Posts tagged with: financial crisis

Blog author: jcouretas
posted by on Tuesday, November 22, 2011

German Chancellor Angela Merkel is congratulated in late September after the German parliament ratified key reforms of the eurozone's bailout fund

At National Review Online, Acton Research Director Samuel Gregg observes that “much of Europe’s political class seems willing to go to almost any lengths to save the euro — including, it seems, beyond the bounds permitted by EU treaty law and national constitutions.” Excerpt:

“We must re-establish the primacy of politics over the market.” That sentence, spoken a little while ago by Germany’s Angela Merkel, sums up the startlingly unoriginal character of the approach adopted by most EU politicians as they seek to save the common currency from what even Paul Krugman seems to concede is its current trajectory towards immolation.

As every good European career politician (is there any other type?) knows, the euro project was never primarily about good economics, let alone a devious “neoliberal” conspiracy to let loose the dreaded market to wreck havoc upon unsuspecting Europeans. The euro was always essentially about the use of an economic tool to realize a political grand design: European unification. Major backers of the common currency back in the 1990s, such as Jacques Delors and Helmut Kohl, never hid the fact that this was their ultimate ambition. Nor did they trouble to hide their disdain of those who thought the whole enterprise would end in tears.

Read “Eurocracy Run Amuck” on NRO.

Protesters outside parliament on May 5 in Athens, Greece.

On the blog of The American Spectator, Acton Research Director Samuel Gregg looks at how Europe refuses to address the root causes of its unending crisis:

Most of us have now lost count of how many times Europe’s political leaders have announced they’ve arrived at a “fundamental” agreement which “decisively” resolves the eurozone’s almost three-year old financial crisis. As recently as late October, we were told the EU had forged an agreement that would contain Greece’s debt problems — only to see the deal suddenly thrown into question by internal Greek political turmoil, which was itself quickly overshadowed by Italy’s sudden descent into high financial farce.

No doubt many of these dramas reflect commonplace problems such as governments having difficulty reconciling promises made in international settings with domestic political demands. The apparently unending character of Europe’s crisis, however, is also being driven by another element: the unwillingness of most of Europe’s political establishment to acknowledge the root causes of Europe’s present mess.

One such mega-reality is the unsustainability of the pattern of low-growth, big public sectors, heavy regulation, large welfare states, aging populations, and below-replacement birthrates that characterizes much of the eurozone. Even now, it’s difficult to find mainstream EU politicians who openly concede the high economic price of these arrangements.

Read “Can’t Face Economic Reality” on The American Spectator.

In the Wall Street Journal, Acton Institute President and Co-Founder Rev. Robert A. Sirico looks at the recent “note” on economics released this week by the Vatican. The document, titled “Toward Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority,” was published with an eye toward the upcoming G-20 meeting in Cannes, France, on Nov. 3-4. This 18-page document has, Rev. Sirico observes, “been celebrated by advocates of bigger government the world over.”

But what’s missing from the popular analysis is that the Vatican document “embraces a sound economic theory concerning the cause of the world financial crisis: the breakdown of the postwar Bretton Woods monetary system and the unleashing of fiat currencies and central-bank printing presses.”

Rev. Sirico:

We went from a hard-money regime, in which there were restrictions on the power of central banks and financial institutions to create money and credit, to one where money became purely paper. There were no restrictions remaining on the power of governments to finance unlimited debt. Banks could create credit seemingly without limit. Central banks became the real power in the world economy.

None of this was true under a gold standard. That system limits the expansion of credit by an indelible physical fact. There was a limit, a check, a rule that went beyond the whim of financial masters and politicians. The Vatican seems to understand this.

But discerning the disease and finding the cure are very different undertakings, and here the document falls short. It imagines a new world central bank and political authority that will rule without “any partial vision or particular good” but rather seek “the common good.” Its decisions should “be made in the interest of all, not only to the advantage of some groups, whether they are formed by private lobbies or national governments.”

Somehow, with an intelligence never before discovered in government bureaucracies, these proposed global authorities would create “socio-economic, political and legal conditions essential for the existence of markets that are efficient and efficacious.”

Read “The Vatican’s Monetary Wisdom” on the website of the Wall Street Journal (may require registration).

This morning the Pontifical Council for Justice and Peace issued a bold statement advising how to bring order to the global financial crisis. I was in attendance at the much anticipated press conference that was organized to debrief reporters on the statement’s content.

The statement came in the form of a “Nota” (“Note” in Vatican terms): Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority.

The President and Secretary of the Council, together with a University of Rome economics professor summarized the points and context of the Note. They were met with tough questions from 60 feisty Vatican-beat journalists representing international newspaper, television and radio outlets.

To say the least, the Council’s Note was controversial and not something you normally see released from a Vatican Council. Normally, concerning specific economic policy and governance, Vatican authorities speak much more boldly on moral and theological matters and much less so on practical prescriptions.

Before getting started with the debriefing, there were a few waivers and clarifications to make about the Note’s official extent of authority and relevance.

Both the council’s President, Cardinal Peter Turkson, and Vatican Press Secretary, Fr. Federico Lombardi, made it very clear that the statement was “not in any way the opinion of the pope”, but solely that of the Pontifical Council of Justice and Peace and those that composed it.

One of the journalists present asked if the Holy Father himself had read the document, to which the Council’s Secretary, Bishop Mario Toso, said the document had only been reviewed by the Secretariat of State and was released to stimulate the practical and moral thinking of world economic leaders attending the G-20 summit this November 3-4 in Cannes, France and to “invite a process of discernment among all peoples of the world” as Cardinal Turkson later added.

Most of the heated questions at the Vatican press conference concentrated on the potential utopian vision of a single world government authority a la United Nations and IMF to promote financial and monetary security as well as greater equality among the rich and poor in teetering markets and destitute nations. Professor Leonardo Becchetti told journalists from the panel that “the world has changed…a globalized economy now calls for a global government”.

Bishop Toso was quick to point out that the statement’s opinions on a global financial authority took inspiration from Pope Benedict’s 2009 encylcical letter, Caritas in Veritate, where he said the Holy Father underscored that some form of world authority was necessary to bring order to the global economic chaos in full force. Therefore, as the Council’s officials argued, some legitimacy to their argument for a world economic authority stemmed from the Church’s official social teachings.

The reference to Caritas in Veritate had today’s journalists on edge with further demanding questions about the natural tendencies and historical proofs that corruption, self-interests and sin almost always destroy the good intentions and original human ideals of large-scale governance and any political authority wielding massive power.

Here are some extended clips from the first and third parts of the Council’s statement, where the issues of economic development, inequality and global financial authority are addressed.

The English translation is still in a process of final revision and should be released soon along with expert articulation and commentary from the Acton staff. Stay tuned for more!


1. Economic Development and Inequalities

The grave economic and financial crisis which the world is going through today springs from multiple causes. Opinions on the number and significance of these causes vary widely. Some commentators emphasize first and foremost certain errors inherent in the economic and financial policies; others stress the structural weaknesses of political, economic and financial institutions; still others say that the causes are ethical breakdowns occurring at all levels of a world economy that is increasingly dominated by utilitarianism and materialism. At every stage of the crisis, one might discover particular technical errors intertwined with certain ethical orientations.

In material goods markets, natural factors and productive capacity as well as labour in all of its many forms set quantitative limits by determining relationships of costs and prices which, under certain conditions, permit an efficient allocation of available resources.

In monetary and financial markets, however, the dynamics are quite different. In recent decades, it was the banks that extended credit, which generated money, which in turn sought a further expansion of credit. In this way, the economic system was driven towards an inflationary spiral that inevitably encountered a limit in the risk that credit institutions could accept. They faced the ultimate danger of bankruptcy, with negative consequences for the entire economic and financial system

After World War II, national economies made progress, albeit with enormous sacrifices for millions, indeed billions of people who, as producers and entrepreneurs on the one hand and as savers and consumers on the other, had put their confidence in a regular and progressive expansion of money supply and investment in line with opportunities for real growth of the economy.

Since the 1990s, we have seen that money and credit instruments worldwide have grown more rapidly than revenue, even adjusting for current prices. From this came the formation of pockets of excessive liquidity and speculative bubbles which later turned into a series of solvency and confidence crises that have spread and followed one another over the years…

A liberalist approach, unsympathetic towards public intervention in the markets, chose to allow an important international financial institution to fall into bankruptcy, on the assumption that this would contain the crisis and its effects. Unfortunately, this spawned a widespread lack of confidence and a sudden change in attitudes. Various public interventions of enormous scope (more than 20% of gross national product) were urgently requested in order to stem the negative effects that could have overwhelmed the entire international financial system.

The consequences for the real economy, what with grave difficulties in some sectors – first of all, construction – and wide distribution of unfavourable forecasts, have generated a negative trend in production and international trade with very serious repercussions for employment as well as other effects that have probably not yet had their full impact. The costs are extremely onerous for millions in the developed countries, but also and above all for billions in the developing ones…

Global economic well-being, traditionally measured by national income and also by levels of capacities, grew during the second half of the twentieth century, to an extent and with a speed never experienced in the history of humankind…

First and foremost, an economic liberalism that spurns rules and controls. Economic liberalism is a theoretical system of thought, a form of “economic apriorism” that purports to derive laws for how markets function from theory, these being laws of capitalistic development, while exaggerating certain aspects of markets. An economic system of thought that sets down a priori the laws of market functioning and economic development, without measuring them against reality, runs the risk of becoming an instrument subordinated to the interests of the countries that effectively enjoy a position of economic and financial advantage.

Regulations and controls, imperfect though they may be, already often exist at the national and regional levels; whereas on the international level, it is hard to apply and consolidate such controls and rules.

The inequalities and distortions of capitalist development are often an expression not only of economic liberalism but also of utilitarian thinking: that is, theoretical and practical approaches according to which what is useful for the individual leads to the good of the community. This saying has a core of truth, but it cannot be ignored that individual utility – even where it is legitimate – does not always favour the common good. In many cases a spirit of solidarity is called for that transcends personal utility for the good of the community….

One devastating effect of these ideologies, especially in the last decades of the past century and the first years of the current one, has been the outbreak of the crisis in which the world is still immersed.

In his social encyclical, Benedict XVI precisely identified the roots of a crisis that is not only economic and financial but above all moral in nature. In fact, as the Pontiff notes, to function correctly the economy needs ethics; and not just of any kind but one that is people-centred. He goes on to denounce the role played by utilitarianism and individualism and the responsibilities of those who have adopted and promoted them as the parameters for the optimal behaviour of all economic and political agents who operate and interact in the social context. But Benedict XVI also identifies and denounces a new ideology, that of “technocracy”.

3. An Authority over Globalization

On the way to building a more fraternal and just human family and, even before that, a new humanism open to transcendence, Blessed John XXIII’s teaching seems especially timely. In the prophetic Encyclical Pacem in Terris of 1963, he observed that the world was heading towards ever greater unification. He then acknowledged the fact that a correspondence was lacking in the human community between the political organization “on a world level and the objective needs of the universal common good”. He also expressed the hope that one day “a true world political authority” would be created.

In view of the unification of the world engendered by the complex phenomenon of globalization, and of the importance of guaranteeing, in addition to other collective goods, the good of a free, stable world economic and financial system at the service of the real economy, today the teaching of Pacem in Terris appears to be even more vital and worthy of urgent implementation.

In the same spirit of Pacem in Terris, Benedict XVI himself expressed the need to create a world political authority. This seems obvious if we consider the fact that the agenda of questions to be dealt with globally is becoming ever longer. Think, for example, of peace and security; disarmament and arms control; promotion and protection of fundamental human rights; management of the economy and development policies; management of the migratory flows and food security, and protection of the environment. In all these areas, the growing interdependence between States and regions of the world becomes more and more obvious as well as the need for answers that are not just sectorial and isolated, but systematic and integrated, rich in solidarity and subsidiarity and geared to the universal common good.

As the Pope reminds us, if this road is not followed, “despite the great progress accomplished in various sectors, international law would risk being conditioned by the balance of power among the strongest nations.”

The purpose of the public authority, as John XXIII recalled in Pacem in Terris, is first and foremost to serve the common good. Therefore, it should be endowed with structures and adequate, effective mechanisms equal to its mission and the expectations placed in it. This is especially true in a globalized world which makes individuals and peoples increasingly interconnected and interdependent, but which also reveals the existence of monetary and financial markets of a predominantly speculative sort that are harmful for the real economy, especially of the weaker countries.

This is a complex and delicate process. A supranational Authority of this kind should have a realistic structure and be set up gradually. It should be favourable to the existence of efficient and effective monetary and financial systems; that is, free and stable markets overseen by a suitable legal framework, well-functioning in support of sustainable development and social progress of all, and inspired by the values of charity and truth. It is a matter of an Authority with a global reach that cannot be imposed by force, coercion or violence, but should be the outcome of a free and shared agreement and a reflection of the permanent and historic needs of the world common good. It ought to arise from a process of progressive maturation of consciences and freedoms as well as the awareness of growing responsibilities. Consequently, reciprocal trust, autonomy and participation cannot be overlooked as if they were superfluous elements. The consent should involve an ever greater number of countries that adhere with conviction, through a sincere dialogue that values the minority opinions rather than marginalizing them. So the world Authority should consistently involve all peoples in a collaboration in which they are called to contribute, bringing to it the heritage of their virtues and their civilizations.

The establishment of a world political Authority should be preceded by a preliminary phase of consultation from which a legitimated institution will emerge that is in a position to be an effective guide and, at the same time, can allow each country to express and pursue its own particular good. The exercise of this Authority at the service of the good of each and every one will necessarily be super partes (impartial): that is, above any partial vision or particular good, in view of achieving the common good. Its decisions should not be the result of the more developed countries’ excessive power over the weaker countries. Instead, they should be made in the interest of all, not only to the advantage of some groups, whether they are formed by private lobbies or national governments.

A supranational Institution, the expression of a “community of nations”, will not last long, however, if the countries’ diversities from the standpoint of cultures, material and immaterial resources and historic and geographic conditions, are not recognized and fully respected. The lack of a convinced consensus, nourished by an unceasing moral communion on the part of the world community, would also reduce the effectiveness of such an Authority.

What is valid on the national level is also valid on the global level. A person is not made to serve authority unconditionally. Rather, it is the task of authority to be at the service of the person, consistent with the pre-eminent value of human dignity. Likewise, governments should not serve the world Authority unconditionally. Instead, it is the world Authority that should put itself at the service of the various member countries, according to the principle of subsidiarity. Among the ways it should do this is by creating the socio-economic, political and legal conditions essential for the existence of markets that are efficient and efficacious because they are not over-protected by paternalistic national policies and not weakened by systematic deficits in public finances and of the gross national products – indeed, such policies and deficits actually hamper the markets themselves in operating in a world context as open and competitive institutions.

In the tradition of the Church’s Magisterium which Benedict XVI has vigorously embraced, the principle of subsidiarity should regulate relations between the State and local communities and between public and private institutions, not excluding the monetary and financial institutions. So, on a higher level, it ought to govern the relations between a possible future global public Authority and regional and national institutions. This principle guarantees both democratic legitimacy and the efficacy of the decisions of those called to make them. It allows respect for the freedom of people, individually and in communities, and at the same time, allows them to take responsibility for the objectives and duties that pertain to them.
According to the logic of subsidiarity, the higher Authority offers its subsidium, that is, its aid, only when individual, social or financial actors are intrinsically deficient in capacity, or cannot manage by themselves to do what is required of them. Thanks to the principle of solidarity, a lasting and fruitful relation is built up between global civil society and a world public Authority as States, intermediate bodies, various institutions – including economic and financial ones – and citizens make their decisions with a view to the global common good, which transcends national goods.
As we read in Caritas in Veritate, “The governance of globalization must be marked by subsidiarity, articulated into several layers and involving different levels that can work together.” Only in this way can the danger of a central Authority’s bureaucratic isolation be avoided, which would otherwise risk being delegitimized by an excessive distance from the realities on which it is based and easily fall prey to paternalistic, technocratic or hegemonic temptations.
However, a long road still needs to be travelled before arriving at the creation of a public Authority with universal jurisdiction. It would seem logical for the reform process to proceed with the United Nations as its reference because of the worldwide scope of its responsibilities, its ability to bring together the nations of the world, and the diversity of its tasks and those of its specialized Agencies. The fruit of such reforms ought to be a greater ability to adopt policies and choices that are binding because they are aimed at achieving the common good on the local, regional and world levels. Among the policies, those regarding global social justice seem most urgent: financial and monetary policies that will not damage the weakest countries; and policies aimed at achieving free and stable markets and a fair distribution of world wealth, which may also derive from unprecedented forms of global fiscal solidarity, which will be dealt with later.
On the way to creating a world political Authority, questions of governance (that is, a system of merely horizontal coordination without an authority super partes cannot be separated from those of a shared government (that is, a system which in addition to horizontal coordination establishes an authority super partes) which is functional and proportionate to the gradual development of a global political society. The establishment of a global political Authority cannot be achieved without an already functioning multilateralism, not only on a diplomatic level, but also and above all in relation to programs for sustainable development and peace. It is not possible to arrive at global Government without giving political expression to pre-existing forms of interdependence and cooperation.

In a recent Reuters opinion column, Mark Thoma faults academic economists for their failure to predict the housing crash. He says their failure can be attributed to the disconnect between academia and economic forecasters. I don’t agree with Thoma, but I do think he gets it right when he says the failure of modern day economics,

May have something to do with the desire among economists to become more of a science – a heavy focus on theory and math is the result.

During the classical period, economics was closely linked to psychology. In the early 20th century, neoclassical economics veered from the study of psychology as economists sought to reshape the discipline as a natural science.

Modern neoclassical economics draws influence dating back to René Descartes. According to Dr. Robert Nelson’s review of Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street by Tomas Sedlack, Cartesian thought encouraged a belief that mathematical equations are equivalent to religious truths. The economic man is seen as,

 ‘A mechanical construct that works on infallible mathematical principles, … and economists are [therefore] capable of explaining even his innermost motives’ through mathematical methods.

Philosophical implications suggest modern economics is essentially attempting to reduce individuals to numbers. Economic models that operate in a perfect abstract framework with absolute assumptions conflict with the unpredictable and sometimes irrational behavior of human nature. This may explain why data forecasting without a full picture of the human person is not sufficient in predicting major market failures like the housing crash.

Karen Ho takes an anthropological approach to the financial crisis in her 2008 book  Liquidated: An Ethnography of Wall Street. As an anthropology graduate from Princeton, Ho is hired to work at an investment bank and writes about the corporate culture on Wall Street prior to the housing collapse. Homogenous recruitment, constant downsizing, high risk/high reward job liquidity, short-sighted bonuses, and deception of shareholder value were among many behaviors she observed. Such irrational and risky behavior should have been a red flag for any economist, shedding light on a major incentive problem.

Though it can be argued that the separation between modern economics and behavioral economics is necessary for empirical data and analysis, some economists want to see the gap close. According to Sedlack, modern economics should deemphasize the role of mathematics. Math is only the tip of the ice berg; it is vital, but not sufficient in economics. Nelson quoted him saying,

‘Below the mathematics lie much more fundamental issues’ of institutions, culture, and basic belief — even of religion. These issues do not readily lend themselves to mathematical methods.

Some human desires simply cannot be fulfilled by economic objects. A price value cannot be placed on the community, family, knowledge of God and so on. It is impossible to commodify or quantify these desires into an economic model. Richard Neuhaus famously said,

To attribute everything to the economic factor is to perpetuate the terrible lie of the Marxists. In addition to the economic is the political and, most important, the cultural. At the heart of the cultural is the moral and spiritual.

The number one failure of modern economics is an understanding of the human person that is incomplete. Economists must draw on anthropology, sociology, psychology, philosophy, and theology to better understand what drives human behavior and decision making. Forecasters will never be able to predict the future the way they would like, but social studies coupled with empirical economic analysis may help economists better understand the why questions that numbers cannot explain.

Dodd-Frank regulations, originally scheduled to take effect on July 16, are intended to create market stability. Instead, they are doing just the opposite.

Regulations aimed at financial derivatives, incorporated into the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law last July, have recently been rescheduled to take effect on December 31. The regulations are aimed at reducing the risk of derivatives, a contentious issue among those debating the root cause of the financial crisis. A Reuters’ report suggests this legislation will create uncertainty and a legal void for the derivatives market. Fears that trades could be challenged or invalidated may send the market for swaps (over-the-counter derivatives) into “legal limbo,” according to NASDAQ News.

Scott O’Malia, a commissioner of the Commodity Futures Trading Commission, told Reuters,

I have concerns that this proposal will not provide the appropriate level of legal certainty, and if it is to last only a few months, will likely only serve to further confuse and frustrate the markets and market participants.

Legal delays and uncertainties are only a small part of a much larger problem. Saturated with 2,253 pages of confusing regulation, Dodd-Frank is considered to be the most drastic financial revision in 80 years.

Former U.S. Senator Judd Gregg, now an adviser to Goldman Sachs, says Dodd-Frank goes too far for our good. He argues the regulation will hurt job creation and smother economic growth:

The consequences will be a massive transfer of economic activity overseas and an equally massive contraction in the liquidity and credit that keeps U.S. business competitive and vibrant.

Though intended to stabilize the financial market, Dodd-Frank is creating more uncertainty and instability at our liberty’s expense. Regulation will harm competition and stifle individual freedom. In an attempt to correct the immoral behavior on Wall Street, the government is compromising the dignity of the individual by reducing financial choices.

In a commentary titled “Credit Crunch, Character Crisis,” Samuel Gregg, the Director of Research at the Acton Institute, discusses the financial and moral costs of similar risk-controlling regulation in the past:

A longer-term problem is that this failure may facilitate calls for more financial regulation, much as the Sarbanes-Oxley Act was a response to America’s 2000-2001 corporate scandals. The evidence is growing that Sarbanes-Oxley has proved extremely costly for business. Even Sarbanes-Oxley’s authors now concede many of its provisions were badly drafted.

According to a University of Pittsburgh study, Sarbanes-Oxley’s discouragement of prudent risk-taking and its generation of additional compliance-costs have contributed to many firms listing themselves in the City of London rather than Wall Street. This has also been facilitated by Britain’s Financial Services Authority’s shift away from Sarbanes-Oxley-like procedural approaches to financial regulation, towards principles-based regulation which focuses on (a) the behavior reasonably expected from financial practitioners and (b) good outcomes.

In the end, however, no amount of regulation — heavy or light — can substitute for the type of character-formation that is supposed to occur in families, schools, churches, and synagogues.

These are the institutions (rather than ethics-auditors and business-ethics courses) which The Wealth of Nations’ author, Adam Smith, identified as primarily responsible for helping people develop what he called the “moral sense” that causes us to know instinctively when particular courses of action are imprudent or simply wrong — regardless of whether we are Wall St bankers or humble actuaries working at securities-rating agencies.

Perhaps the recent financial turmoil will remind us that sound financial sectors rely more than we think upon sound moral cultures.

Gregg’s economic and moral analysis suggests regulation cannot build character. The implicit goal of Dodd-Frank is to achieve moral ends on Wall Street through coercive means — expanding government oversight. We must remember virtue cannot be artificially manufactured by increased regulation; rather virtue requires freedom to choose the proper course of action. Moral character in the business world should be encouraged by a proper incentive structure, but even more importantly by the values taught in our social institutions.

It is very easy to forget what is happening in other parts of the world especially when we are in the midst of our own financial crisis in the United States. Considering the economic challenges we are faced with, this may be a mistake as we can learn from other’s problems. Europe is experiencing economic woes that continue to worsen. In the American Spectator, Samuel Gregg explains:

As Europe’s financial crisis worsens, it’s increasingly apparent that the economic woes of countries like Portugal, Spain, and Greece have resulted from more than just bad policy. With each passing day, evidence mounts that one dynamic driving the crisis is that of untruth: a disturbing European pattern of fabrication about levels of public spending and debt.

The latest proof for this thesis is the discovery by newly-elected Spanish regional and local governments of concealed debts run up by their predecessors. This contradicts claims by Spain’s Socialist Finance Minister, Elena Salgado, that Spain’s regions had no “hidden deficits” on their accounts. Spain’s business community, however, has long complained about local governments pressuring private companies to do business with them “off the books.”

One reason for such behavior is that Spain’s government knows that the greater Spain’s real overall-public debt, the higher will be the interest-rates demanded by financial markets and the more stringent will be the conditions attached to any “financial assistance package” (i.e., bailout) that Spain might, like Portugal and Greece, eventually need.

As Gregg says, the financial problems in Europe are not just current but have been festering since the beginning of the Eurozone when strict standards were to be implemented:

In the 1990s, European governments agreed the single currency’s success would depend upon countries entering the eurozone on a solid financial basis and then remaining on a firm footing. To that end, both the 1992 Maastricht Treaty and the 1997 Stability and Growth Pact (SGP) established strict criteria concerning public spending for countries admitted to the single currency.

One such standard concerned the ratio of an applicant country’ gross government debt to GDP. It was not to exceed 60 percent at the end of the preceding fiscal year. Maastricht’s convergence criteria also specified that the ratio of the annual government deficit to GDP should not exceed 3 percent of the same fiscal period.

Such standards were supposed to prevent a “free rider” program from occurring so countries with an irresponsible fiscal reputation, such as Greece, didn’t use their membership to over-indulge and rely on the rest of the members to bail them out. However, this policy wasn’t strictly adhered too. Gregg states that “…many euro applicants were allowed to get away with ‘creative accounting’ to meet the conditions of Maastricht.”

Europe continued to financially falter and wasn’t showing signs of recovery. This could be seen from many actions such as the encouragement of “fudging” numbers through new rules that “added many exceptions for types of spending that would not be included when determining debt and deficit figures.”

Is there a solution to Europe’s financial crisis? Gregg responds with a resounding yes:

Few “core values” would have a more bracing effect upon Europe’s current economic problems than their governments embracing honesty, transparency, and accountability. No doubt many a European political-career would be terminated as a result. The alternative, however, is for Europe’s governments to continue the charade about the real state of their finances.

Morally and financially, that’s not an option at all.

Click here to read the full article in the American Spectator.

From Chuck Colson’s column on Christian Post. Read the entire article here.

If the Great Recession of 2008 has taught us anything, it’s that you can’t detach economic prosperity from moral issues. Greed, imprudent spending by individuals and by government, debt, all of these things brought our economy to where we are today. As I’ve said many times on BreakPoint, our economic collapse is the result of our moral and ethical collapse.

We don’t teach our kids that there are such things as right or wrong, and we wonder why they grow up to cheat and steal.

And the social costs of disintegrating traditional families in terms of crime, divorce, juvenile delinquency, are truly staggering.

You don’t think supporting traditional families — and marriage — matters? Well, then you’ve never been inside a prison, like I have. You haven’t met the thousands of young men and women I have who have told you about their missing fathers or their drugged-out moms.

No society that rejects the moral good can possibly stay solvent. The price tag for moral corruption, as we have learned, is simply too high.

Until recently, many thought that Europe had escaped the worst of the 2008 financial crisis. Some even argued that the crisis has demonstrated the European social model’s superiority over “Anglo-Saxon capitalism”. In 2010, however, we have seen an entire country bailed out, riots in Athens, governments slashing budgets, and several European nations staring sovereign debt default in the face. Some are even claiming that the euro is finished. So what went wrong for Europe? How adequate have been the responses of European governments? And what are the consequences for America? The video is from the Aug. 2 Acton Lecture Series in Grand Rapids, Mich.

Blog author: jcouretas
posted by on Wednesday, September 1, 2010

Acton Research Director Samuel Gregg contributed this piece to today’s Acton News & Commentary. Sign up here for the free, weekly email newsletter.

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Humility in a Time of Recession

By Samuel Gregg

Since 2008, there has been much discussion about the contribution of unethical behavior to our present economic circumstances. Whether it was borrowers’ lying on mortgage-applications or Fannie Mae and Freddie Mac’s politically-driven lending policies, there seems to be some consciousness that non-economic factors played a role in facilitating what we already call the Great Recession.

Unfortunately evidence is emerging that some people have learned nothing. A recent report, for example, commissioned by the Wall Street Journal illustrates that “losses from mortgage fraud—ranging from falsified credit reports to identity theft—rose 17% last year after declining 57% in the two years after its 2006 peak.”

Of course wider adherence to ethical norms against lying and stealing won’t solve every economic problem. There are heavy technical dimensions to many economic dilemmas which require technical solutions. Nor does every policy-error constitute a moral failure.

Nevertheless those making economic decisions are human beings, and our virtues and vices do shape our purchasing, selling and policy choices. Many such virtues could be highlighted, but one needing extra-attention today is humility.

The word “humility” derives from the Latin humilitas. This in turn comes from humus which means earth or soil, but is also related to homō, meaning man. For the Greeks and Romans, the word underscored the idea that humans are not God or gods. Likewise for the Jews and early Christians, humility was about remembering that humans are fallible creatures who come from and return to the earth: ashes to ashes, dust to dust. Some first millennium Christian writers, such as St. John Chrysostom, even described humility as the mother of the virtues, as it prevented vanity from corrupting every other virtue.

So how might a renewed embrace of humility help us to rethink our approach to contemporary economic life?

In the case of consumers, a good dose of humility might well encourage some acceptance that the meaning of life is not simple and is certainly not to be found in how many material things we possess, as important as wealth can be in helping us to live dignified lives. To this extent, greater humility might temper the “I-want-it-all-right-now” mentality that helped generate such high household-debt levels in America and Europe.

Likewise, businesses could benefit from a renewed appreciation of humility. The financial wizard the late Sir John Templeton once wrote that humility was crucial if business was to maintain the open-mindedness that is essential to successful entrepreneurship rather than rest upon their past glories. To this we might add the insight of another prominent entrepreneur, François Michelin, that humility helps business leaders in a market economy remember that the customers are the real masters. More humble business-leaders would also be less-inclined to succumb to the “Masters-of-the-Universe” hubris that helped destroy any number of banks in 2008.

Speaking of hubris, humility also has a role to play in encouraging mainstream economists to accept economics’ limits as a science and acknowledge that not everything about markets can be explained by mathematical models that were supposed to fail only once in a million years. As George Mason University professor of economics Russ Roberts has wisely observed, while “facts and evidence still matter”, economists “should face the evidence that we are no better today at predicting tomorrow than we were yesterday.”

But perhaps those who could do with the biggest bout of humility during recessions are politicians and governments. If the Great Recession has taught us anything, it is that governments should admit many economic problems are beyond their control, and that any claim by politicians to be able to “manage” trillion-dollar economies is arrogant nonsense.

Instead politicians should be modest enough to concede that (1) the seemingly disorderly process of market exchange resolves many challenges that governments cannot; and (2) government overreach invariably causes new problems. Here they would do well to read Adam Smith’s famous warning concerning the “man of system” who “is apt to be very wise in his own conceit, and is so often enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it.”

The fear of the Lord, the Bible says, is the beginning of wisdom. Contrary to received opinion, this verse has nothing to do with frightening people into religious belief. Instead it reminds each of us that we are not the center of the universe and that the sooner we grasp this, the wiser our choices will be. All of us—consumers, business-leaders, and politicians—need to be sufficiently humble to reassess our actions in a time of recession, acknowledge our errors, and then live out the necessary correctives.

To this extent, the virtue of humility may well be a key to understanding our pre-recessionary past and a way of illuminating our path to a better and more economically-prosperous future.

Dr. Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.