Posts tagged with: credit crisis

This week’s Acton Commentary:

Our economic life is concerned with more than just the objective exchange of goods and services. Far from being morally neutral, it is an expression of how we understand our dependence on God and neighbor and is the means by which we fulfill, or not, our obligations toward them. Both for reasons of morality as well as long term economic efficiency, we cannot overlook or minimize the centrality of personal virtue, and of a culture of virtue, to the success of the free market. It is not enough for me to be good; we must be good together. Or at minimum, and whatever our personal moral shortcomings, culturally we must value and reward moral excellence.

Jack Cashill understands this and in his new book, Popes & Bankers: A Cultural History of Credit & Debt, From Aristotle to AIG, he traces the changing moral attitudes towards lending and borrowing in Western culture. From the beginning the author is clear that we cannot separate a conversation about debt and credit, and so the economics of the free market, from a conversation about our personal and cultural moral lives.

Quickly the author takes us through some 25 centuries of social history. Along the way we hear from Dante and Shakespeare. To my delight, The Merchant of Venice has a recurring role in Cashill’s analysis and he uses effectively the changing portrayals of Shylock to illustrate shifting cultural attitudes toward debt.

Aristotle and Aquinas also make an appearance and join a cast that includes Medieval popes, Renaissance Jewish lenders, Protestant Reformers, 19th Century American robber barons and financiers. And of course our favorite villains, the bankers, lenders and borrowers who figure so prominently in the recent economic collapse make an appearance. Though the tone is at time a bit too flippant for my tastes (especially when discussing the Medieval Catholic Church), the text offers a good historical overview of the cultural and moral debate about debt. Throughout the author highlights intimate connection between moral character and economic life.

Cashill locates our current distress in the gradual cultural changes in the “fifty or so years since interest rates” were last at 1 percent. This cultural shift has “had less to do with the behavior” of lenders and more to do with our unwillingness to censure “the behavior of consumers, especially the prodigal” among us. While not minimizing the “downside” of “major investment houses” shifting “from partnerships to corporations” (which both “democratized Wall Street” even as “it diminished long-term loyalty and distanced executives from the consequences of failure”) he locates our moral failure in our growing evermore “dependent on credit.”

Through governmental and private institutions, Western culture is now eager “to oblige its prodigals” and extend to them the credit that allows them to live, for a short time at least, above their means. In addition where once we thought of “prodigals as sinners” today we “think of them as they think of themselves–as victims.” Cashill points out that “the real divide in America today is not between left and right but between those who would sympathize” with the prodigals among us “and those who would not.” While we condemn “predatory lenders” we never even discuss, much less censure, the”predatory borrower” who also played a central role in the collapse of the housing market.

Ideally our willingness to go into debt reflects our confidence in the future and rather than a desire to fulfill momentary desires. For this reason, we should think of debt, as Cashill does (and as Western cultural has historically) as a profoundly moral and is not simply economic question. Because we have lost sight of the necessary connection between virtue and an efficient free market, we now face a widespread lack of confidence in the economy.

Our lack of confidence reflects a more fundamental a lack of trust in the future. To borrow from moral theology, the economic crisis is a crisis of despair; we have lost faith in the goodness of tomorrow.

So how do we reclaim hope in the economic sphere? As Aristotle has it, we must be “liberal.”

Needless to say Aristotelian liberality is markedly different than our contemporary understanding. For Aristotle to be liberal means that we not spend more than we have and then spend only “on the right objects.”

But true liberality can only exist within a living tradition of moral virtue. In our current circumstances we are sorely tempted to settle for merely technical solutions. Yes, these are important but what is needed most is repentance and the cultivation of the cardinal, and dare I say, theological, virtues. Whether this will happen or not depends on how we exercise our personal freedom and the decisions we make as a culture.

In any case Cashill’s work offers us a sound foundation from which to argue in the public square that our economic pursuits must take place within a “culture of life” and this is necessary not only morally but also for the efficient working of the free market.

An essay of mine appears today over at the First Things website as part of their “On the Square: Observations & Contentions” feature. In “Between Market and State,” I explore the dialectic logic of market and government “failure,” which functions in part to provide us with a false dilemma: our solution to social problems must lie with either “market” or “state.”

I work out this logic in the context of the sub-prime mortgage crisis, and conclude that non-profits play a critical role as mediating institutions that are not driven in the first place by profit motives. A great deal of the economic woe of the last year or so has been the result of seeing the poor as objects of material gain rather than partners in charitable compassion. Read the piece over at the First Things site and discuss it here.

I should note that PowerBlog contributor Dr. William Luckey has provided a brief and challenging analysis of the role of non-profits. His survey of the treatment of non-profits in the literature includes the observation, “Many sources see the purposes of non-profits as taking up the slack from either market failure or government failure, thus revealing a pro-statist, anti-market bias.” The argument in my First Things essay takes the position that one purpose of non-profits is to “take up the slack,” so to speak. But I don’t see how this by definition reveals a “pro-statist, anti-market bias.”

As I say in the essay,

Advocates for government intervention abound nowadays. But apologists for the market economy do themselves and their cause no favors when they ignore the fact that there are limits to what the market can and ought to be asked to do. Indeed, much of what has been called “market failure” is actually the result of applying market-based solutions to problems for which profit considerations ought to be considered secondarily—if at all.

Within a market framework people tend to maximize efficiency and increase material well-being. But the market is not the answer for everything. It cannot tell us, for instance, how to arrange our familial or spiritual lives.

I was influenced in this line of thinking by a brief reflection from Arnold Kling, who writes about two propositions in the context of the sub-prime lending disaster: 1) Market failure is inevitable; and 2) Government failure is inevitable. He says, “In talking about the financial crisis, I believe that to speak the truth one has to accept both propositions. Most people prefer narrative, which either explicitly or implicitly denies one or the other.”

To be sure, I do think Luckey is right to call for “a completely new study of non-profit organizations,” an early attempt at which was made in the context of Acton’s own Samaritan Guide program. (With Marvin Olasky’s comment that the finalists tended to be either “rescue missions for the homeless or rehab centers for alcoholics and addicts” in view as well, see the conclusions of the promising paper, “Faith Makes a Difference: A Study of the Influence of Faith in Human Service Programs,” by Beryl Hugen, Fred De Jong, and Karen Woods.)

One non-profit ministry that I highlight in the First Things essay that is neither a homeless shelter nor a rehab center is the Inner City Christian Federation. This is a worthy organization that merits a great deal of attention in the debate about home ownership, the mortgage industry, and Christian charity.

As I also note in the First Things essay, this discussion about the credit crisis must go to our core assumptions about home ownership. A fascinating interview with Edmund Phelps, director of Columbia University’s Center on Capitalism and Society, picks up on some of these issues. Phelps has a lot of great things to say, and here’s one of them:

I’m hoping that the administration and other thought leaders will succeed eventually in bringing the country back to the older idea that the American dream is having a career, getting a job, and getting involved in it, and doing well. That was the core of the good life. That’s what we have to get back to, and get away from this mystique that the most important thing in your life that could ever happen to you is to be a home owner.

A handy chart showing the movement in trust in social institutions over the last thirty years according to the General Social Survey is available here.

Non-profits are increasingly being squeezed out between market and state, and the solutions they offer are either marginalized or subsumed under the logic of profit or coercion. As many others have noted, some recent policy initiatives, most notably lowering the limit on qualifying charitable donations, will only serve to exacerbate this problem.

The latest issue of the Journal of Markets & Morality is now available online for current subscribers. This issue features the timely and challenging article, “Subprime Lending and Social Justice: A Biblical Perspective,” by William C. Wood, professor of economics at James Madison University and director of JMU’s Center for Economic Education. Prof. Wood notes that within the context of Christ’s call to love our enemies as well as our neighbors, “Christians cannot be complacent about credit markets even if they appear to be economically efficient as voluntary transactions.”

The concern for the poor and love of others that Wood observes particularly in the New Testament is also a major theme of the new Scholia translation. Wolfgang Musculus, a second-generation reformer and major biblical commentator of the early modern era, penned his commentary on the book of Psalms in 1551. Here for the first time is Musculus’ full commentary on Psalm 15 translated into English in conjunction with the exegetically-related appendices on oaths and usury. With regard to the question of usury, in his introduction to the Scholia Jordan J. Ballor writes, “Musculus’ reflections on usury in Psalm 15 are significant because they represent a stream of Protestant thought that largely has been ignored by economic historians.” Musculus himself contends that lending at profit to the least among us “is not only condemned as inhuman by the laws of Christ but also by the laws of nature. For it is plainly inhuman to pursue a profit from the sweat and calamities of the poor.”

Also in this issue:

The editorial by executive editor Stephen Grabill, “Hope Amid Financial Calamity,” and article abstracts of current issues are freely available to nonsubscribers (you can sign up for a subscription here, including the very affordable electronic-only access option). And as per our “moving wall” policy of two issues, the most recent publicly-available archived issue is volume 10, number 2 (Fall 2007).

If you are a student or a faculty member at an institution of higher learning, please take the time to recommend that your library subscribe to our journal. If you are in interested layperson or independent scholar, please consider subscribing yourself.

Blog author: jballor
Tuesday, December 23, 2008
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You can view the most recent list of those companies that have received bailout assistance from the federal government via the Emergency Economic Stabilization Act of 2008 (EESA), executed through measures like the Troubled Asset Relief Program (TARP), here (PDF updated 12/16/08).

I’m thinking about adding these companies to my own personal “naughty” list.

Visit the EESA homepage, where you can sign up for EESA e-mail updates as your tax dollars are spent for you. “How is this money being spent?” you might ask. Well, in the interest of full disclosure, the government has not required any special reporting for how the bailees are using these funds.

Remember that rush to push the bailout through right before the election, when the government and the media were telling us that Congress needed to hurry up and authorize the use of more money than has been spent on the entire Iraq war? The legislation appears to be so sloppy that it allows the executive branch to distribute the funds as it pleases, without any accountability for how the funds are being spent, and without any restrictions on what sort of industry qualifies.

I guess it’s more important that the money gets spent rather than how it gets spent.

Since government is now in the business of rewarding failure (call it a “demeritocracy”), nominate those most deserving of money from the bailout in the comment boxes below. Here’s a list to get you started:

Blog author: jballor
Monday, December 1, 2008
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Yesterday’s Grand Rapids Press had an attention-grabbing feature graphic, which highlights an online interactive “game” that gives more information about each of the candidates for the “economic blame game” bracket.

Press Graphic/Milt Klingensmith


The four brackets are broken down by group, so the four major categories at fault are 1) the financial industry; 2) consumers; 3) government; and 4) inexplicable forces.

Notably absent are the media (except perhaps as personified in Jim Cramer’s “Mad Money”) and government over-regulation, including especially the Community Reinvestment Act of 1977 and variations on that theme in the intervening decades. To be sure, “deregulation” is a top seed on the government side, and makes the blame game Final Four. But the summary for that option manages to lay the blame on Ronald Reagan and his dictum: “Government is not the answer to our problems. Government is the problem.”

The Press’ pick for the blame game champion is “Fear and Panic.” Writes Press copy editor Dan Hawkins, “So for your consideration, we rounded up 32 suspects and arranged them in a tournament bracket, as we did for White House scandals and the presidential race. For the first time, however, we decided to declare a winner. This crisis, this worst-of-the-worst competition, is too awful to leave without a scapegoat.”

There isn’t really a good representative for what I consider to be greatly culpable, the culture of consumptive capitalism (as opposed to democratic or entrepreneurial capitalism). Consumptive capitalism adds “spend all you can” to the more stable triumvirate of flourishing: earn all you can, save all you can, and give all you can.

And today comes news that confirms that the recession of the US economy began in December of 2007. The Press’ advice for the ordinary American citizen is “Don’t panic.” If that’s true for the everyday American, how much more so for the Christian.

One reality saves us from the necessity to assign blame to others and enables us to accept responsibility. As we begin the season of Advent in 2008, it is proper for us to reflect on the ultimate “scapegoat,” our Lord and Savior Jesus Christ, who bore the sins of the world on the cross, rose again, ascended to heaven, and is seated at the right hand of God the Father.

Turn your eyes upon Jesus,
Look full in His wonderful face,
And the things of earth will grow strangely dim,
In the light of His glory and grace.

This is not to say that we ignore the hard economic realities of our world. But the “fear and panic” created by material concerns need to be put into proper perspective, relativized and mitigated by hope in one whose kingdom will have no end.

Linked yesterday on the Drudge Report and picked up by news outlets all over the world is a brief Bloomberg report on a statement from the Italian Finance Minister Giulio Tremonti. Tremonti attributed to Pope Benedict XVI a “prophecy” dating from over twenty years ago concerning the current global financial meltdown.

Again, the story is quite brief, and here’s the gist:

“The prediction that an undisciplined economy would collapse by its own rules can be found” in an article written by Cardinal Joseph Ratzinger, who became pope in April 2005, Tremonti said yesterday at Milan’s Cattolica University.

Tremonti’s remarks were made at the inaugural academic year address at the university. It’s unclear to me what the context of Tremonti’s prophetic attribution is, and perhaps some of the colleagues in our Rome office can enlighten us as to Tremonti’s economic and religious perspective.

But if you want the original context of then-Cardinal Ratzinger’s statements, avail yourself of the only readily-accessible English translation of the article cited by Tremonti: “Market economy and ethics,” given by Ratzinger in in 1985 at a symposium in Rome, “Church and Economy in Dialogue.”

Here’s the full quote from Ratzinger’s paper:

It is becoming an increasingly obvious fact of economic history that the development of economic systems which concentrate on the common good depends on a determinate ethical system, which in turn can be born and sustained only by strong religious convictions. Conversely, it has also become obvious that the decline of such discipline can actually cause the laws of the market to collapse. An economic policy that is ordered not only to the good of the group — indeed, not only to the common good of a determinate state — but to the common good of the family of man demands a maximum of ethical discipline and thus a maximum of religious strength.

As you can see from this quote and the context of the larger paper, the import of Ratzinger’s warning is not simply about an “undisciplined economy,” but more specifically about an economy that lacks participants who act from the basis of a serious and committed moral foundation, one that is “sustained only by strong religious convictions.” It’s about a lack of religious discipline as much as economic discipline.

Reading Tremonti’s quote as it appears in the Bloomberg article (which admittedly might be quite different in its own original context) might lead one to think that Ratzinger was simply talking about the lack of material discipline, for which the “new frugality” would be an adequate cure. But as Ratzinger rightly observed then, the causes of poverty and economic distress are not simply material, but also spiritual.

In the wake of the global financial crisis, stories from the pundit class and blogosphere abound proclaiming the imminent death of the conservative movement. This is part of a longer and broader discussion with roots in the post-Reagan era of American politics. (As you’ll see in my comments below, I’m not so inclined to think that a move toward particular kinds of populism is necessarily a move away from conservatism.)

Writing in the American Conservative earlier this month, Claes G. Ryn argues that our recognition of the corrupting nature of power shouldn’t make us abdicate all forms of government and authority:

Without some people governing others, basic social order could not exist, to say nothing of effecting desirable change. The prejudice against power-seeking has left politics too much to people with the wrong kind of ambition, most of whom desire power as an end in itself. Yet wanting power need not be immoral. Pursuing it can be a means to good.

Ryn is professor of politics at the Catholic University of America and chairman of the National Humanities Institute. He notes, in agreement with the older liberal tradition, that,

the old American constitutionalism is inseparable from the moral-spiritual culture that gave it birth. Limited government and liberty were made possible by people who, because of who they were, put checks on their appetites, ran their own lives and communities, and generally behaved in ways conducive to freedom under law. Restoring American constitutionalism would presuppose some kind of resurgence of that old culture. Americans would have to rearrange their priorities and start acting differently, placing more emphasis on family, private groups, and local communities. They would have to want to take back much of the power ceded to politicians far away. Is that likely to happen? If not, the Constitution may not be salvageable.

Ryn discusses what he calls the “coup from within,” where under the guise of conservatism, “People of great ambition who want to exercise the power being abdicated by Americans are trying to make us accept and even welcome the final disappearance of constitutionalism and its culture of modesty and self-restraint.”

I’m not as pessimistic as Ryn about the seemingly inevitable outcome of the crisis and the government interventions and consolidations of power, at least in the economic sphere. He says of those perpetrating the coup, “Their response to the crisis, which they have aggravated, will hasten the crumbling of the American constitutional order. Their prescriptions contain the outlines of tyranny.” He may well be right about that, and Ryn’s concerns shouldn’t be limited to the American scene but apply to the international scene as well. As John Witherspoon said, “A good form of government may hold the rotten materials together for some time, but beyond a certain pitch, even the best constitution will be ineffectual, and slavery must ensue.”

But despite all this, common sense folk are realizing again that virtues like frugality, thrift, and self-discipline are necessary parts of a broader view of stewardship. This is in part why the bailout has had difficulty finding any serious measure of popular support…it is a plan that is counter-intuitive on so many levels, and despite the media’s best efforts to sell the bi-partisan scheme, the American citizen isn’t convinced. In fact, the concept of stewardship is a pretty good model for Ryn’s view of the appropriate pursuit of power.

It is certainly an uphill battle to practice traditional virtues against a government and a culture that tells us to spend all we can on credit. We have just about maxed out the credit borrowed from the moral and cultural capital of previous generations. In response to those pushing the expansion of federal and executive power, it’s time to, as Ryn says, “expose their false solutions to what are real problems and to explore by what measures the best of our civilization might, despite daunting odds, be given a new lease on life.”

The impending death of conservatism might just be the kind of big-government conservatism that is virtually indistinguishable from big-government liberalism on the scope and size of the government. If that’s the case, then let us celebrate: “Conservatism is dead. Long live conservatism.”

What is the root cause of the sub-prime crisis shaking the global economy? We need to know so we don’t allow it to screw up our economy even worse.

Many point to dishonesty and poor judgment on Wall Street. There was plenty of that leading up to the near-trillion dollar bailout, and even now the stock market is busily disciplining stupid, dishonest companies.

Others point to the many people who falsified loan applications to get mortgages beyond their means. That too played a role.

But dishonesty and poor judgment are as old as Adam and Eve. Something more was at work in the present crisis, a crisis of unprecedented scope. Why didn’t profit-minded loan companies run thorough credit checks? Why did they keep pumping out low interest loans to high risk borrowers, ignoring the risks?

It’s as if somebody spiked the financial system’s punch bowl with stupid juice, driving normally prudent financiers to dash, en masse, over the cliff.

It seems that way because it is that way. The brewers of the stupid juice were largely (if not exclusively) politicians in Washington who sought to redistribute wealth from the rich and middle class to poor people with bad credit. These politicians fostered various laws and institutions that directed, cajoled and legally bullied mortgage companies to extend big loans to people with little credit.

A case in point is a group called ACORN—Association of Community Organizations for Reform Now. Stanley Kurtz explains in an Oct. 7 essay at National Review Online:

“You’ve got only a couple thousand bucks in the bank. Your job pays you dog-food wages. Your credit history has been bent, stapled, and mutilated. You declared bankruptcy in 1989. Don’t despair: You can still buy a house.” So began an April 1995 article in the Chicago Sun-Times that went on to direct prospective home-buyers fitting this profile to a group of far-left “community organizers” called ACORN, for assistance. In retrospect, of course, encouraging customers like this to buy homes seems little short of madness.

… At the time, however, that 1995 Chicago newspaper article represented something of a triumph for Barack Obama. That same year, as a director at Chicago’s Woods Fund, Obama was successfully pushing for a major expansion of assistance to ACORN, and sending still more money ACORN’s way from his post as board chair of the Chicago Annenberg Challenge. Through both funding and personal-leadership training, Obama supported ACORN. And ACORN, far more than we’ve recognized up to now, had a major role in precipitating the subprime crisis.

(more…)

Blog author: jballor
Wednesday, October 1, 2008
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Dave Ramsey’s got a three step plan to “change the nation’s future.” He’s calling it “The Common Sense Fix” (PDF). Here’s Dave’s prediction:

Whichever presidential candidate or political party that champions this plan from their leadership down will likely become the next president. That is because this plan fixes the crisis while going along with the wishes of the vast majority of Americans.

Check out the plan and share what you think about the nation’s economic future.

Blog author: jballor
Wednesday, September 24, 2008
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I don’t think government ownership is what President Bush had in mind when he talked about his vision for an “ownership society,” which had ostensibly included a plank focused on “expanding homeownership.” But it looks like that’s where we’re headed in an era of government takeovers and bailouts.

For some background on how we go to this place, check out this 1999 piece from the New York Times (HT): “In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.”

All this seems like case of good intentions (increasing private ownership, extending capital access to the poor and oppressed) executed by means of bad policy (lowering credit standards for loans, bailing out failed corporations) resulting in negative (albeit unintended) consequences (foreclosures and bankruptcies).

Oh, and are you one of the people who didn’t borrow beyond your means? Guess what? You got pwned. As one blogger wonders, “Am I just a sucker or something to play by the rules? Are all of us who paid taxes suckers?” Think of that as the “pwnership” society.