The Financial Crisis Revisited
Fiesole, Italy | May 6 8, 2010

Organized by
The Program in Ethics, Culture, and Economic Development
of the
Witherspoon Institute

Sponsored by
The Social Trends Institute
The European University Institute

Directed by:
Samuel Gregg (Acton Institute)
Harold James (Princeton University)


Consultation Overview
Under the direction of Harold James and Samuel Gregg, the Witherspoon Institute, in collaboration with the European University Institute and the Social Trends Institute, hosted a two-day consultation at the European University Institute May, 6-8, 2010. This consultation assembled responsible professionals, philosophers, historians, journalists, financiers and business executives to help to better understand the foundation and the interconnected nature of the current financial and economic crisis. In addition, they tried to define an ethical framework for individuals, for business and for society that will help support a healthier environment in the future. This consultation project drew from various fields such as philosophy, anthropology, sociology, economics and business.

Additional Background
Scholars, politicians and financiers around the world agree that the current financial and economic crisis will be an enduring aspect of our time. Dr. Drew Faust, President of Harvard University, recently wrote to the members of the Harvard community, Every day's conversations remind us that we remain in the midst of an economic downturn unlike any in decades What has become clear is that we are living through much more than a bump in the road. Our economic landscape has fundamentally changed. And through this change, the crisis is deeply affecting not only the success of financial institutions and of business at large, but also the livelihood of universities, the scope of government and millions of ordinary citizens in the world, especially the undereducated, the poor and the unemployed.

This crisis has been largely described as a severe credit crunch and as a downfall of trust among banks in the world financial system. But is this the whole picture? And how should one proceed for a thorough analysis?

Although dissecting the technical mistakes that lead up to the credit crunch and to the lack of trust is necessary and useful, the crisis should not be considered in any case as merely technical or as the result of mistakes made by the professional management of a given industry. Neither can it be considered the result of a lack of technical knowledge on the part of the main actors, nor can be limited to bank mismanagement. The assumption is that the current crisis is not like some others that took place in recent times. These were not global but local, and were not structural but rather superficial. This crisis has a much broader base and its origins can be traced not only to institutions and their governance, but also to society and its prevailing values and ideologies, and finally to individuals values and behavior.

In this sense, the financial and economic crisis rests on three interwoven and not easily fixed elements that will be referred to in a simplified form: firstly, companies in the financial sector, firms and organizations in the auditing and rating business, and government supervisory agencies that have gravely broken the rules of their respective professions; secondly, some ideologies in modern societies such as relativism and individualism that have facilitated, and in a way explain, the misconduct of decision makers; and thirdly, the individual players that have been driven by various degrees of personal greed and ambition, and have neglected the ethical consequences of their decisions. In order to begin to effectively evaluate and understand the impact of the financial and economic crisis, all three elements must be addressed and understood.

Companies in the financial sector, in big and small ways, are responsible for neglecting and violating the basic rules of their profession related to risk assessment and risk management, which is at the core of their business. Money has been lent lavishly in the financial system without minimum guarantees. Products have been offered and sold without informing the public of the risks involved in them; instead, they were presented as safe and profitable investments. This behavior has been accompanied by lack of transparency, by bad internal governance and by wrong and improper management incentives based on the volume of business, rather than on the quality of service.

Governments and rating agencies, too have neglected the rules of their professions. As the Madoff Securities case became apparent, for example, many questioned the supervisory and auditing procedures followed, and why accurate reports and cautions were not issued as a result. Madoff Securities is only a single example of many questionable practices undertaken by supervisory agencies. Much information has been gathered recently on rating agencies that were being paid by the companies to which they provided their rating services, prompting some serious questions about the independence of their judgments.

The current social environment likely had its own negative impact. This crisis occurred in a culture where relativism, individualism and pragmatism are most relevant in shaping the values of society and conditioning the actions of people. When relativism becomes the prevailing rule, for instance, it is difficult, if not impossible to maintain a climate of basic ethical principles and responsible behavior. In this line of involving society, Professor Harold James noted in his essay on The Public Discourse, "We should not think of the market as something disembodied from the rest of society, but rather something that arises out of an ethic of responsibility. When it [the market] fails, that is a general failure."

Indeed, the financial failure is also a failure of society, and could also be in part the result of it. At its root, the financial crisis exemplifies some of the social ills that have been contemplated and described by responsible people and groups. On this particular front, it may be instructive to use the language of human ecology, defined as the complex web of social relationships that make up human life, including most obviously the individuals relationship to the family, to the company and to society at large. Just as physical ecology can be polluted and damaged by misuse, so too can human ecology. The assumption is that a less ecological society is likely to facilitate market and financial failures.

And yet, in the final analysis, it is free individuals that must be held responsible for their conduct, decisions and mistakes even if some of their behavior can be analyzed in the context of unethical organizations and a damaged society. Indeed, some individual managers and officials have already been found responsible for transgressions of an unethical and/or an illegal nature leading up to this crisis. But it is not only management to be blamed. Individual consumers should share some of the blame too. Excessive consumer debt is a major contributing factor to the financial crisis. Living beyond ones means on a permanent basis has traditionally been considered an imprudent and risky position. Those that do it are often led by a prevailing culture of possessing rather than by a culture of being and in no way by a culture of virtuous moderation. And the opposite might also be true: that virtuous consumer moderation would make more difficult any financial and economic crisis.

Moderator
Luis Tellez, The Witherspoon Institute

Discussants:
Sean Fieler, Managing Partner, Equinox Partners
Rainer Hank, Head of Economic Section, Frankfurter Allgemeine Zeitung
Colin Moran, Principal, Abdiel Partners
Craig Smith, Director, Politics and Economic Project, Centre for Ethics, Philosophy and Public Affairs, University of St. Andrews
Hans Tietmeyer, former head of the Deustche Bundesbank

Presenters:
Amity Shlaes, Council on Foreign Relations
"The Limits of Cardiology: Forgotten Factors in the Great Depression and the Current Period"

Geoffrey Wood, City University London (Cass Business School)
"Was Tolstoy Right?"

Samuel Gregg, Acton Institute
"Money and its Future in the Global Economy"

Hans-Helmut Kotz, Deutsche Bundesbank
"Financial Ordnungspolitik – Conceiving Rules Internationally"

Harold James, Princeton University
"The Financial Crisis and the Disciplinary Challenge of Natural Law"

Philip Booth, Institute of Economic Affairs and Cass Business School
"The Crash of 2008: A Discussion of the Causes and the Relationship with Ethical Issues"

Edward Skidelsky, University of Exeter
"From Ends To Consequences: Thoughts on Economics and Moral Philosophy"

Amar Bhide, Harvard University
"A Call for Judgment: Sensible Finance for a Dynamic World"

Gerhard Schwarz, Neue Zürcher Zeitung
"On the Exceptional Character of Emergency Fiscal Assistance: Some Reflections on Economic Order"

Ludger Schuknecht, European Central Bank
"Booms, Busts and Fiscal Policy: Public Finances in the Future"

Robert Skidelsky, Professor of Political Economy, Emeritus, University of Warwick
"The Great Recession: Two Stories of Causes and Cures"