Former managing director at JP Morgan John Fullerton. (Screengrab: Video Nation)The British banking scandal reveals—again—just how wrong-headed our assumptions about finance are. Morality and self-interest are hopelessly at odds; add planetary crisis to the picture, and we're "lost," said one former JPMorgan executive I had a chance to interview last month.
Are banksters redeemable? The British rate-rigging scandal has been lying in plain sight. City of London bankers, upper crust, chummy types, were supposed to tell the truth about their own bank’s borrowing power and every day, based on those estimates, the London inter-bank borrowing rate or LIBOR was set. Now that regulators have spoken, it’s come to seem absurd that private bankers were expected to play fair, act responsibly and act in anything other their own self-interest—without oversight. But that’s just how the inter-bank lending rate setting worked.
As one former senior trader close to the scandal put it to The Economist, “There is no reporting of transactions, no one really knows what’s going on in the market…” The implications? “You have this vast overhang of financial instruments that hang their own fixes off a rate that doesn’t actually exist.”
Sans transparency, soaked in incentives, the bankers had every reason to hide their institution’s weaknesses, and that (it turns out), is all too often what they did. Now regulators have woken up, criminal investigations are about to start and Barclays chief Bob Diamond is likely to be only the first, not the last, chief executive hit. But what about the bigger story?
The LIBOR scandal itself will soon shift to courts and public inquiries, boring, complex and long enough for most regular people to lose interest. The bigger morality tale is already slithering down the details-tube.
Before it does, it’s worth seizing the opportunity to ask some bigger questions—like what are bankers for? What are banks for? If banker self-interest conflicts with the public world interest, what regulator on the planet can cope with that?
John Fullerton is a former managing director at JPMorgan. Finance drives economics, he says, and economics largely determines the fate of the planet, yet the resources of the planet are finite. “The notion that exponential growth can go on indefinitely in a finite planet is in violation with arithmetic and basic physics.” As long as growth is the sine qua non of market economic ideology: “We are lost.”
If we don’t redefine self-interest, said Fullerton, in this conversation recorded in New York in late June, “I think we will look back, and our grandchildren will ask us, What were you thinking?”
Today, Fullerton is the founder and director of Capital Institute, whose “Third Millenium Economy” project released a potentially useful report in the run-up to the RIO+20 United Nations Conference on Sustainable Development. You can download “Economics, Finance, Governance and Ethics for the Anthropocene," here.
Laura Flanders: Let’s talk quickly about Rio. As we’re meeting, it’s pretty clear that not much came out of what was supposed to be the landmark follow-up to the Earth Summit of twenty years ago. Why so little agreement, why so little progress?
John Fullerton:Well, I think that timing is probably part of it. I think the world has enormous very near-term challenges that are really overwhelming the agenda of the politicians. So from the people I talk to I think the expectations about any breakthrough were very low…
What do you make of the idea coming out of Rio that now is the time to put a value on our natural processes—in order to induce people like you, people in the finance sector and business, to tread more carefully.
The idea comes from the classic neoliberal economics frame which is to say, if we value something we need to put a price on it so that the price of that gets factored into the economic system. Right now we don’t have a price on carbon, for example so we’re free to pollute the atmosphere with as much carbon as we want without paying for it and that’s clearly a problem. This idea of valuing ecosystem services is to take that same idea and apply it to a broad range of ecosystem services.
Such as bee pollination or a healthy water cycle, or such as the cleansing of rivers through natural systems
So you would say, “the work of all those bees is equal to this many million dollars?”
Yes, or what would it cost if we had to artificially pollinate our crops? If we had to breed bees bring them into agricultural zones, which people do and pay beekeepers to do that.
Isn’t this a horrible kind of concession to the idea that everything and everyone on our planet can be commodified and put a price on?
I have real mixed feelings about it. I think on the one hand, it’s taking the price system and saying well, we have externalities—we have things that are not being priced—so let’s internalize them into our economic system. That’s all well and good, but the logical extension of this thinking is that, A, we’ll never know enough to put a price on all these systems. I mean there’s an enormous complexity within natural systems that we don’t even begin to understand much less put a value on them. Secondly, and probably more importantly, by putting a price on these services it implies that we can actually consume them and use them up, and what I’ve been taught by ecologists is that there is no ecosystem services if there is no ecosystem function! What’s important is to preserve the function, which in many cases is actually priceless.
I am much more in favor of an idea of a safe operating space for the human economy, figuring out what are the unbreachable barriers and imposing real hard limits through policy to ensure that we don’t destroy critical ecosystem function which is the foundation of the entire human economy.
Well, this really goes to your personal story in a sense. You were once happily trundling along a very successful career track in the financial world. To start with why did you decide to go into finance? And secondly, why did you decide to leave?
The story of how I got into finance is kind of an interesting one. It was not the classic, boy-goes-to-Wall Street-to-make-fortune kind of story. When I went to Wall Street in 1982 I went to a commercial bank called Morgan Guaranty Trust…. My decision was inspired by a course I took in college. I had been an International Relations major, and the course was called the Economics of International Relations and the thesis was that global finance and economics would determine the course of international relations in the future rather than politics.... That idea turned out to be true, but certainly not in the way I had anticipated. But I went into to banking to really learn about international economics and finance and I had this sort of vague idea that I would get trained in banking and then go work in the World Bank someday and put the knowledge to good use.
And at what point did you say, I got to leave, this is not for me?
Well, it was sort of a long process.… As the business matured and I kind of grew restless to find something more aligned with my initial purpose of going to Wall Street. Frankly, when the merger with Chase Manhattan occurred, I’ll be very candid, my stock options vested. I didn’t have to walk away and leave a lot of equity at the door and the culture had shifted in a way that made me less comfortable working there so I got up one summer and I left with no real plan on what I would do and it was real frightening.'