Risk is an inevitable part of life, and those involved in finance understand this well. They are therefore concerned to quantify risk as far as possible, and to reduce it where they can. This policy generally functions well enough; but where the whole market systematically underestimates the risk involved in particular kinds of investment, then the danger of a speculative bubble appears.
To examine the current crisis in more detail, it is helpful to reflect on one of the concepts that Alice Bailey discusses extensively in her books, viz. the rays. The rays are said to be the major conditioning energies within consciousness, and the ray that is mainly associated with money and finance is the third ray of active intelligence. Like all the rays, this energy is essentially neutral, but can produce both positive and negative effects. One of its negative effects is a tendency towards cleverness and love of complication for its own sake, which has led, as noted earlier, to the creation of ever more complicated financial instruments. One would have thought that there is nothing very complicated about a mortgage – a loan secured against property. But by a process of financial wizardry, millions of mortgages, given to people with few or no checks whether they could sensibly repay them, (the so-called ‘sub-prime’ mortgages) were sliced up into billions of tiny pieces, and then re-combined into financial packages called Collateralised Debt Obligations (CDOs). And there are other, even more exotic financial instruments, such as credit-default swaps, involved in this current crisis. These are the so-called ‘toxic assets’ that are poisoning the financial system.
Why would one split up mortgages like this? The short answer is to attempt to reduce risk. Sub-prime mortgages are risky because of the lack of vetting of the borrowers. By splitting up a sub-prime mortgage, and distributing the fragments across a number of CDOs, each CDO should become a less risky investment than a whole mortgage; because while one mortgage borrower might default, the multiple mortgages involved in the CDO should not. Unfortunately for all concerned – the mortgage holders, the mortgage arrangers, and the creators and investors in CDOs; and indirectly, just about everyone – this assumption turned out to be wrong. The US property market2 had been through a long period of increasing prices, and it was inevitable that at some point there would be a correction. The correction came, prices began to fall across the whole market, borrowers began to default on their mortgages in large numbers, and suddenly, CDOs began to look like a very bad investment indeed. Basically, because the defaulting mortgages are scattered throughout many CDOs it has become almost impossible to properly value these CDOs. So those holding large quantities of these assets now have no way of selling them on, and do not know how much the assets are worth, which creates major uncertainty concerning their own financial health. And because CDOs have been sold to many investors and institutions around the world, the problem is correspondingly widespread. One of the ways in which the overall problem is now being tackled is by governments purchasing these ‘toxic assets’ from financial institutions. This will hopefully allow institutions with large holdings to recover; and when the assets are finally sold by governments, the further hope is that they will be sold at or near their original value, so ensuring little or no loss – or maybe even profit – for taxpayers.
So a big part of the current crisis concerns the difficulty of correctly assessing risk. It seems strange that the occupation of banking, that in the past has had the reputation of being highly risk-averse, even to the point of dullness, should be the arena where such apparent recklessness has flourished. Perhaps the simplest, if least palatable explanation is that, finding themselves in a position of power over vast sums and flows of money, bankers succumbed to the glamour of material riches, allowing this to blind them to their wider responsibilities and the risks involved. It is easy to judge and condemn others for this fault – but as Christ warned, judging others without judging ourselves is a mistake. Who can say what they would have done, if placed in the same position? But without pointing the finger at anyone in particular, it is surely right to say that greed infected the system and worked to its detriment.