‘Where is Milton Friedman now? He would have retorted: “The business of financial business is business”’
These are tough times for bankers. It takes a lot of determination to hang on in the financial business, after all the castigation in the public sphere ever since the American property bubble burst. Who, after all, likes to be decried as the personification of evil? Of greed? Of ignorance? Of irresponsibility? In the course of the dramatic financial meltdown, a tsunami of distrust and disenchantment has washed over bankers and free markets, financial or other. Politicians have swiftly taken advantage of their sudden glory as the saviours of the world. Public opinion has followed suit.
While this hostility has spread around the globe, accusations seem especially acrid in Germany. As the crisis began to be felt, Finance Minister Peer Steinbrück lashed out against “unfettered capitalism” with the bankers’ unlimited “greed for ever more yield”, echoing Marx’s prognosis that ultimately, “capitalism will eat itself up”. Ever since, Steinbrück and Chancellor Angela Merkel, the dream-team of the grand coalition’s financial crisis fire brigade, have been administering heavy moral suasion, urging the banks to stand up and “do their duty”. In a recent speech, Merkel declared: “As the financial sector transforms savings into productive capital, it delivers a necessary service to our whole system … But service – and that is the task of the financial sector – really has something to do with serving people. The agents in the financial markets must realise that it is their role to serve.” This is the new, remarkably moralistic, language of the dirigiste state that has risen from the ashes of the financial crisis. Banks have duties. They serve a higher purpose. They need a new ethics of responsibility – not for their shareholders, but for the country. For the common good.
Where is Milton Friedman to eradicate such moralistic nonsense? The late head of the Chicago school would have retorted: “The business of financial business is business.” German politicians haven’t read their Adam Smith or Friedrich Hayek, any more than politicians elsewhere in our intellectually impoverished post-Thatcher-and-Reagan era. They fail to see that markets can neither allocate resources efficiently nor generate new knowledge if people are prevented from pursuing their self-interest or if governments distort incentives. Self-interest has nothing to do with greed: in a market setting, self-interest cannot degenerate as it is naturally limited by the counterpart in a given transaction. If interactions are allowed to play themselves out spontaneously, the market works to align people’s differing interests harmoniously. This is what Adam Smith called “the invisible hand”.
The beauty of the market is that it works without people needing to concern themselves with the common good. On the contrary, many things that we undertake for the alleged common good, such as corporate social responsibility policies, are a waste of money. We should not pretend to know what the common good really is – it only arises spontaneously through interaction. Markets are a platform for such interaction. The common good then is, as David Hume put it, “the result of human action but not of human design”. Banks, in particular, happen to promote the common good when they pursue their own profit goals, just like anybody else. A smooth provision of credit will then be the result of bankers’ action but not of bankers’ design. Thus, to paraphrase Adam Smith, it is not from the benevolence of the bankers that we can expect our credit line, but from their regard to their own interest.
Meanwhile, the German government has devised a substantial aid package for troubled banks, consisting of guarantees worth 400 billion euros (£325 billion), and 100 billion euros (£80 billion) for capital injections. For their part, beneficiaries have to disclose their business plans; in administering credit, they must give preference to small and medium-sized companies; neither bonuses nor dividends may be paid; salaries are capped at 500,000 euros (£400,000) per year. Critics have argued that this restriction aims more to satisfy a vindictive public than to set reasonable economic incentives. Sure enough, banks have been reluctant to take state aid. Steinbrück’s brutal comment was that bankers who wait too long will be “nailed to the board in public”.
When Josef Ackermann, head of Deutsche Bank, admitted in an internal meeting that he would find it “a shame if we asked for money from the taxpayers”, the reaction from Berlin was equally harsh. Outraged instead of being grateful, Steinbrück and Merkel urged Ackermann to stop stigmatising needy banks by such “irresponsible behaviour”. Peter Sodann, left-wing candidate for the German presidency, even wanted to put Ackermann in jail. It doesn’t help that, behind the scenes, Ackermann has provided his technical expertise to help put the federal aid package together. The mood is against him, as it is against all bankers.
The economist Hans Werner Sinn recently lamented that bankers have been made scapegoats. His sensible public call to reason has, however, turned out to be devastatingly counterproductive. Just how thoughtless can one be to draw a parallel between 2008 and the bankers on the one hand, and 1929 and the Jews on the other, as he did? Our bankers need better advocacy. For the common good.