Posts tagged with: financial crisis

In this week’s Acton Commentary, I review a new book by economist Joseph E. Stiglitz, Freefall: America, Free Markets, and the Sinking of the World Economy. Text follows:

A rare growth industry following the 2008 financial crisis has been financial crisis commentaries. An apparently endless stream of books and articles from assorted pundits and scholars continues to explain what went wrong and how to fix our present problems.

In this context, it was almost inevitable that one Joseph E. Stiglitz would enter the fray of finger-pointing and policy-offerings. As a Nobel Prize economist, former World Bank chief economist, former Chairman of the President’s Council of Economic Advisors, and member of the Pontifical Academy of Social Sciences, it would be surprising if he had nothing to say.

Moreover Stiglitz has assumed the role of social-democrat-public-intellectual-in-chief since his door-slamming departure from the World Bank in 1999. From this standpoint, Stiglitz opines about, well, pretty much everything. He also increasingly labels anyone disagreeing with him as a “market fundamentalist” or “conservative journalist.”

Yet despite his iconoclastic reputation, Stiglitz reveals himself in his latest offering, Freefall: America, Free Markets, and the Sinking of the World Economy, as a rather conventional Keynesian-inclined economist who, like most Keynesian-inclined economists, thinks everything went wrong in the early 1980s. (more…)

In a February 10 wire story by ANSA, it was reported that Benedict XVI has once again exhorted economists and leaders to place “people at the center of [their] economic decision-making” and reminded them that the “global financial crisis has impoverished no small number of people.”

For those who follow Benedict closely in Rome, one might wonder why the Holy Father’s words, delivered during his February 10 general audience, even made national headlines. To be sure, it is not the first time we hear the Holy Father expressing his views on the price the world is still paying for not placing the human person, along with and our God-given freedom, innovation and basic dignity, at the core of economic models and financial choices.

The pope is perhaps sounding like a broken record, criticizing and admonishing the “same-o, same-o” regarding the global financial crisis and the Church’s social teachings. Why so?

No doubt, a wave of recent woes in the European financial news have caused Benedict grave concern.

The robust euro currency has experienced a precipitous fall since January 1, and especially so since emergency meetings were held in Brussels last week to save Greece — one of Europe’s most corrupt nations and lowest-ranking economic performers — from Euro-zone fall out; while earlier this week, in an unprecedented move, Germany and France threw on their red capes to rescue the cradle of Western civilization from the brink of financial disaster. Then there were the corrupt public officials in Spain who finally received severe sentencing for illegally boosting a once-thriving Spanish housing market. And the local financial reports became even more bleak in Italy, when in late January two of the country’s “too-big-too-fail” production plants (at Fiat and Alcoa) announced imminent closure, and thousands of their incensed employees rallied in union-led strikes to save their jobs in early February.

It was these same very worried plant workers who appeared under Benedict’s apartment window during a January 31 Angelus and heard the pope’s anger: “The financial crisis is causing the loss of many jobs and this situation requires a great sense of responsibility on the part of all: entrepreneurs and government leaders [alike].”

hard-of-hearing1Hence the pope’s sermonizing against the continued causes and effects of the financial market’s moral failings certainly still do have concrete realities to draw upon. The aftermath of corporate and political leadership’s deafness to the Church’s basic social teachings seems endless and with no sign of turning around.

So we should rightly ask ourselves whether we have become a little too hard of hearing, rather than thinking the Holy Father is not saying anything new.

The Holy Father, a patient and loving university professor at heart, knows that he should not worry about the needle skipping on his turntable of teaching: After all, he knows all too well that repetition is the best form of learning.

Sooner or later, our human hearts are bound to embrace the repeated Truth that continues to call us home during this dark period. Its final acceptance and application will be our only way out.

It’s over a year now since the 2008 financial crisis spread havoc throughout the global economy. Dozens of books and articles have appeared to explain what went wrong. They identify culprits ranging from Wall Street financiers overleveraging assets, to ACORN lobbying policy-makers to lower mortgage standards, to politicians closely connected to government-sponsored enterprises such as Freddie Mac and Fannie Mae failing to exercise oversight of those agencies.

As time passes, armies of doctoral students will explore every nook and cranny of the 2008 meltdown. But if most governments’ policy responses to the crisis are any guide, it’s apparent that many lessons from the financial crisis are being ignored or escaping most policy-makers’ attention. Here are five of them.

Perhaps the most prominent unlearned lesson is the danger of moral hazard. The message conveyed to business by many governments’ reactions to the financial crisis is this: if you are big enough (or enjoy extensive connections with influential politicians) and behave irresponsibly, you may reasonably expect that governments will shield you from the consequences of your actions. What other message could businesses such as AIG, Citigroup, Royal Bank of Scotland, Lloyds, and Bank of America have possibly received from all the bailouts and virtual nationalizations?

A second unlearned lesson is that once you allow governments to increase their involvement in the economy to address a crisis, it is extremely difficult to wind that involvement back. Indeed, the exact opposite usually occurs.

Who today remembers the stimulus and bailout packages so heatedly debated in late-2008? They pale next to the fiscal excesses of governments in America and Britain throughout 2009. Recessions and subsequent government interventions create an atmosphere in which the hitherto implausible – such as trillion-dollar, 1900 pages-long healthcare legislation in an era of record deficits – becomes thinkable. Likewise the Bush Administration’s bailout of Chrysler and GM morphed into the Obama Administration’s virtual appropriation of the same two companies. (more…)

“The Deal Professor,” Steven M. Davidoff, has a good piece at The New York Times website about the indispensability of finance to our economy. It briefly rebuts the view popularized in the Oliver Stone movie Wall Street, in which financiers are portrayed as greedy parasites. I left a comment at the web page, noting that our documentary The Call of the Entrepreneur makes a similar case. I include the comment below, since it may not pass muster with the page’s comment moderator:

A documentary that explores the wealth-creating role both of the entrepreneur simpliciter and the finance entrepreneur in particular: The Call of the Entrepreneur. The film appeared on more than 80 PBS affiliates nationwide, including repeated airings in several major markets. And in what may be a first, it appeared both on PBS and Fox Business. I mention this by way of reassuring readers that the documentary isn’t screechy.

The one-hour film is a combination of narrative and expert commentary that many have found useful for explaining what entrepreneurs and merchant bankers bring to the economy, a particularly useful explanation for friends and family who wouldn’t read a lengthy article or book on the subject but will watch a documentary with high production values. It doesn’t pretend that there isn’t corruption or greed on Wall Street, but it does insist that these elements do not provide a full picture.

Full disclosure: I wrote the script for the documentary and am a fellow of the institute that created the film, The Acton Institute. The film is available at calloftheentrepreneur.com/. Also, the film doesn’t address the market distortions generated by Alan Greenspan and others, distortions that encouraged excesses in the financing world leading up to the economic crisis. Those issues are tackled at our web page on the economic crisis: acton.org/issues/economy.php/.

— Jonathan Witt

Memo to documentary filmmaker Michael Moore: Free markets didn’t cause the financial crisis. The biggest culprits were government planners meddling with the market. That’s the message of Acton’s newest video short.



So why on earth is Michael Moore (Capitalism: A Love Story, Sicko) so eager to route even more power and money through Washington? Centralized planning is economic poison. Doubling down isn’t the cure.

(Also, Acton’s resource page on the economic crisis is here.)

Blog author: jwitt
posted by on Tuesday, August 4, 2009

“We talk about what caused the financial crisis, whether ‘greed is good,’ and if ‘it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.’ It’s John J. Miller describing his podcast interview with Jay Richards here at NRO. They discuss Jay’s excellent new book, Money, Greed and God: Why Capitalism is the Solution and not the Problem.

Relativists beware. Whether you like it or not, truth matters – even in the economy. That’s the core message of Pope Benedict XVI’s new social encyclical Caritas in Veritate.

For 2000 years, the Catholic Church has hammered home a trio of presently-unpopular ideas into the humus of human civilization: that there is truth; that it is not simply of the scientific variety; that it is knowable through faith and reason; and that it is not whatever you want or “feel” it to be. Throughout his entire life, Benedict XVI has underscored these themes, precisely because much of the world, including many Christians, has lost sight of their importance.

Perhaps Caritas in Veritate’s most important truth-claim about economic life is that the market economy cannot be based on just any value-system. Against all relativists on the left and the right, Benedict maintains that market economies must be underpinned by commitments to particular basic moral goods and a certain vision of the human person if it is to serve rather than undermine humanity’s common good: “The economy needs ethics in order to function correctly — not any ethics whatsoever, but an ethics which is people-centred” (CV no.45)

“Without internal forms of solidarity and mutual trust,” the Pope writes, “the market cannot completely fulfill its proper economic function” (CV no. 35). This surely has been amply confirmed by the recent financial crisis. America’s subprime-mortgage market collapse was at least partly attributable to the fact that literally thousands of people lied on their mortgage application forms. Should we be surprised that mass violation of the moral prohibition against lying has devastating economic consequences? “The economic sphere”, the pope reminds us, “is neither ethically neutral, nor inherently inhuman and opposed to society. It is part and parcel of human activity and precisely because it is human, it must be structured and governed in an ethical manner” (CV no.36).

Contrary to the pre-encyclical hype of certain American commentators and the ever-unreliable British press, predictions of papal anathemas against “global capitalism” have – as usual – been found wanting. In economic terms, the pope describes as “erroneous” the tired notion that the developed countries’ wealth is predicated on poor nations’ poverty (CV no.35) that one hears customarily from the likes of Hugo Chavez and whatever’s left of the dwindling band of aging liberation theologians. That’s a pontifical body-blow to a central working assumption of many professional social justice “activists”.

Nor will they be happy with the pope’s concerns about the ways in which foreign aid can produce situations of dependency (CV no.58), not to mention Benedict’s strictures against protectionism (CV no.42) as well as his stress that no amount of structural change can possibly compensate for people freely choosing the good: “Integral human development presupposes the responsible freedom of the individual and of peoples: no structure can guarantee this development over and above human responsibility” (CV no.17).

Nor does Benedict regard the market as morally problematic in itself. “In and of itself,” the Pope states, “the market is not . . . the place where the strong subdue the weak. Society does not have to protect itself from the market, as if the development of the latter were ipso facto to entail the death of authentically human relations” (CV no.36). What matters, Benedict claims, is the moral culture in which markets exists.

At the heart of the economy are human persons. People whose minds are dominated by crassly hedonistic cultures will make crassly hedonistic economic choices. “Therefore”, Benedict comments, “it is not the instrument that must be called to account, but individuals” (CV no.36).

The implications of truth for economic life do not, however, stop here. For Benedict, it is a lens through which to assess ideas such as “business ethics”, “ethical investing” and “corporate social responsibility.” The notion that investment and business choices have a moral dimension is hardly new. What matters for Benedict is the understanding of morality underlying these schemes. Merely labeling an investment scheme as “ethical”, Benedict notes, hardly tells us whether it is moral (CV no.45).

A second major truth underscored by Benedict is the indispensability of a strong civil society for both undergirding and limiting the market and the state. By this, he does not mean a plethora of government-funded NGOs, many of whom Benedict identifies as intent upon imposing some of the very worst aspects of Western lifestyle-libertarianism upon developing nations (CV no.28). Certainly, Benedict believes, there is a need to re-evaluate (CV no.24) how the state regulates different parts of the economy. Ultimately, however, Benedict stresses that the virtue of solidarity, he argues, is about people concretely loving their neighbour; it “cannot therefore be merely delegated to the State” (CV no.38). This is reminiscent of Alexis de Tocqueville’s attention to the manner in which the habit of free association both limits the size of government while also discouraging people from retreating into their own little bubbles.

The economist John Maynard Keynes is famous for many things, including the saying that “in the long run, we’re all dead.” The horizon of Benedict XVI’s perspective on economic life is rather different. The pope asks people to live their economic lives in the short, medium, and long-term as if living in the truth is eternally important, not to mention eternally relevant to their soul’s salvation.

That’s change we can all believe in.

In the midst of the release of his expected encyclical, Pope Benedict is calling for a new world economic order; a model that is “more attentive to the demands of solidarity and more respectful of human dignity.” Professor Philip Booth, editorial and program director of the Institute for Economic Affairs, and speaker at Acton University, was interviewed by The Catholic Herald, a UK paper, about the Pope’s upcoming encyclical:

…it would be dangerous to follow a path of greater socialization and greater regulation of the economy and financial sector.  This is a model that has been tried and which is failing.

But what is essential is ethical renewal in all aspects of life-including in the financial sector.  Trying to deal with problems such as the lack of ethics in economic life with more regulation is like trying to deal with promiscuity through sex education lessons – it is the wrong instrument.

Kishore Jayabalan, director of Istituto Acton in Rome and an AU lecturer, was also interviewed by The Herald.

The Pope’s challenge to all of us is that we make the best possible use of our freedom and gifts, which will require a bit more intellectual and spiritual fortitude than we’ve seen from most of our political and business leaders recently.

To read the article and more comments by Professor Booth and Jayabalan please click here.

Pope Benedict’s encyclical is expected to be released on June 29.  The Acton Institute will be commenting on the encyclical once it is released and we encourage everybody to return to the PowerBlog and our website for more commentary.

The Detroit News says the General Motors bankruptcy filing “is a hammer blow for a state that was already on its knees.” In an editorial, the paper calls for an “emergency response” from government and an entirely new orientation to attracting businesses and jobs to the state:

Longer term, Michigan’s entire focus must be on creating a business climate that makes the state attractive for job creators in a wide range of industries. It can’t afford to focus on any one segment in hopes of finding the next Big Three. Its future will depend on making itself irresistible to investors across the spectrum.

This echoes Sam Gregg’s Detroit News commentary “Entrepreneurs Require More Room to Thrive” published on May 12:

Michigan must create an entrepreneur-friendly economy by lowering the cost of doing business for all firms, not just the favored few darlings of the moment. The state’s policymakers have spent decades trying to pick the winners (automation, biotech, green energy) that would rescue the state from its dependency on automotive manufacturing. But policy makers and elected officials do not “create jobs” or industrial sectors — businesses and entrepreneurs do.

Also in today’s News, Oskari Juurikkala writes about the push for greater regulation in financial markets:

Is lighter regulation the solution to economic crises? It depends. Some over-the-counter financial derivatives are practically unregulated, so there is nowhere to cut regulation. It might be more appropriate to cover such clear gaps in existing rules in a principled manner so as not to lead people to the temptation of recklessness.

But a few clear-and-fast rules are often better than numerous rules that are hard to understand — especially if they are poorly enforced, which seems to be the case in financial market regulation.

When designing rules for a game, one must take into account the moral character of the players. But there needs to be adequate variation: General laws designed for crooks will not produce any saints.

Much of the blame for the current financial crisis has been aimed at Wall Street and the bankers who, the story goes, created toxic debt instruments and then lined their own pockets with the proceeds. In “Verdict on the Crash: Causes and Policy Implications,” a new analysis from economists and scholars — including Acton Institute Research Director Samuel Gregg — the London-based Institute of Economic Affairs comes to the opposite conclusion: It was governments and regulators who erred. Moreover, the IEA report says, the people most often berated for their part in the crisis – the hedge fund managers and those who run tax havens – are among the least guilty. The report also spells out the need for a “radical overhaul” of the financial system to guard against a repeat of the errors that led to the crisis.

The authors of “Verdict on the Crash” assert that “a revolution in financial regulation is needed. The proposals of the G20 governments and the EU are wholly misconceived. Specific and targeted laws and regulations could restore market discipline.”

Read a letter to London’s Daily Telegraph from the economists and scholars who wrote the “Verdict on the Crash” report for IEA. Read highlights and download the full report from the IEA blog. Acton’s Samuel Gregg authored the chapter titled, “Moral Failure: Borrowing, Lending and the Financial Crisis.”