Global crisis dented trust in financial system, says RBI

“What the crisis has done is to cause a massive breakdown of trust: trust in the financial system, in bankers, in business, business leaders, investment advisers, credit rating agencies, politicians, media and in globalisation,” he said at a conference on ‘Ethics & the World of Finance’ here.

Saying that current financial crisis has called into question the ethical foundation of the financial world, the governor at Sri Sathya Sai University said the crisis has exposed an issue of moral hazard in the banking system. “... something that has come to be called privatisation of profit and socialisation of costs,” he said. Governments can hardly afford to have large institutions fail as they would be bailed out at tax payers expense, he added.

The ‘too big to fail’ syndrome enables financial institutions to take risks a soap maker cannot take, he said. The crisis, he said, has triggered a soul searching debate on whether the malaise in the financial sector could be a result of the flaws in the direction that economics, as an academic discipline, has taken over the years. “I have raised the issue of economics, as an academic discipline, losing its value base, and conjectured if that could be at the root of the malaise in the financial sector,” Subbarao further added.

Ethical content
Subbarao said the ethical content of economics got eroded over the centuries as economics tried to move from being a value based social science to a value free exact science.

“The mathematical abstractions got carried too far and in the process economics lost its link with real life situations that it was expected to study and analyse,” he said.

Though there is no evidence to show that people in the financial sector are inherently less ethical, given the larger temptation and more opportunities there could be greater incidence of unethical behaviour in the sector, he said. “Banks and financial institutions have a greater responsibility of being conscious of the obligation they have of not jeopardising the larger public interest,” he said. Further, quoting economist John Stuart Mill, he said that “if we make men honest, good and decent, then they will make themselves honest, good and decent engineers, doctors and teachers, and may I add, financial sector professionals.”