Irish law professor Justin O’Brien told a public lecture in Brisbane tonight that the cause of the global financial crisis was a failure of ethics. Speaking at QUT Gardens Point, O’Brien said the financial services bloodbath was no accident and could easily be repeated if all parties including governments, business, lawyers and the media do not change their ethical behaviours. Justin O’Brien was promoting his new book called “Engineering a Financial Bloodbath: How Sub-Prime Securitisation Destroyed the Legitimacy of Financial Capitalism”. He is a research professor at QUT’s Faculty of Law & Faculty of Business and the lecture investigated the origins and implications of the securitisation crisis that swept the world in 2008.
He began by exploring the roots of financial capitalism in three books that all emerged towards the end of World War II. The 1944 Hayek book “The Road to Serfdom” promoted free market economics and was the inspiration for Thatcherite and Reaganite reforms. In comparison Karl Polonyi’s The Great Transformation written around the same time argued that laissez-faire capitalism causes massive social dislocation. Joseph Schumpeter explored a third approach in Capitalism, Socialism and Democracy that saw capitalism transforming into advanced socialism.
The warning from these books was that economics would become detached from society with the rise of the market economy. This disconnect was almost complete by the middle part of this decade with the rampant greed disguised by the boom times. O’Brien disputed that the crisis that began to emerge in late 2007 was a “perfect storm” or that “there was no one to blame”. The problem was that almost everything that happened was legal and regulatory bodies did little except follow formal rules and principles. Those rules were interpreted within specific corporations for their own maximum advantage without any thought of the ethics involved.
Flawed governance mechanisms enhanced the need for short-term profit at the expense of the large picture. There were flawed financial models including securitisation (the process that re-packages assets into securities which are sold to investors). No one came out of it well. There were few internal controls, poor quality attestation by auditors, a lack of legal due diligence, poor calls by rating agencies, and a lack of investigation by the fourth estate. Social norms were destroyed by rampant greed.
The result is an electorate (particularly in the US, the UK and Ireland) where no one knows why the crisis happened. The anger is palpable and political and economic trust has been badly eroded. O’Brien said the focus needs to shift from government to governance to accountability to responsibility and finally to integrity. This requires inter-disciplinary collaboration and a move to behavioural economics. O’Brien discussed the New Institutional Economics (NIE) framework which frames economic activity in the wider social sphere.
What was needed is integrity which is a cluster concept consisting of actions, values and ethics. For example, lawyers can not simply get away with just knowing the law. There are moral and social responsibilities. O’Brien suggested three approaches. Firstly there is Kant’s categorical imperative which states that people’s actions should always correspond to a universally applied rule and people should never use people for our own benefit. Secondly there is the utilitarian approach that looks to the consequences of actions. Securitisation was not wrong in itself, said O’Brien, the problem was the way it was used. Thirdly and perhaps most importantly, there is virtue ethics with its emphasis on the moral dimension.
Only when all three ethical approaches are used can the sins of omission, commission and collusion that caused the GFC be tackled. O’Brien noted that the Australian Securities and Investment Commission (ASIC) has recently completed a review of its operations focussing on outcomes. But its success depends on business embracing its reform agenda. O’Brien called it ASIC's reform a “Trojan Horse” for moving forward. All professional groups, he said, must recognise ownership for ethical failure and look towards a new code of conduct. Companies must work with the regulators to weed out problems, which although possibly legal, have ethically difficulties that might contain the seed for the next crisis. Quite simply, said O’Brien, it was a moral issue.
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