The Italian online daily Ilsussidiario.net recently turned to Rev. Robert A. Sirico with a a couple of key questions about the financial crisis: “So what went wrong with our culture that turned up so badly in our markets? Or were the cause and effect reversed: something went wrong in our markets that turned up badly in our culture?”

Here’s part of the exchange:

Have moral or cultural causes contributed to the financial crisis? If so, what are they?

One could point to a wide variety of moral and cultural failures that precipitated the current financial crisis. These would be the same kind of moral failure that we could find in all of social interactions. A late friend once wisely noted something to the effect that the market would always manifest every vice and virtue that men exhibit in free inter-action, because that is in fact what the market is.

What is different in this case is that through a series of political inducements, people have been tempted to act in ways that they might not have otherwise. In the economic literature this is called “the moral hazard”. Moral hazard takes place when people are unable to see the risks associated with their actions because of some obstruction or distortion by a third party which has introduced an information asymmetry.

This is what happened in the US, which quickly metastasized internationally, in the housing market. Intervention into this market through the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (Freddie Mac and Fannie Mae – both of which incidentally were and remain government-sponsored enterprises) essentially induced people to take out loans they could not afford and banks to offer loans to people who did not have a credit history indicating they could repay them. I might also add that a number of Congressmen and Senators saw Freddie Mac and Fannie Mae as vehicles for using taxpayers’ money to build up reliable voting constituencies.

Read “The Cultural and Moral Failures that Precipitated the Crash” on Ilsussidiario.net.

  • Roger McKinney

    I love most of what Sirico writes, but this is pretty poor economics. Blaming morals for economic crises is like blaming gravity for airplane crashes. Austrian econ has the best explanation for crises. If moral failure is involved, it the failure to adhere to God’s laws about property. The Fed has a monopoly on money, which in itself is immoral, and then unjustly manipulates the supply of that money, which immorally takes from one group of people and gives to another.

  • Neal Lang

    “I love most of what Sirico writes, but this is pretty poor economics. Blaming morals for economic crises is like blaming gravity for airplane crashes. Austrian econ has the best explanation for crises. If moral failure is involved, it the failure to adhere to God’s laws about property.”

    Actually, the governmental corruptions of our current Free Market, Capitalist System are a result of the loss of morality by “We, the People.” On a moral people can enjoy the liberty necessary for a Capitalist, Free Market to flourish. Of course, you need not look to the Austrian Economist for that truth as I believe most of Founding Fathers made a similar observation over 200 years ago.

  • Neal Lang

    We get the government we deserve, and along with it the economy. You can’t cheat an honest people. “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.” Abraham Lincoln.

  • Roger McKinney

    “Actually, the governmental corruptions of our current Free Market, Capitalist System are a result of the loss of morality by “We, the People.”

    I agree with that. Socialism did not begin to take hold of this country until the majority abandoned traditional Christianity. That made them suckers for the snake oil that socialism was selling. And socialism elevates envy to a virtue. Socialism itself is evidence of a decline in morality on the part of the people.