The Depth of the Global Economic Crisis: Peeling the Onion

Published in the Catalyst, Vol. 32, No. 2 - Spring 2009

In considering the present crisis, we must first address the impression that the present financial and economic crisis will be relatively short, so that, after one or two painful years, we can go back to ‘business as usual.’

To me, that looks highly improbable. The size and the impact of the present crisis are severe. More significantly, the crisis creeps through the entire economy: banks came first, followed by auto concerns and the building sector, and now businesses close and jobs are lost in the remote corners of our countries. But there is more: today’s crisis also seems to have impacted our long-term collective confidence.

Most business-people, politicians, and well-educated citizens thought we had learned enough from the crisis of the thirties to prevent something like this from happening again. Somehow, we would always have a toolkit available to bring our economy rapidly back to form, especially in times of an approaching recession.

But today the toolkit looks empty. It appears as if the huge amounts of money that governments gave to the banks simply evaporated; the banks absorbed them without actually stopping the credit crunch. The public financial bleeding implies that most western governments now lack the necessary budgetary means to rescue our staggering real economies. Our real economies, unlike the paper, virtual economy (which focuses on creating money and profits), are about the production and distribution of real goods and services.

So the fear of a deep economic depression is growing—a mighty blow to our confidence.

All this brings up the inevitable question – why? Many financial experts declared that today’s crisis was unpredictable. But what made this crisis so unforeseen? Questions like these bring us to deeper levels of analysis and understanding than are usually discussed. But asking these questions is worthwhile. The exercise is like peeling an onion: to find the onion’s heart, we must peel off layer after layer.

Let us therefore start by asking if there are deeper, structural reasons for today’s unexpected crisis. This is our first layer.

What happened?

The relationship between our modern society and the role and creation of money has always been intriguing. In the past, the coining of money was almost always done by public authorities. But increasingly private banks played a substantial part in money creation by issuing credit money or debt money, allowing private elements of the money-creation process to effectively explode in the last 10 to 15 years.

That process was driven by the prospect of enormous gains and short term profits. The statistics about the accelerated total growth of debt-money in recent years have not been officially published. But recent estimates approximate an annual growth of credit money in the last 10 years being, on average, a fourfold of the growth-rate of the real economy.

Most of that newly created money ended in the development of and speculation on so-called derivatives, a word which stands for all kinds of new financial “goods” like various packets or slices of mortgages. Money itself became something one could buy and sell as a good, a tradable commodity. Financial assets were thus able to grow by a multiple of the real economy’s growth.

American economist Herman Daly calculated that the amount of paper exchanging for paper is now 20 times greater than exchanges of paper for real commodities. An enormous balloon of collective speculation has grown and has now burst. Confidence has been lost, and the crisis now fully threatens the real economy.

Beyond greed

It is generally acknowledged that this entire process has been fed by the enormous driving power of the lust for money. The September 2008 issue of Time, the month of Wall Street’s collapse, named it “the price of greed.” Greed was not only the price for speculators, but also for the once-reliable banks. Banks had created enormous amounts of money, but had also fully participated in the speculation process to earn money back with huge surpluses.

But was it only greed? This brings us face to face with the structural dimension of the crisis. Clearly, money has become more than just a facilitating medium. It has become a kind of separate realm, able to build around itself new structures (like financial markets) and institutions (like derivatives). It has thus grown in recent years into an almost autonomous crucial domain in and of our modern society.

Money is capable of setting people, firms and markets into continual motion. Recent years have found financial markets able to take control of a substantial part of our real economies. These markets, especially via hedge funds, could order firms to reorient their entire behaviour towards higher levels of short term financial profitability, and even to merge or split firms if the financial results were too low.

As declared just a few years ago by the president of the German Federal Bank (with deep satisfaction), politicians and governments have now been brought under the control of the financial markets. There is a deep, prevailing view that where money goes, society must follow.

A staggering god

But here we reach a deeper layer—the spiritual level—which appears to be the heart of the onion. Money is not a part of God’s good creation; it is created by humankind. But this implies that money can easily grow into an awful tyrant, especially if money is accepted as a decisive yardstick by which people, governments, businesses, and other societal institutions must measure their actions. Put in biblical terms, there are strong indications that Money has been given the status and power of an idol, a Mammon, in modern society.

In principle, of course, money itself is no more than a good and serviceable instrument for facilitating transactions in our real economy—as it should be. But we should never forget that this humanly-made medium can be enthroned and followed as a decisive compass for all economic actions. From that point forward, it begins to show traits of terror. In the end, it will also fundamentally betray its servants.

The essence of idolatry is elevated, self-centred expectations mixed with fear. On the one side the adoration of money tends to narrow current perceptions of reality, as if the law of financial dynamics is the ultimate rule. But on the other side, people delegate their power and influence to their god. They authorize their new god to take the lead, and in so doing they can force an entire society into patterns of obedience.

In this manner, the financial markets easily gained control over the real economy. Even now some financial experts insist that we must put our energy into completely restoring the money-markets, for they alone can save our real economies.

But their claims sound increasingly hollow. The general public is now aware that banks were given full financial priority in receiving government assistance, rather than struggling home-owners. Decision-makers still see banks as the cornerstone of our modern economies. But did the support given to them forestall our present economic crisis? No, most banks are now hoarding these enormous amounts of financial support to increase their own capital base.

Clearly, the idol of an acquisitive financial culture is now staggering, as idols usually do. We can observe signs of its profound betrayal. The deepest underlying cause of our present financial crisis therefore looks like the sudden, unpredicted betrayal of a self-made god.

But this awful experience has its good side. It is now highly improbable that the same unconditional faith will be given again anytime soon to such a profoundly untrustworthy guide. The lesson is clear for all those who are willing to listen: money needs to be our servant; never again should it become our master.

What now?

But what about the condition and the future of our real economy? Will simply swearing off the alien god immediately restore our real economies, thus ending the present economic crisis? I don’t think so.

It appears that we have entered not only a difficult financial situation but also a structural economic deadlock. Consider this: there is social interest, and correctly so, in maintaining high levels of employment. But modern market-economies also feature a structural rise in labour productivity, of perhaps 2 to 4% annually, made possible by continuous technological and organisational achievements. But that brings with it a structural need for ongoing annual economic growth in our collective spending! In turn, assuming productivity growth of 3.5 % per year, our production and consumption levels will need to double every 20 years to preserve employment levels.

But is that growth possible, feasible and responsible? Such a high growth rate in rich countries would be simply devastating for the global environment, for the needs of poorer countries, and for preserving peace in the world. Are we really structurally doomed to strive for infinite material economic growth? Does the reality of our need for economic recovery not simply force us to return to this risky path as soon as possible?

No, of course not! Thankfully, there are far more responsible ways out of the crisis that are both possible and feasible. But in light of what we have just seen, none of these seem possible without severe structural consequences. Perhaps this very moment of profound crisis gives us the opportunity, however painful, to reflect on these consequences and to implement some necessary structural changes.

Let me indicate briefly what is needed. We need nothing less than the liberation of technology from its narrow, one-sided financial orientation to enhance labour productivity in the market-sector of our economies.

Here again we confront the ruling domain of money. Technologies must be geared not to the highest possible short-term profitability, but rather to supporting a sustainable future and reducing the stress on labour. While possible and feasible, it will come at the cost of maintaining rather than increasing our present income and consumption levels.

Will modern men and women, modern consumers, accept this necessary turn? Here lies the urgent need for a new educational task of churches, schools and religiously-oriented organisations such as CPJ. What our society needs most, especially during this time of crisis, is the perspective of shalom, salaam. Shalom is far richer than the growth of material acquisition. It is a matter of following ways of justice, stewardship, blessing and sufficiency.

We cannot and should not accept that our present financial system drives us to always produce and consume more. Such a drive is contrary to our mandate to take care of people, to strive for peace and to take heed of God’s creation.

A promise lies hidden in the fulfilment of that mandate—the promise of more meaningful employment for our children and of greater environmental sustainability, including a lesser degree of global warming than is now predicted.

Bob Goudzwaard is professor emeritus of economics and social philosophy at the Free University of Amsterdam and a former member of the Dutch Parliament. He is the co-author of Hope in Troubled Times: A new vision for confronting global crises.