Posts tagged with: financial crisis

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.

As Kishore Jayabalan noted yesterday, the fallacy of “broken windows” is, unfortunately, ubiquitous in discussions of public finance and macroeconomics. Though we are told that government spending and public works have a stimulating effect on economic activity, rarely are the costs of such projects discussed.

Such is the case with several stimulus projects in my own hometown of Atlanta, GA. The Atlanta Journal-Constitution reports on a list that Sen. John McCain and Sen. Tim Coburn drew up, criticizing wasteful stimulus projects throughout the country:

Their list includes Georgia Tech professors who received federal stimulus funds to understand how jazz, avant-garde art and Indian classical musicians improvise. The report cites an Atlanta Journal-Constitution article that describes the $762,372 study, which involves using brain imaging to learn how musicians do their work.

[....] The senators also highlighted a $677,462 research project at Georgia State University to study “why monkeys respond negatively to inequity and unfairness.” Asked about the project, the university sent the AJC a news release from last year that said the research “will hopefully answer questions about the evolution of responses to reward inequality — including those responses in humans.”

Georgia Tech has fired back:

Georgia Tech issued a statement in response, saying such research is “necessary for the long-term economic success of our state and our nation.”

But how can one verify such claims? As Kishore has pointed out, the mere fact that money is being spent is not enough to claim that the economy benefits from such expenditure. The hidden costs of stimulus money are the jobs and services that would have otherwise been funded by the private sector.

In order to actually determine whether an investment is truly beneficial to the economy, one must be able to subject it to the cost-accounting of profit and loss. A product or service that makes losses has consumed resources that could have otherwise been put to more productive uses in the economy. But since government expenditures are funded not through any kind of voluntary market exchange, but through taxation, this kind of mechanism cannot be used to evaluate them.

So we can be pretty sure that stimulus projects, in fact, are not as conducive to economic growth as we have been led to believe, since such projects would probably not withstand the profit-and-loss test of the market.

But this is not to say that funding any of this kind of scientific research is not worthwhile. Activities such as philanthropy and charitable giving do not produce any kind of profitable return, but are nevertheless recognized as noble and praiseworthy. There may be good reasons for funding these projects, but economic growth is not one of them.

The extent and persistence of the global economic and financial crisis has caused many people to start asking if there is any alternative to the current monetary system of fiat money overseen by central banks which enjoy varying — and apparently diminishing — degrees of independence from politicians who seem unable to resist meddling with monetary policy in pursuit of short-term goals (such as their reelection).

Most arguments about the respective merits of fiat money, private money, or the gold standard are couched almost entirely in terms of economic efficiency. Over at Public Discourse, however, Acton’s Research Director Samuel Gregg has penned an article outlining the principled case for a return to the classical gold standard. Gregg draws upon economic history and ethical analysis to argue that there is a strong more-than-economic case for the classical gold standard that rarely receives much attention. As Gregg writes:

There were several economic advantages to the gold standard. . . . A number of principled considerations were, however, also operative. The gold standard placed a high premium on economic security by reducing the uncertainty and risk that flows from fluctuations in the value of money that have nothing to do with the relative valuation of different goods and services. . . .

Another commitment at stake was the conviction that stable money meant greater economic prosperity for increasing numbers of people. Greater monetary certainty spurred productivity and investment, not least because many long-term contracts benefited from a confidence that prices would remain relatively constant over time. Then there were the ways in which the gold standard bolstered the economic well-being of particular marginalized groups. Monetary stability helps, for example, those who lack the financial sophistication to navigate the shoals of inflation, or who are on fixed incomes (e.g., the elderly and disabled).

At the same time the gold standard also encouraged governments to promote the common good instead of narrow sectional interests. Within nation-states, for instance, the gold standard diminished opportunities for the state to manipulate monetary policy in order to favor those with an interest in inflationist policies.

Likewise, the gold standard also generated a commitment on the part of governments to promoting the international common good. As the German economist Wilhelm Röpke once wrote, the gold standard relied upon the unwritten agreement of central banks and governments “to behave in matters of monetary and credit policy in such a way that this fixed and free coupling remained an undisputed permanent institution, irrespective of trade fluctuations”. This required central banks and governments to prioritize the global economy’s long-terms needs over the short-term exigencies of national economies. It also entailed a willingness to resist popular pressures to revert to a type of monetary nationalism in the face of the fluctuations in employment and growth sometimes generated by the gold standard’s adjustment mechanisms.

There is, Gregg notes, bound to be considerable opposition to any move away from fiat money. It’s hard to imagine, for instance, politicians, central banks, or Keynesian-inclined economists being very willing to give up a tool that — or so they believe — is a vital element of macroeconomic management. Gregg points out that there are also plenty of groups with a vested interest in the type of easy money policies (what’s euphemistically called “quantitative easing” these days) which are always an option under fiat money regimes.

Despite this opposition, Gregg says that going back to gold is certainly worth a second look — if only because no one seems especially satisfied with the present system.

For more from Gregg on this subject, see The Gold Standard: A Principled Case.

Blog author: jcouretas
posted by on Friday, May 28, 2010

Sell! Sell! Sell!

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.

This week’s Acton Commentary from Baylor University economics professor John Pisciotta:

Americans have less confidence and trust in government today than at any time since the 1950s. This is the conclusion of the Pew Research Center survey released in mid-April. Just 22 percent expressed trust in government to deliver effective policies almost always or most of the time. With the robust expansion of the economic role of the federal government under George W. Bush and Barack Obama, the Pew poll is evidence of an opportunity for advocates of freer markets.

That Americans distrust their government is not unadulterated good news. An effective rule of law, one aspect of which is a government that can be trusted to act justly and equitably, is a necessary precondition of the free and virtuous society. Still, in the context of the extraordinary extension of government control in areas such as finance and health care, news of political skepticism offers an opportunity for those who recognize that both the moral and economic wellbeing of our nation depends more on the health of individuals, families, and other institutions than on the engineering of bureaucrats. The apostle Peter advised Christians to “always be ready to give an answer” to those who ask for “a reason of the hope that is in you” (I Pt 3:15). This advice is relevant for defenders of private sector reliance. We must not merely repeat slogans regarding private enterprise. We must express the reasons why we defend decentralized, voluntary organization of our economy over centralized control. Here are my top 10 reasons, in reverse order, for the hope that is within me.

10. Difference in competition. Competition is at work in both government and private markets, but the competition in markets is more civil and evenhanded. Business competition is similar to golf. Each competitor works to improve his own performance. Political competition—between parties, between candidates for office, and among legislators—is more like basketball. While a competitor works to elevate his own game, participants also attempt to undercut, debilitate, and intimidate opponents. It is common to see political advertising that is hostile, even to the extent of lying about the opponent. Combative ads are the exception in business appeals to consumers.

9. Enterprise expansion. In private markets, a business venture has to be profitable to expand, whereas expansion is “in the DNA” of government ventures and programs. Program beneficiaries and bureaucratic suppliers work in collaboration with elected politicians to expand particular government programs. The basic idea is this: If a government program is good, an expanded program would be even better.

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Acton Research Director Samuel Gregg is quoted in yesterday’s Pittsburgh Tribune-Review editorial on Goldman Sachs:

The most shocking moment in Tuesday’s Senate hearing on Goldman Sachs wasn’t Sen. Carl Levin’s repeated use of the big investment house’s scatological description of its own dubious offerings.

No, it was when one of Goldman’s high cluckety-clucks actually said that it has no ethical responsibility to tell clients that it is betting against the same investments it recommends.

That really is (expletive deleted).

Samuel Gregg of the Acton Institute reminded in 2008 that it wasn’t merely loose monetary policy, massive bank overleveraging, the subprime mortgage implosion and government-backed social re-engineering programs that landed the economy in a pickle.

“(I)f the current financial upheaval teaches us anything, it should be how much market capitalism depends upon most people developing and adhering to some rather uncontroversial moral virtues.”

We are learning the hard way that “prudence, temperance, thrift, promise-keeping, honesty and humility — not to mention a willingness not to do to others what we wouldn’t want them to do to us — can’t be optional-extras in communities that value economic freedom,” says Dr. Gregg.

“If markets are going to work and appropriate limits on government power maintained, then society requires reserves of moral capital,” he adds.

It’s clear the financial sector has lots of work to do.

The Gregg quote is drawn from his October 2008 Acton commentary, “No Morality, No Markets.”

In a new column on Sojourners, Prophet Jim Wallis reveals that Wall Street financiers are coming to him for confession, sometimes skulking along darkened streets to hide their shame:

Some come like Nicodemus – a religious leader who came to talk to Jesus in private – at night. Many have felt remorseful about what happened on Wall Street and how it has hurt so many people. They describe the behavior in their profession with words such as “greedy,” “risky,” or “reckless.” These business and banking leaders do feel sorry, but repentance means that remorse must be coupled with a change in the behaviors that led to the problems.

The Prophet, who can read their very thoughts (“repentance and accountability were far from their minds”), bids them to change their ways and reminds them about God and Mammon. But it is not so much a conversion of hearts and minds Wallis is asking for, as it is the divine wrath of Washington regulators. His three-point plan (emphasis mine):

First, provide transparency and accountability. Given the human condition and the many temptations of money, we need transparency and accountability in financial markets and instruments, including high-risk and questionable ones such as the now infamous “derivatives.” To protect the common good, we need to enact greater regulation and oversight of all elements of the banking industry.

Second, provide consumer protection. Any pastor can now tell you stories of how parishioners were mistreated, cheated, and damaged by current banking practices. Many clergy strongly favor protecting consumers from predatory financial practices. They want a strong independent Consumer Finance Protection Agency, with jurisdiction and enforcement power over all companies in the financial sector, in order to protect people from fraudulent, misleading, and abusive practices.

Third, limit size and risk, so banks are no longer too big to fail – and are bailed out at public expense. This means setting limits on the size of financial institutions and the risks they can take. Ban bank ownership of private investment funds, and establish an orderly process to dissolve a failing bank, in order to avoid future taxpayer bailouts. Give a stronger voice to shareholders and investors in institutional practices and policies – including determining the executive compensation of companies, and the now infamous bank executive bonuses.

A much more intelligent and balanced analysis of the financial crisis was published yesterday by Russ Roberts, a professor of economics at George Mason University and a scholar at the Mercatus Center. Note the complete lack of cheap moralizing that informs so much of Wallis’ economic “analysis.” This is from the introduction to Roberts’ “Gambling with Other People’s Money”: (more…)

Sign up for Acton News & Commentary here. This week, I contributed a piece on Jim Wallis’ new book.

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This class of the very poor – those who are just on the borders of pauperism or fairly over the borders – is rapidly growing. Wealth is increasing very fast; poverty, even pauperism, is increasing still more rapidly. – Washington Gladden, Applied Christianity (1886)

For three decades, we have experienced a social engineered inequality that is really a sin – of biblical proportions. We have indeed seen class warfare, but this war has been waged by the wealthy and their political allies against the poor and the middle class. – Jim Wallis, Rediscovering Values: On Wall Street, Main Street, and Your Street (2010)

One of Jim Wallis’ long running aims at Sojourners is to cast himself as a moderate or centrist (God is not a Republican. Or a Democrat). This is howling nonsense to anyone who pays attention to his policy prescriptions or watches the progressive/liberal company he keeps. With his new book, Rediscovering Values: On Wall Street, Main Street, and Your Street (Howard Books, 2010), Wallis drops all pretense to holding the center as he piles on with the horde of religious left activists and others now demonizing Wall Street. The book, a clip-file pastiche of easy eat-the-rich moralizing, relentlessly pushes for the sort of collectivist policies that even the Obama administration is reluctant to take on directly (to Wallis’ chagrin).

The Wallis publicity machine casts him in the tradition of the Hebrew prophets with their fiery visions and passion for the social application of faith. Alas, he can only scold: “It’s clear that Wall Street has learned nothing, wants to learn nothing, and instead just wants to go back to the same old behaviors.”

With this new book, Wallis has ventured into the nation’s economic life with his cheap outrage. There, he has exposed himself as utterly ignorant of even the most basic economic principles. Not even a disinterested undergraduate halfway through a compulsory Econ 101 would make these mistakes. Case in point:

The market’s fear of scarcity must be replaced with the abundance of the loving God. And the first commandment of the Market: “There is never enough,” must be replaced by the dictum of God’s economy: namely, there is enough, if we share it.

Well, no, wrong. You cannot wish scarcity away. It is one of the most fundamental realities of economic life, involving everything from raw materials to money to the very time we have on God’s green earth. Still less can you wish away scarcity with shallow sentiment and decree that all of humanity will have enough (what is enough?) if we follow the “dictum” of “God’s economy.” Scarcity is not a Republican or a Democrat issue, you might say.

(more…)

LifeSiteNews.com recently asked me to comment on statements made by Ettore Gotti Tedeschi, president of the Vatican bank, about the economic effects of demographic decline in Western industrialized countries. Tedeschi told the Zenit news service that the “true cause” of the financial crisis is the low birth rate in these countries.

“Instead of stimulating families and society to again believe in the future and have children […] we have stopped having children and have created a situation, a negative economic context decrease,” Gotti Tedeschi observed. “And decrease means greater austerity.”

“With the decline in births,” he explained, “there are fewer young people that productively enter the working world. And there are many more elderly people that leave the system of production and become a cost for the collective.

“In practice the fixed costs of this economic and social structure increase. How dramatically they increase depends on how evidently unbalanced the structure of the population is and how much wealth it has. The fixed costs however increase: The costs of health increase and the social costs increase.”

This is from reporter Peter J. Smith’s article on LifeSiteNews.com:

Sirico explained that the Vatican economist’s view opposes that of population control groups, who subscribe to a different vision of economic activity: what he called a Marxist or “redistributivist” paradigm: “If there is a pie and there are more people added to the pie then there is more poverty.” But the reality, Sirico says is that “the pie is dynamic.”

“Mr. Tedeschi is saying is that: no, the human person is himself creative. Human beings are not mouths that consume, but minds that produce,” he said. Sirico added that John Paul II hit on this very point in his social encyclical Centesimus Annus, when he wrote that “Man is man’s greatest resource.”

Because human beings are also creative producers, the excess of what they produce becomes the basis for trade in the economy, and the creation of wealth, said Sirico. Contrary to population controllers obsessed with overpopulation, he noted, it is incredibly population dense cities like Tokyo and Hong Kong that are incredibly rich, while sparsely populated areas of the globe such as Angola are comparatively very poor.

Read “President of the Vatican Bank: Zero Population Growth Responsible for World-wide Recession” on LifeSiteNews.com