Posts tagged with: financial crisis

[Part 1 is here.]

Some might answer any defense of the free economy by pointing to the housing and financial crisis that came to a head in 2008, holding it up as proof positive the free economy is a wrecking ball swinging through communities and leaving all manner of economic and cultural destruction in its wake. The financial crisis did enormous damage, but the major drivers of the crisis were a series of public policies that manipulated the market in pursuit of certain desired ends.

It all began modestly enough. The federal government built incentives into the tax code in favor of taking out a home mortgage. Many local governments also provide property tax breaks to home owners unavailable to renters. While people who are forced by circumstances to rent might question the fairness of such tax breaks, these measures are seen by most as relatively benign. Eventually, however, other top-down manipulations of the housing market were piled on top of these tax breaks.

The U.S. government offered implicit backing to mortgage giants Fannie Mae and Freddie Mac so that the companies understood that if they got into financial trouble, Washington would bail them out. This allowed Fannie and Freddie to offer low interest home loans to high risks borrowers, since the companies knew the government would come to their rescue if too many of these borrowers started defaulting on their loans.

The government also passed regulations that actually pushed mortgage companies, including Fannie and Freddie, to provide home loans to people with bad credit—subprime loans.

Finally, (more…)

indexActon’s Director of Research, Samuel Gregg, recently wrote an article at Aleteia about the recent Great Recession and Former president of the Federal Reserve Bank of New York and Treasury Secretary Timothy Geithner’s book, Stress Test: Reflections on Financial Crises. Gregg begins by noting that economists and historians are still speculating about the causes of the Great Depression and doesn’t doubt that similar debates will occur about more recent economic decline. He says, “it’s not surprising that some of those who were closets to the policy epicenter of the maelstrom are anxious to get their version of events on the record” and it’s hardly surprising that now Geithner is talking about it. Gregg continues:

Stress Test is written in the regrettably chatty, forced-informality manner of too many memoirs by politicians and public officials in our age of excessive casualness, selfies, and perpetual adolescence. For all that, however, Geithner does make a sincere effort to explain himself and his actions — even if his account won’t convince everyone.

Judging from this text (but also from other books written on the financial crisis by other players), Geithner comes across as an intelligent, decent man who found himself dealing with incredibly difficult problems in an environment full of Zeus-sized egos inside the self-referential bubble of Washington, D.C. “I wasn’t,” he writes, “a banker, an economist, a politician, or even a Democrat” (1). Indeed Geithner stresses over and over again his independence. The Left, according to Geithner, saw him as “Wall Street’s wingmen” while Wall Street thought he and others were “Che Guevaras in suits” (20). (more…)

Former Acton research fellow Jay Richards has another bestseller, as of last night–Infiltrated: How to Stop the Insiders and Activists Who are Exploiting the Financial Crisis to Control Our Lives and Our Fortunes.

IF you follow free market writers closely, you known that government interventions in the financial markets, rather than too much economic freedom, fueled the housing bubble and paved the way to the subsequent housing collapse and financial crisis. Infiltrated deftly summarizes this, but it’s in two other areas where the author, former Acton research fellow Jay Richards, offers fresh insight.

The first is the way he explains how activists and politicians have used the financial crisis to double down on the same big-government hyper-regulatory strategies that got us into the financial crisis in the first place. As Jay explains, the misleadingly named “Dodd-Frank Wall Street Reform and Consumer Protection Act,” which neither reforms Wall Street nor protects consumers, is mostly just more of the misguided medicine that contributed to the crisis in the first place.

The second valuable feature of the book is its often novel-like descriptions of the characters and tactics that led from small beginnings to the Leviathan creature that is Dodd-Frank. Understanding the opposition–their strategies and appeal, their cynicisms and idealism–is crucial to mounting a successful counteroffensive.

The book explains all of this with the sort of accessible, engaging prose that characterized Richards’ previous bestseller, Indivisible, and lays out a practical blueprint for a counteroffensive.

“Richards brings a sharp analytical mind and a passion for justice to bear on the financial crisis and its aftermath.” –Arthur C. Brooks, President, American Enterprise Institute

“If you want to know why the popular wisdom about the causes and effects of the financial crisis is mosty wrong, and how such myths will help faciliatae similar crises in the future, Jay Richards’s Infiltrated is an eye=opener.” –Samuel Gregg, author of Becoming Europe and Tea Party Catholic.

On June 27, 2013, Samuel Gregg, Acton’s Director of Research, discussed his book Becoming Europe: Economic Decline, Culture, and How America Can Avoid a European Future as part of the 2013 Acton Lecture Series. If you weren’t able to join us here at the Acton Building for the lecture, you can watch below:

 

Last night on Real News on The Blaze TV, Acton Institute Director of Research Samuel Gregg joined the panel to add his analysis of the current financial crisis in the nation of Cyprus, and the potential impacts that this crisis could have for other European Union nations that are currently trying to deal with financial issues of their own.

Gregg deals extensively with the problems of Europe in his book Becoming Europe: Economic Decline, Culture, and How America Can Avoid a European Future, which is well worth your time, and you can check out his appearance on the Library of Law and Liberty Podcast as well on the same topic. His Blaze TV interview is below.

Pin not actual size.

I commented last week on the “textbook bubble” (here) and have commented in the past on the “higher-ed bubble” and the character of American education more generally (see here, here, and here). To briefly summarize, over the last few decades the quality of higher education has diminished while the cost and the number of people receiving college degrees has increased. The cost is being paid for, in large part, through government subsidized loans. But with the drop in quality and increase in quantity, a college degree is not as impressive as it used to be; in many cases it no longer signals to employers what it used to. When a critical mass of those loans goes into default, we will have another housing-bubble-esque crisis on our hands. At the same time, government loans, which are largely indiscriminate with regard to the risk of the applicant and guaranteed on the backs of taxpayers, have incentivized colleges and universities to raise the costs to students for the sake of increased expenditures, inflating the bubble even more. Now, Alex Williams of The New Times reports last Friday,

The idea that a college diploma is an all-but-mandatory ticket to a successful career is showing fissures. Feeling squeezed by a sagging job market and mounting student debt, a groundswell of university-age heretics are pledging allegiance to new groups like UnCollege, dedicated to “hacking” higher education. Inspired by billionaire role models, and empowered by online college courses, they consider themselves a D.I.Y. vanguard, committed to changing the perception of dropping out from a personal failure to a sensible option, at least for a certain breed of risk-embracing maverick.

An increasing number of students are realizing that they, to quote Good Will Hunting, do not want to be $150,000 in debt for an education that they could have gotten “for a $1.50 in late charges at the public library.” (more…)

At least Obamacare comes at us head on. The greater legislative threat may be the one that most Americans have never heard of. Economist Scott Powell and Acton friend Jay Richards explain in a new piece in Barron’s:

While Obamacare received more attention, the Wall Street Reform and Consumer Protection Act, also known as Dodd-Frank after its Senate and House sponsors, … unleashed a new regulatory body, the Consumer Financial Protection Bureau, to operate with unprecedented power.

Dodd-Frank became law in 2010 and is supposed to avert the next financial crisis. Yet banks are still too big to fail and Fannie Mae and Freddie Mac remain wards of the state, while the CFPB has been given sweeping authority over consumer credit and other financial products and services that played no significant role in the crisis of 2008.

Powell and Richards then offer some specifics:
(more…)

On National Review Online, Acton Research Director Samuel Gregg reviews a new document from the Vatican’s Pontifical Council for Justice and Peace titled, “The Vocation of the Christian Business Leader.” This follows the PCJP’s controversial “note” on the global financial system issued in October. Gregg says the “Business Leader” document:

Though it doesn’t shy away from making pointed criticisms of much contemporary business activity — and there is much to criticize — the Note articulates, perhaps for the first time in the Catholic Church’s history, a lengthy and thoroughly positive reflection from a body of the Roman Curia about the nature and ends of business.

Unlike the October 2011 Note, this new document avoids grand theorizing about the nature of economic development throughout the 20th century. Nor does the Note lend itself to absurd claims that the Church is to “the left of Nancy Pelosi” on economic issues. Instead, this text’s analysis of life as a business leader is rooted in a sophisticated appreciation and application of the principles of Catholic moral and social teaching. It also reflects a background of solid natural law reasoning about what Benedict XVI has called “integral human development,” and recognizes the sheer diversity of forms assumed by business in the modern economy. To that extent, the Note reflects a very welcome (and much over-due) “bottom-up” rather than “top-down” method of analysis of life in business.

So what are some of the document’s key themes?

Read “In Praise of Business: A New ‘Note’ from Justice and Peace” by Samuel Gregg on National Review Online.

Blog author: flair
posted by on Friday, March 23, 2012

Would dissolving the European common currency, as proposed by the French free-market economist and entrepreneur Charles Gave in his book Libéral mais non coupable (“Liberal But Not Guilty”) free the Old Continent to stand upright on its financial feet again? Or would dissolving the currency drastically end the European project altogether, as some pro-Euro technocrats in Brussels fear?

Charles Gave, the chairman of the investment firm GaveKal, (and whose lecture I listened to at a 2011 Acton Conference Family Enterprise, Market Economies, and Poverty in Rome), offers an excellent economic policy analysis in answering these urgent questions.  However, as you will read below, the European side of the financial crisis cannot be fixed in purely economic terms.

In his chapter “Europe: A Turtle on its Back”, Gave says that the EU’s already slow-moving economic tortoise is now in a worse position while laying flat on its back – its shell “heavily weighed down by a systemic debt trap” whose origins are found in keeping the common currency afloat at all costs.

Gave believes that the only way to get the turtle walking upright again would be lighten its load by effectively dissolving the heavily debt-tied euro and restoring national currencies to pre-1999 monetary standards. In Gave’s opinion, a restoration of national currencies across the Eurozone would force member states to return to a culture of self-reliance, that is to say, to count more on their own national fiscal and monetary means and standards.

The positive effect would also mean abandoning the quasi-idolatrous ways in which Europeans go to save their common currency while closing a blind eye to less responsible member states’ reckless spending.

Gave’s criticism of local/national responsibilities and the very origins of debt raise deeper questions about the cause of the  European debt and monetary crises, but it is far from offering a  more complete picture of the problem.

Acton’s research director, Dr. Samuel Gregg, helps us fill in the gaps.  As he said in a recent editorial for the American Spectator:

Europe does indeed face huge monetary challenges. Having a common currency while permitting euro-members to violate mutually-agreed debt limits was always a recipe for disaster. Greece could happily splurge on adding tens of thousands of public sector workers to the government’s payroll and financing Chicago-esque patronage politics, while Portugal built dozens of now-idle, often half-finished soccer stadiums.  Why? Because everyone knew if things went bad, then preserving the euro (a ‘sacred cow’ for Europe’s political class) from the impact of nations’ defaulting meant that heavyweights like Germany would go to considerable lengths to try and prevent a currency-meltdown.

Yet this amounts to only a partial — and therefore inadequate — explanation of Europe’s present disarray…[It] can’t disguise the truth that there’s something even more fundamental driving Europe’s economic crisis.

From the beginning, post-war Social Democracy’s goal … was to use the state to realize as much economic security and equality as possible, without resorting to the outright collectivization pursued by the comrades in the East.  In policy-terms, that meant extensive regulation, legal privileges for trade unions, “free” healthcare, subsidies and special breaks for politically-connected businesses, ever-growing social security programs, and legions of national and EU public sector workers to “manage” the regulatory-welfare state…with little-to-no experience of the private sector.

None of this was cost-free. It was financed by punishing taxation and, particularly in recent years, public and private debt. In terms of outcomes, it has produced some of the developed world’s worst long-term unemployment rates, steadily-declining productivity, and risk-averse private sectors.

In sum, the idolatrous preservation of a European common currency and the ensuing “debt trap”  and “domino default” which Gave articulates in his book  is more fully understood when we link the European financial crisis to a crisis of Christianity — a  faith which makes challenging demands on practicing members’  moral interrelationships, levels of risk aversion, and practical ways in which they care for fellow citizens and see their moral duties relation to their neighbor and society.

Christianity, as defined so well by the Catholic Church’s teachings on subsidiarity, demands that social problems must be first solved at the individual, local level. Only if the local and personal proves insufficient should the problem to be taken to higher levels, with the state as the means of last resort.

Subsidiarity – a guiding principle to all responsible Christians – helps limit public debt by relegating moral duties first and foremost to the private sphere.  Subsidiarity is a check against  forms of collectivization and the expensive public costs involved. When too much of the moral duty is placed on the state, public costs grow and debt is possible.  When it is not, the state’s welfare machine is tends to shut down.

In conclusion, if it is true that the vast majority of Europeans no longer practice their Christian faith or take their charitable duties very seriously, one can rightly doubt how easily it will be them to free themselves from the weight of unsustainable debt  (see also Sam Gregg’s ALS lecture below on this topic). If non-practicing Europeans tend to pass on more of their individual moral responsibilities to the state  for the welfare of the elderly, sick and need people of society, it ends up being a costly delegation of Christian freedom and responsibility.  In economic consequences, this makes the EU a fertile ground for a systemic debt traps and precarious monetary crises.

[youtube http://www.youtube.com/watch?v=h1HZud5lHGc&w=350&h=208]

A week ago, Dr. Samuel Gregg addressed an audience here at Acton’s Grand Rapids, Michigan office on the topic of “Europe: A Continent in Economic and Cultural Crisis.” If you weren’t able to attend, we’re pleased to present the video of Dr. Gregg’s presentation below.