Detail from book cover
Detail from book cover

Necessary Evil: How to Fix Finance by Saving Human Rights, with David Kinley

Mar 5, 2018

Rich and poor, we're all dependent on the global financial system and it can be a force for good, says human rights law professor David Kinley, but the incentive structures within banking encourage people to behave unethically. In other words, "finance does not attract cheats, it creates them." How can we change this? We have to start with education, says Kinley.

DEVIN STEWART: Hi. I am Devin Stewart here at Carnegie Council in New York City.

We are very happy to have David Kinley in the studio with us. He is a professor at the University of Sydney in Australia, and he is the author of a brand-new book called Necessary Evil: How to Fix Finance by Saving Human Rights. That might strike some as a counterintuitive idea, but I think it is very important to remember that finance is around to help us, not to hurt us, and so is economics.

David, great to have you here.

DAVID KINLEY: It is wonderful. Thank you very much for inviting me, Devin. I am delighted to be here.

DEVIN STEWART: It is a pleasure to see you again.

This is a book that has been in the works for probably a decade, 10 years, and 10 years ago was the global financial crisis of 2008. I suppose that might have had something to do with it. What is the story behind why you did this book, Necessary Evil?

DAVID KINLEY: You mentioned in your introduction economics, and the previous book [Civilizing Globalization] to this came out just immediately after the global financial crisis, and that was a book focusing on the global economy. I remember thinking to myself, How much finance have I got in this global economy? To my horror, not enough, and yet here we are having an unfolding of the economy due to a financial crisis. In a way, that was the genesis, that was the idea behind the book: let's investigate finance and its relationship to human rights.

In fact, I think one of the reasons why it was not investigated then and still now is because it is so opaque. And indeed because it is so prevalent, it is everywhere, one takes it more for granted rather than investigating it even for something like its impact on human rights. So that was the impetus for me to get into it.

DEVIN STEWART: [Finance is] accepted like gravity or air and not examined.

DAVID KINLEY: And we all use it. Just think of you and everyone who is listening to this, the numbers of times you have relied on the financial system today and the things that you are living in, drinking, traveling in, everything, and we take it for granted. The poor do as well.

I think one of the most interesting things for me was—I do a lot of work in developing countries—is that they are really sophisticated when it comes to financial management because every cent or equivalent counts. So they are really good managers of their money.

We are all dependent on it, and we all use it, and it can be a force and is a force for good. It's when it does bad that is the problem.

DEVIN STEWART: Absolutely. Like globalization, right?


DEVIN STEWART: Let's define our terms because it is important. Finance means some things to some people, it means other things to other people. What do you mean by finance? And then what is the problem you have identified with finance?

DAVID KINLEY: I am taking a very broad definition and interpretation of finance. I really mean the financial system rather than money itself. It is the system around it, and of course the intentions of those who have designed and operate the system. Like any system, that is what determines where it goes and how it behaves. Therein therefore lies the potential problem for the bad that it does but also the potential for the good that it can do.

You ask, what is the central problem? Well, obviously one has spent a number of pages looking at this, but I think if there is anything that struck me looking at the history of finance over the last 100 years, but particularly in the last 30, is that it has changed in the way in which it operates in our lives. It is no longer boring banking. It is this sort of hyperbolic teenager-type banking, huge risk-taking, enormous leverage.

It has been able to colonize government in a way that means that it can in effect direct what sorts of rules and regulations cover it so that, for instance, after the savings and loan crisis in the 1980s and 1990s there was a high number of prosecutions of individual bankers, and lots of banks and other financial institutions went to the wall. After the global financial crisis it was a very different story. Far fewer personal prosecutions, far fewer prosecutions of banks themselves, settlements rather than convictions. Why? Because the criminal bar had been lifted that much higher—and there was a lot of gray area in it as well—to allow the finance system to be more liberal and more risk-taking. Part of that was the fact that financiers were influencing, or in, government.

DEVIN STEWART: Interesting. So they have gained a lot more influence in creating an environment where they can have as much leeway and liberty as possible, freedom to do whatever they want.

You also mention in your book that we as the general public(s) around the world tend to treat finance as a special thing, with an amount of reverence that one would apply to a church or some sort of holy entity rather than a utility or just a basic retail business. Why is that the case? Is it because it is so complicated, or is it something else?

DAVID KINLEY: The prevalence, but certainly the complication. There is no doubt that we have drunk the Kool-Aid of: "This is everywhere, so important, so complex, that you must not really mess with it. Leave it to us, the experts." I actually call it in the book an "attitude of exceptionalism," where finance has this attitude of: "Leave us alone. Just allow us to bake as big a pie as possible. We're going to take a large part of that pie, but the pie that will be left over and trickle-down economics will mean that we will all benefit from this." I think there is a lot of that in the way we look at finance.

Is it really a religion? Well, no, but it has the same sort of power over us. I think that we have become very comfortable with the financial benefits.

Just think of it. I would imagine you, certainly myself, and many of our listeners, would their parents, would their grandparents have dealt with the debt that you hold at the moment? I am guessing, Devin, but maybe. But certainly my grandparents would be horrified at the amount of debt that I have, horrified that I use credit cards and savings or non-savings, electronic funds transfers. We use the system in such a useful way that we have bought into it. So debt has really been something of a two-way process. The banks know that we will take it on, so they have taken on more debt to feed us.

DEVIN STEWART: Right. Have you done any sort of anthropological examination of that change in attitudes over time? Our grandparents used to think that you should only spend what you have and not go into debt in order to buy big things. Is it a cultural shift, or is it indicating the reality where we live today where we just need to go into debt in order to buy—

DAVID KINLEY: Isn't that an interesting comment, that you may "need" to go into debt? I think because the opportunity is there where previously it wasn't. I think it really has got a lot to do with the what happened in the 1980s and 1990s, particularly in the big financial centers of London and New York or their equivalent congresses or parliaments, because there you had an attitude of freeing up the economy generally—privatization—but freeing up finance by the so-called "big banks." That allowed, then, banks to be much more inventive about the sorts of products they could provide us, and much more importantly they were freed up in the sort of leverage they could use and incur huge debts themselves. Why? Because they knew we would buy the debt, we would take it on.

In a way it started slowly, but then it became big because they realized people are going to take this on. Even if you look at the example of subprime that led, of course, to the global financial crisis in 2007 and 2008, that was instigated by largely—many reasons, but largely—deregulation of banking restrictions on providing credit to the poor. A lot of this came from a couple of pieces of legislation that Bill Clinton brought in with the best intentions, which were—

DEVIN STEWART: Access to finance.

DAVID KINLEY: And to let the poor, who were otherwise locked out, no credit record, to be able to get it. But of course as they got into this, as they obtained the mortgages, there became this attraction from finance to say, "Well, we can make a buck out of this," and they exploited people in a way that was frankly exploitative and was discriminatory.

DEVIN STEWART: Is there a vicious circle from the consumer's perspective here where access to credit and debt might have made the prices of things go haywire a little bit? I think it is the conventional wisdom of people in my generation to believe that our parents and grandparents could save up enough money to buy a house, and that sounds ridiculous to someone in my generation.

DAVID KINLEY: You can barely save up for the deposit.

DEVIN STEWART: Exactly. How does the causation go? Did access to finance boost housing or vice versa?

DAVID KINLEY: I think really it is a bit of both. As I maybe somewhat inarticulately tried to say a moment ago, This is an opportunity, banking thought. Test the waters. Will people take this sort of debt on? Yes. So we will ramp up our debt. Will they take on more debt? Yes.

We have become almost sponge-like. We really do take on enormous amounts. I can see it even in myself over the last 35 years in which I have been in debt. I have moved up, hopefully eventually starting to move down. There could be a chastening, and there certainly is a chastening after the global financial crisis for both us as consumers and clients of banks and the banks, but nowhere near to bring us back to where we were in the 1950s and 1960s.

DEVIN STEWART: You talked a little bit about the culture of Wall Street. This is the Carnegie Council for Ethics in International Affairs, so it is always interesting to ask about the moral implications of things. I think when people think about how Wall Street appears in the movies—you think of The Wolf of Wall Street, you think of other depictions like that—opulence, arrogance, freewheeling spending, just excess, and also proving that you are better than everyone else seem to be tropes. What did you find about the culture of Wall Street, and are these tropes true? How have they contributed to creating the moral code of finance?

DAVID KINLEY: I think largely they are.

DEVIN STEWART: They're true?

DAVID KINLEY: They are true. In order to achieve this capacity for greater debt you had to be open to risk-taking. In fact, as the openness grew it became a keenness for risk-taking, and with risk-taking comes a competitive spirit. How do you instill that? How do you try to create an ever-increasing rolling ball? You compete against each other. So the way in which incentives were designed was to compete. Bonuses, therefore, became a big part of one's remuneration.

I remember talking in the course of the book to bankers who said: "Actually, you know, it's not the final sum that we're interested in. It's whether that sum is greater than our next-door neighbor," so it is the competitive.

DEVIN STEWART: That's human nature, though, isn't it?

DAVID KINLEY: To a degree. It is expanded within the financial sector. It is utilized as a way in which to promote.

DEVIN STEWART: A primate instinct to check out what the person next to us or the hominid next to us is getting, whether the monkey is getting a grape or a piece of cucumber, and you want to have at least—

DAVID KINLEY: Double that.

DEVIN STEWART: —as good as the—

DAVID KINLEY: Also I think there is an element of pursuing this in a way that will encourage unethical behavior. One of the most interesting studies I quote near the end of the book is a law firm and a university did a study of 1,200 bankers in the United States and the United Kingdom, asking them about ethical questions within their bank and indeed their competitors. It was remarkable. Nearly 50 percent of them said that they would expect their competitors to act unethically and indeed illegally. Then asked the same question about their own colleagues in the same institution, a quarter of them said that they would act unethically and illegally. It is phenomenal that you believe that you will act in ways that are not just unethical but illegal.

DEVIN STEWART: Is there a moral logic? Are they trying to say, "Well, because our competitors are doing this, we have no choice"? Is that what you are hearing from that, or is that self-serving?

DAVID KINLEY: Maybe I should add a third statistic. When they were asked: "What do you think drives this? Is it the incentive structures within your bank?" Thirty percent, so a third of them, said yes.

Therein I do genuinely think there lies a hope, because if—I call them "esteem factors"—the things that make you feel respected and have status as well as pay within your industry are things that extol entitlement and avarice, then that is what you will get. Whereas if you change them and you say, "Well, look, we are a service, we are a utility, we can certainly make a buck, but we have also got to serve society," then you will—it may take time—change the attitude and the perspectives and the behavior of those within the industry.

I do not think you can underestimate the importance of this, but one of the most important moves in the right direction from finance that I have seen in recent times was last month when Laurence Fink, the CEO of BlackRock—the biggest asset-holder in the world, $6 trillion worth of assets under their control, the equivalent to about 8 percent of the New York Stock Exchange, a phenomenal amount of money—said: "CEOs that I am investing in, you should have social purpose, and that social purpose should be evident, and what's more it should include what you're giving back to the community as well as what you're taking as profit. And if you don't do that, then the public, and indeed I as an investor, don't believe you are doing the right thing." That is quite a statement coming from somebody like Fink.

DEVIN STEWART: I remember that news. That was very interesting about Fink.

You talk about what we call here at Carnegie Council "vices and virtues." In your book Necessary Evil you talk about their role in finance. You just mentioned a few of them just in your last comment.

There are vices like greed, cheating, graft, lies, and deceit, which you talk about, and there are also virtues like empathy, dignity, and self-esteem. Is your argument that we need to convert the vices like greed and lies into virtues like self-esteem and empathy? Or is it taking the vices and making them incentives to behave ethically? Is that too abstract? In other words, do we have to eliminate the vices, or can we actually use the vices to promote ethical behavior?

DAVID KINLEY: That is an interesting way of putting it. I think there is an element of both.

But let me go back to the first part of your question: do we eliminate them? I don't think so. I think frankly human beings have all these aspects in them. All of us have greed, all of us have a degree of nobility, a certain degree of avarice, competition, carelessness about certain people. I think these things are unavoidable.

What I do think is possible is in civilization we are able to direct them, attune them, and I think that what we want to do is move toward being more noble, more empathetic, and less avaricious and less introspective and having senses of entitlement.

I think bankers are human beings, of course, like you and me, and they are capable of that. If they are in an environment, however, in which they are encouraged not to act in that way, they are not going to act in that way.

The psychological studies that seem to show—and I quote them in the book, wonderful tests—that finance does not attract cheats, it creates them. And it would probably create even you, Devin, and even me, if we were put into that environment. We may not put ourselves in that environment, but it may do that, which is I think at one level a damnation but at another level a sense of hope.

You think, Well, okay, then we change the incentives. We don't create a level of esteem for being avaricious and Darwinian, but we change it for being more empathetic, more recognizing of the social consequences of your actions.

I should add that—this can go to your second point about vice being a virtue—if you are going to pursue personal goals and greed is your driver, which is what Adam Smith was talking about, but as a consequence of that society can also benefit, you must make sure that they do benefit, and that you do not take the lion's share, or all of it, the vast majority of it. But in so doing you can use that introspective personalized drive for something that creates a bigger, broader economy that everyone, including those who perhaps are on the edge of it, would not be able to achieve on their own, and you can therefore legitimize your industry. Finance then has greater pillars of legitimacy to make it be respected and to have trust invested in it.

DEVIN STEWART: Let's talk about the how then. Your assertion is that finance should and can help with human rights, and it also implies that finance can do more than just enrich a small percentage of the global population. How do we get finance to do more good in the world? Does it have to do with things like starting at the top with people like Fink, or is it regulations, is it incentivizing people to do the right things? Is it changing the law? What about business schools? There are so many aspects. What are the main things that you have come across that could make a difference that are actually practical?

DAVID KINLEY: The first thing I think to say about the practicality of it is that finance has done good. One of the statistics that I quote in the book is that in 1981, so well within our lifetime, nearly half the world's population lived in abject poverty. Today it is less than 10 percent. That is a real achievement. Finance, of course, has not created that alone, but it has definitely been part of it.

Indeed, if there is one thing that is worse than being locked into the finance system, it is being locked out of it, and I think that the whole experience, albeit with warts—microfinance has been an example in that—the poor have taken on, even if they are really high rent-seeking extortionate interest rates with their microfinance loans, they have taken it on. Why? Because they genuinely believe that that will help them to break the cycle of poverty.

DEVIN STEWART: And you are saying they are right to believe that.

DAVID KINLEY: I think many of them are. I think they have proved it because they look at every dollar, and they may know, or they may just accept that it is a price to pay, that their interest rates are high, certainly compared to what you and I would have, but they feel that that can buy them a loom or a phone to understand what market prices are down the road, or a bicycle or whatever it is to be able to lift themselves out of a cycle of poverty that they are not able otherwise to break. So I think finance can do good and has done good.

What we can do in practical terms—I do not seek to identify individual regulatory instruments. I think that is for somebody else. I ran out of steam somewhat as well, but I also think it would attract an undue attention on them. It is more the change of attitude that I am trying to drive in the book.

On the attitude, I think one of the most important things, just like we deal with our children, is education. I am an educator, and I do believe that more law schools that produce a lot of people who go into business and finance and more business schools have got to take this seriously.

Next week I speak at the Stern School here in New York at NYU, and that is an institution that has included a professor of business and human rights, Mike Posner. That is a real positive move for a business school.

This sort of thing has been happening in law schools for a long time. One hopes it makes a difference, but I think that is a real marker in the sand for business schools because I do think ultimately it is a cultural change, and it may take therefore a generation. The students who are in business schools and law schools now are being made aware unavoidably of business and human rights concerns including finance and human rights.

So when they get to our age and they are in positions of real power in these institutions, one would like to think some of that education is still with them. They are making profits, they are making a good living, but you would like to think that they recognize the service that finance can do to the community.

DEVIN STEWART: One more question about the regulatory aspect. I am asking this because of Flash Boys, a great book. I think that your project is changing attitudes and changing people's ethical fabric, starting from the ground up with students and teachers. That is a very important part. Do you worry that there are people out there who will just take the game and just figure out how to game it and defeat the purpose of improving things?

DAVID KINLEY: Yes. I think one of the most interesting things I quote is Michael Lewis saying that after he wrote Liar's Poker and indeed after Flash Boys, indeed all of them, The Big Short, he said that his mailbag was full of letters from young men and women across America who had read his book as a how-to manual, and they wanted to know, "How can I get into this?" Rather than taking on the excoriation that Lewis—from, of course, his inside knowledge—was pouring on the industry, they said, "Whoa, this sounds really great." Oliver Stone said the same actually about his movie as well, about Wall Street.

That said, I think that if you change the community's views of what is esteem and respectful and status-granting, then you will change the industry, but you change the needs and desires of the young to focus on those. But you will always have what Immanuel Kant calls the "crooked timber of humanity." There are always going to be the crooks out there.

But you want somehow to ensure that those who would be fence-sitters do not go to the wrong side and maybe see value in being part of the service to community as well as enriching themselves. I am not denying that. And they get a sort of double whammy rather than just being seen as avaricious and grabbing. You will always have those on the other side, but you want to make the majority of people sit on the other, on the good side, so that you can demonize, as it were, the crooks.

DEVIN STEWART: Right. Finally, David, on your book tour your book has been called both pro-capitalist and anti-capitalist, which is a good sign. I might suggest you are trying to make a better capitalist. How do you respond to the feedback you have been getting so far, and does it give you hope?

DAVID KINLEY: Certainly I have been with the young mostly and with students thus far. Yes, I think they do. I think they are coming and listening to it. They are intrigued by this connection.

One of the things I say—I teach in Australia, I teach here, I teach in Europe—often to these elite law school students doing human rights classes with me is: "Don't believe that the only thing that you can do is work for the United Nations or become an open-toed sandal-wearing hippie and be lambasting finance. It's good if you want to be like that, but we don't need everyone to be there. What we really need are young, bright, sympathetic brains like you working inside Wall Street, working inside the big businesses, because that is where the change will come, and we want you in there at the beginning. You can work from within the beast rather than be one of its lambasters from the outside."

I have to say you just have to invest hope in the young. I first started this trip in Boston, and I went to JFK's memorial library, and I was struck by one little clip of him before he was president, when he was giving a stump political speech to a lot of young people, and he said, "You know, you have the least invested in the present and the most invested in the future," and I thought, What a neat way of saying—and every generation has had that opportunity.

So in many ways I feel that what I am trying to do is to say there is another path. Look at finance. You can get inside finance and still do good and still make a profit for yourself, live well. So why not have both those worlds rather than just stay, as it were, on the dark side?

DEVIN STEWART: That is a hopeful ending, David. David Kinley is author of the new book, Necessary Evil: How to Fix Finance by Saving Human Rights.

David, great to see you. Thanks for coming by.

DAVID KINLEY: Thanks so much, Devin. A pleasure.

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