued that it was mistaken to understand totalitarianism as simply the latest form of tyranny. Indeed, one should not understand totalitarianism, for to understand it is to normalize it and to desensitize ourselves to the fact of its extraordinary evil.

Against the effort to understand, Arendt counsels comprehension. By comprehension, she means, the unpremeditated, attentive facing up to, and resisting of, reality—whatever it may be.⁷ The factual reality of totalitarianism, as Arendt comprehended it, was that in our world today any and every evil is possible and can even be rationally justified by otherwise well-meaning people. What is needed, she argued, was that we face up to the fact that totalitarianism, genocide, and administrative massacres were now ever-present dangers in our times. Originally titled The Burden of Our Time, Arendt’s book The Origins of Totalitarianism seeks not to explain totalitarianism but to face up to its singular actuality. Arendt’s passion was, as she later wrote, to think what we are doing.⁸

Crises offer particularly good opportunities to think what we are doing. A crisis tears away façades and obliterates prejudices and thus allows us to explore and inquire into whatever has been laid bare of the essence of the matter.⁹ When she discusses the crisis of education, Arendt affirms that the essence of education is natality—the fact that, born into a preexisting world, human beings must be educated both to fit into and also to remake that world. What we need to ask amid our contemporary crisis is: What is the essence of economics today that the crisis lays bare?

Surprisingly, since she is rarely cited as an authority on economic affairs, Arendt offers an original and thoughtful road map to think through the financial crisis, one that begins with the insight that the essence of economics is unlimited growth. In her telling, the seeds of the financial crisis are not in economics itself, but in the importation of economics into politics, or rather the dominance of infinite growth—an economic principle—in the realm of politics, where it does not belong.

Arendt develops her thesis about the dangerous subordination of politics to economics in The Origins of Totalitarianism. She argues that imperialism is the most important intellectual foundation of totalitarianism. At the root of imperialism is the transfer of the economic principle of unlimited growth to politics. Imperialism has its economic roots in the realm of business speculation—specifically the bursting of an investment bubble in the 1870s. As national entrepreneurs sought new markets, they enlisted state support for economic expansion. Expansion as a permanent and supreme aim of politics is the central idea of imperialism.¹⁰ The rise of imperialism, Arendt argues, means that politics becomes subservient to economics.

Arendt fears the confusion of economics and politics and especially the elevation of economics over politics. Since politics demands the imposition of limits and stabilizing forces that stand in the way of constant transformation and expansion, she argues that imperialist expansion brought with it a grave and destabilizing threat to the political order. When politics under the sway of economic imperatives is forced to expand on the world stage, political leaders must offer ideologies that give meaning to an ever-larger, undefined, disconnected, and homeless mass, a population that replaces a citizenry. Under the economic imperatives of growth, politics becomes world politics.

It is an open question today whether politics can return to a political activity that sets moral, ethical, and economic limits on human action. The prevalence of economic and scientific thinking—thinking that by their natures evades limits—means that politics is caught up in discourses that make the central boundary-setting idea of politics immensely difficult, if not impossible. Those who, in the name of community, defend the purity of national boundaries confront the same inexorable economic laws that defeat advocates for local ownership against chain stores as well as those who defend some notion of biological humanity in the face of a seemingly inexorable advance of human implants, genetic modification, and prosthetic medicine. The economic and scientific spirit of our age supports the implacably modern maxim that whatever can be done, should be done. Thus political judgment limiting action—economic, global, or scientific—is increasingly an anachronism.

The confusion of economic and political thinking is rampant today. I refer not only to George W. Bush’s claim to be a CEO president, the increasing appeal of businessmen as politicians, and President Barack Obama’s pragmatism, but to the more general confusion today between prosperity and happiness. We now believe that if we achieve a certain—apparently ever-increasing—level of material prosperity, we will be happy. The welfare state is inseparably part of democratic capitalism, and politics—to a degree unimaginable in the recent past—now defines the common good as the commonwealth. Political legitimacy, as countries like China make clear, is guaranteed more by economic security than political liberty. As Michel Foucault observed nearly fifty years ago, economic prosperity produces legitimacy for the state that is its guarantor.¹¹ Economics, not politics, is increasingly the foundation of modern politics.

Not only politics but also who we are—as a matter of personal identity—is defined by economic thinking. Amid productivity gains that offer riches that were unimaginable decades ago, let alone centuries ago, we continue to labor away—and not out of need. Freed from need, and yet deprived of a publicly meaningful religious, cultural, or civil life beyond economic concerns, modern economic citizens work to consume. Homo sapiens is replaced by homo oeconomicus. As economic beings, we treat ourselves as consumers. Every consumer is an entrepreneur, the CEO of his personal corporation that invests in the right schooling, training, and universities—all of which promise a certain return on the investment. Even health care, as President Obama reminds us, is justifiable primarily as a good investment in our future productivity. The economic foundation of our present worldview is so natural that we rarely today perceive its strangeness. When we hear human rights advocates proclaim that human rights is good for business or antiwar activists discourse on the economic costs of war, we forget that other cultures in other times did not reduce ethical and martial considerations to economic calculus.

Our philo-economism also obscures the fairly obvious fact that a man does not ‘by nature’ wish to earn more and more money.¹² Take that statement by Max Weber seriously, and let it sink in. Throughout history, humans have wanted to live well, but they have generally sought to avoid work whenever possible; they have wanted to be rich, but they have sought wealth to attain power or to avoid work; when they have worked, they worked from need. Those who succeeded became aristocrats and paid others to work for them, so that they could pursue the more meaningful activities of politics, leisure, and pious devotion.

How did homo oeconomicus overcome man’s natural hedonism? How did econocentrism overcome the religious prescriptions against acquisitiveness and the love of money? How did capitalism emerge as the natural and dominant way of assessing value in the world?

The most famous answer to this question was given by Max Weber in his book The Protestant Ethic and the Spirit of Capitalism. Put aside Weber’s controversial historical thesis about the importance of Protestantism to capitalism—a thesis that Liah Greenfeld has brilliantly adopted and adapted in her book The Spirit of Capitalism and in her essay in this volume. At the heart of Weber’s account is his claim that the rise of an unnatural and specifically capitalist ethic—to earn more and more money combined with the a strong work ethic that limits the spontaneous enjoyment of life outside of work—is rooted in the increasing rationalization of society, culture, and humanity itself. What capitalist rationality demands is that humans act according to the reason of profit and loss. Capitalist rationality is enormously powerful in allocating resources efficiently and increasing general prosperity. But such rationalization is also dehumanizing. For if humans must act rationally, they must abandon spontaneous feelings, passions, instincts, even commonsense moral sensations—all of which are rejected as irrational. The great paradox that Weber discovered in capitalism is that the pure rationalism of capitalist activity is irrational. And yet, the power of capitalist rationality is, it seems, irresistible.

The irresistibility of capitalism is part and parcel of the demand for certainty. Capitalism offers the certainty of a balanced ledger and the clarity of profit and loss. Capitalism thus offers objective criteria on which to rationally evaluate all decisions. In its promise of objective certainty, capitalism is a symptom of what Hannah Arendt calls the experience of homelessness. Our world, the world defined by the loss of the authority of religions and the decay of traditions, is also a world defined by the loss of a spiritual home. Capitalism—the social system that defines good and bad, winners and losers, status and power, by clear and certain criteria of salary and wealth—is one way that a homeless humanity sets itself on a certain and stable foundation, albeit one of its own making.

In a New York Times op-ed essay in the midst of the financial crisis, Calvin Trillin presented the thesis that the origin of the financial crisis is that smart guys began working on Wall Street. There is no doubt truth to this, and it goes hand in hand with the extraordinary rise of the entire financial and banking industries in the world. What needs to be seen, however, is that the reason smart guys have come to Wall Street is not simply because they wanted or needed that second ocean-faring yacht. Rather, it is that in an era of unbridled capitalism, self-worth and purpose are determined above all by one’s standing in the game of workplace success. When all higher culture and spiritual values have been devalued, the one way that a person can secure meaning and sense to life is through the objective measurement of success that capitalism offers. In such a world, the pursuit of wealth, as Max Weber saw, is stripped of all need for spiritual justification, and emerges simply as a sport, a game in which not only the spoils but also the sense of significance and wholeness go to the winners.

Our challenge, the burden of our time, is facing up to and also resisting this reality: that our public world has no values outside of those objectively recognizable values of profit and loss. In this sense, the crisis must not merely be seen as an inevitable hiccup in the advance of capitalism. The point in such a volume as this is not to solve the crisis, but to think what we are doing. For it is in thinking what we are doing, Arendt writes, that we erect obstacles to oversimplifications, compromises, and conventions. Following Arendt, our challenge is to think what we are doing amid the crisis in the global financial system. That means facing up to the inescapable connection between crisis and capitalism without thereby reconciling oneself to the crisis. What is needed, in other words, is a facing up to the realities of easy money, financial crises, and the subordination of politics to economics without losing our ability to resist those realities.

It is to this task, to thinking through, facing up to, and resisting the foundational elements of the global financial crisis, that the essays in this volume are dedicated. Although Arendt is often thought to have ignored the concerns of economics, this is, as Tracy Strong argues, quite misleading. Arendt’s defense of politics is to be understood as an engagement with what she takes to be an illegitimate elevation of economics over politics, a transformation that she explores and resists throughout her work. Even her first book, The Origins of Totalitarianism, shows that the predominance of economics over politics is at the very heart of the potential for totalitarian government in our age. For Strong, we must confront not simply the economic but also, more importantly, the political dangers revealed by the financial crisis. To think what we are doing today, he writes, is to rethink and reimagine citizenship and politics in an imperialist world.

The essays by Strong, Jerome Kohn, and Antonia Grunenberg in Part 1 of this volume directly engage Arendt’s thinking about imperialism and economics as a prod to think through the intellectual origins of our contemporary financial crisis. For Kohn, imperialism and its explosion of all political limits names the unresolved problem of politics in an age in which politics, at least in its traditional sense, has become very nearly impossible. He turns to Arendt’s own discovery of Thomas Hobbes as the philosophical origin of the modern contempt for politics; Hobbes’s elevation of self-interest over the public good, Kohn argues, is the intellectual foundation for the loss of political limits on the economic pursuit of self-interest. We must, he writes, take the opportunity of the financial crisis to think politically in a way that reclaims our public world, to the extent that this is possible.

Grunenberg agrees that we as citizens must judge the political origins and lessons of the financial crisis, even though we are not experts in financial affairs. She worries that the political body seems to have been converted into an appendix of economic self-interest and that we are increasingly less able to use the political body to control overarching economic powers. This loss of political control over the economy, she argues, is at the core of our contemporary reality.

In the essays, interviews, and round-table discussions that form Part 2 of this volume, ten businesspersons from outside the academy offer their accounts, frequently inspired by Hannah Arendt, of the intellectual and cultural sources of the financial crisis. At the root of many of these contributions is the sense that our economic and political worlds have undergone a transformation of values. David Callahan finds the foundation of the crisis in the relentless, amoral logic of self-interest, profit, and the bottom line, a logic that has grown ever more dominant as it has squeezed out the fuzzier bonds of human connectivity and our integrity in dealing with other people. Callahan follows the increased incidences of cheating that pervade our culture and argues that now is the time to tell a moral story about capitalism that can restore values supportive of a more benign capitalism.

Following Callahan’s call for a new moral narrative are a series of interviews with successful business leaders, which focus on the values of business in modern American capitalism. Paul Levy, managing director of JLL Partners, asks, Who are the people who made loans and sold the derivatives that led to the financial crisis? They are, he answers, generally good, law-abiding people. Like Callahan, Levy understands that reckless financial actions are often undertaken by decent people who simply get caught up in the clichés of the day and cut corners or push legal limits from a thoughtless desire to secure their position rather than from monstrosity or evil. Levy bemoans the loss of a liberal arts background, an education in the literary and historical classics that binds a society together and gives people something to live for besides simply earning more money. What is being lost, he writes, are the good lives, the happy lives, without which people live simply for gain and acquisition.

Vincent Mai, chairman of AEA Investors, seconds Levy’s insistence on the apparent loss of the upright businesspersons engaged in work for intellectual satisfaction and the reputational goods that come from personal integrity rather than mere financial gain. Mai writes of the transformation of the business world in which the old rules have been turned upside down, so that a culture of making as much money as you can has replaced a culture where reputation and honor mattered equally as much if not more than the drive for large bonuses. For Mai, as for Levy, there is a strong sense that the unlimited drive for profit has replaced other ends as the driving force of the financial industry and that this shift in the values of business contributed greatly to the oversized bubbles that were the proximate cause of the financial crisis. Mai argues that the financial community must come to understand that there are things more important than its immediate self-interest.

One potential response to the crisis in values described by Callahan, Levy, and Mai is the development of corporate social responsibility. Alex Bazelow, who worked with Hannah Arendt for five years before her death, discusses the film Twelve Hours to Midnight—How Brazil Has Responded to the Global Financial Crisis, a film exploring the work of business leaders in Brazil who have set out to reform capitalism. Bazelow describes the corporate social responsibility movement and later the Instituto Ethos in Brazil, which have evolved into powerful instruments of social reform and now include over a thousand corporations responsible for