Posts tagged with: financial crisis

The National Catholic Register’s Tom McFeely interviewed Sam Gregg, director of research at Acton, about President Barack Obama’s $75-billion plan to help mortgage holders at risk of default.

McFeely: What is your overall assessment of President Obama’s mortgage relief plan? Is it likely to work?

Sam Gregg: Without question, thousands are suffering as mortgage defaults rise across America. Their plight should not be trivialized. That said, I am deeply skeptical of the mortgage relief plan. I believe that it will be counterproductive and only harm those that it is intended to help.

First, we know that something like 55% of people who have defaulted on their mortgage and received a temporary reprieve typically re-default within six months. In short, this plan is likely to encourage people to stay in painful situations instead of moving on with their lives, rebuilding their credit, and investing their talent, time and energy in more productive activities.

Secondly, the plan will encourage some to stay attached to mortgages that are worth far more than the real value of the actual properties. Frankly, foreclosure or individuals renegotiating their mortgages with their banks would be better, and allow for a faster recovery of the housing market, which is truly in the interests of the common good.

Read “The Morality of Mortgage Relief” on the NCR site.

Acton’s Sam Gregg on Public Discourse:

At the level of government policy, a prominent instance of moral hazard was what some call the “Greenspan doctrine” of 2002. This involved the U.S. Federal Reserve stating that, while it was powerless to prevent the emergence of asset bubbles (such as the dot-com and housing booms), the Federal Reserve would do everything that it could to soften the effects of an imploding bubble. This included providing investors with the option of selling their depreciated assets to the Federal Reserve at a time of crisis. Not surprisingly, the result was a surge in excessive risk-taking by investors confident that, if everything did not proceed as planned, they could recoup their losses at someone else’s expense. In his recent book, Fixing Global Finance (2008), the financial journalist Martin Wolf underlines “the distortions introduced by government guarantees to risk-taking.” These, he writes, “create an overwhelming incentive to privatize gains and socialize losses.”

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Blog author: jcouretas
posted by on Tuesday, December 23, 2008

Catching up on “Revisiting the 1986 economic pastoral”, an article from October in the National Catholic Reporter:

The bishops’ point “that Catholics’ moral life cannot be separated entirely from their economic life has relevance for what we’re going through now,” said Kevin Schmiesing, research fellow for the Acton Institute, a proponent of free markets. “Unless you believe there is no moral component to this, that there’s no failure of responsibility, that there’s no greed at work, that those kinds of moral issues have no impact. … If you’re willing to concede that they do, then I think you can also concede that the bishops have a point.”

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The Catholic News Service has published a report on “Philanthropy and Human Rights: Creating Space for Caritas in Civil Society,” a conference held Dec. 3 in Rome by the Acton Institute.

ROME (CNS) — Even at a time of global financial crisis, human beings need to give charity in order to be happy, said several speakers at a Rome conference on philanthropy and human rights.

Expecting a government to provide all social services and assistance robs those who are economically stable of the opportunity to help others and risks being inefficient, cold and even immoral, said the speakers at the Dec. 3 conference sponsored by the Michigan-based Acton Institute and the U.S. Embassy to the Holy See.

Father Robert A. Sirico, co-founder of the Acton Institute, said, “The market economy is not only the most efficient system to produce and distribute goods and services; it is also the system most respectful of our God-given creative freedom and which allows us to meet the basic needs of our brothers and sisters.”

Father Sirico was the only speaker at the conference — which included Catholic thinkers who have long praised the potential of the free-market economy — to speak directly about the current crisis.

Read the full story on the CNS site.

Blog author: jcouretas
posted by on Thursday, December 4, 2008


In the inaugural lecture of the Center for the Study of Judaism and Economics at the Jerusalem Institute for Market Studies, Nobel Laureate economist Professor Robert (Yisrael) Aumann talked about the link between economics, Judaism and the current economic downturn. Aumann argues that Judaism subscribes to a market philosophy and contains a blueprint for solving today’s economic woes.

The JIMS has the lecture archived on its YouTube page in three parts here.

In an article written for Israeli magazine Global Business, Corinne Sauer of the Jerusalem Institute said Aumann’s lecture showed how the Torah and the Talmud acknowledge the importance of economic incentives within a competitive market economy.

As one example of fundamental market-oriented principles inherent in Judaism, Professor Aumman cited the support in the Talmud for unfettered price competition, adding that the Talmud preceded Adam Smith’s groundbreaking ideas on price competition by hundreds of years. In the Talmud, there is absolutely no room for price fixing; only support for ensuring the use of honest weights and measures. In a competitive market economy, the firm selling at the highest price will either go out of business or be forced to decrease its price in order to survive.

National Review Online today published Rev. Robert Sirico’s “A House Built on Sand,” his Acton commentary on the financial crisis.

Wall Street has been skewered and denounced in almost every attempt to examine the moral dimension of this crisis. Yet, Wall Street is too often denounced for all the wrong reasons — as a surrogate for the free economy, for seeking and making a profit, as though the alternative was somehow a preferable moral result.

No, if we are going to offer a moral critique of Wall Street, this should not be done because free markets allocate and produce capital, without which people’s homes and savings evaporate. Rather, it should be done because all these previously private businesses are now waddling up to the governmental trough begging to be nationalized and asking for their share of the dole.

Rev. Sirico was also a featured speaker on the recently concluded National Review 2008 Post-Election Caribbean Cruise, which drew more than 700 attendees. Jim Geraghty, on NRO’s Campaign Spot, offered a review of the event and this about Rev. Sirico’s panel of speakers:

If that panel had a surprise star, though, it was Father Robert Sirico of the Acton Institute, who cut through a lot of numerical haze by pointing out the moral dimensions of all economic choices – and that it is morally wrong to accept a loan that you know you are unlikely to be able to repay, and that it is equally wrong to loan money that is not yours to someone you know is unlikely to pay it back. At the heart of the housing/banking/market chaos is a lot of people who faced a choice that they had to know was wrong on some level, and did it anyway.

Posted at the Center for a Just Society (notice courtesy the National Humanities Institute), Dr. Mark T. Mitchell asks a series of questions focused on the intersection between morality and economics in light of the recent financial crisis. In “Ten Questions and a Modest Proposal,” Dr. Mitchell invokes the institute’s namesake and this blog’s tagline.

In question number 9, Dr. Mitchell says,

Lord Acton’s hoary saying is pertinent: “power tends to corrupt.” If so, then we should make efforts to decentralize power. Such a sensibility is behind the separation of powers written into the fabric of the U.S. Constitution. We should be concerned, then, when big corporations get into bed with big government. The off-spring will be ugly and, we can rest assured, it will be big. This bailout represents a stunning consolidation of corporate and government power. Of course, we are promised that the government will regulate the corporations, but the conflict of interest is glaring. Could it be that the problem is not de-regulation but regulations that favor big corporations over small businesses?

Recent reports have placed the economic impact of a shutdown of one of the Big 3 automakers could cost 3 million jobs and $60 billion in 2009. Now Detroit automakers are apparently “too big to fail.” (Update: Ford has announced significant 3Q losses this year, and plans to cut 10% of its salaried workforce in North America.)

The other questions are prescient, as well, and Dr. Mitchell’s “modest” proposal is well worth considering: “The American way of life is sustainable only if we acknowledge that publicly and privately we are called to lives of responsibility. Hubris is only countered when we recognize limits.”

Blog author: jcouretas
posted by on Wednesday, November 5, 2008

If a handful of friends and I were able to bang our heads against the wall for years by speaking the truth about Communist totalitarianism while surrounded by an ocean of apathy, there is no reason why I shouldn’t go on banging my head against the wall by speaking ad nauseam, despite the condescending smiles, about responsibility and morality in the face of our present social marasmus. There is no reason to think that this struggle is a lost cause. The only lost cause is one we give up on before we enter the struggle. — Václav Havel

The above quote is from “Politics, Morality & Civility,” an essay by Czech playwright and former President Václav Havel, published in his 1992 book Summer Meditations. The book was written soon after the former dissident took office following the fall of Communism in Czechoslovakia.

Doing some post-election reading, I came across the quote in an article by Al Sikes titled “Overwhelmed by Culture” on the Trinity Forum site. Sikes, whose career has spanned law, business, and government, currently divides his time between business consulting for the Hearst Corporation and board work. He also chairs the Board of Trustees of The Trinity Forum.

Although “Overwhelmed by Culture” is on the surface about the financial crisis, it really goes much deeper than that. Sikes observes that “the culture has overwhelmed its purported masters; the culmination of systemic wrong-headedness has miniaturized much of the leader class.” He reminds us that the Founders were most concerned about the “overwhelming importance” of the young nation’s moral condition, which is the basis for economic and political decision-making. Sikes:

Today’s crisis is said to be about money (too little liquidity); I believe it is about character. Putting people at profound risk as a tool of either public or private greed is morally wrong. Sure, each time a loan is made to an aspiring homeowner or entrepreneur, for example, there is risk, but the risk of highly leveraged purchases of exotic securities is of a different order. And the risk of under-funding pension and health-care promises (yes—promises, not mere programs) is of a different and, I would suggest, more profound order.

In a Darwinian world such conduct is simply in the order of things. After all, there are thousands who now live in lavish comfort as a result of their predation. They are survivors. But those who deal derisively or dismissively with faith and its foundations should pause; this crisis offers a learning moment.

We are on the eve of an election. It is often said that this election will be the most important one in at least a generation. Perhaps. I have no trouble finding admirable traits in both candidates for President, and I am hopeful because that is my temperament. But in parallel, I am convinced that the most important need is not on Pennsylvania Avenue but in the hearts and minds of the governed.

Read the rest of “Overwhelmed by Culture.”

According to a report from the Zenit News Service, Cardinal Renato Martino, president of the Pontifical Council of Justice and Peace, recently insisted that the “logic” of the market be changed. He said that the logic “was till (sic) now that of maximum gain, and therefore the most investments possible directed toward obtaining maximum benefit. And this, according to the social doctrine of the Church, is immoral.” This is because, according to the Cardinal, the market “should be able to benefit not just those who invest capital, but those who participate in the step of making it grow, that is, those who work.”

Aside from the fact that some of the terms he used are too vague to make any judgment about, like “maximum benefit,” the economics in his statement would be more appropriate of a kid, rather than a Cardinal. So, let’s learn some economics.

Firstly, money has alternative uses. If I have some excess wealth, I am going to invest it in the things which give me the highest return. Why would I do this? Because, those projects which promise the highest return, taking risk into account, will produce the things that people want most, and hence will give me more “bang for the buck.” For example, would you invest your money in a carpentry business run by me? I wouldn’t—because I can’t hammer a nail. No wants a carpenter who does not know what he is doing. But would you invest in McDonald’s? Sure. Most everyone eats at McDonald’s, and kids especially love the place. And what do the people who patronize McDonald’s get out of it? They get a food for which they willingly and freely exchange money, and feel the better off for doing so, or they would not do it. And who supplies the food? The workers, in exchange for their discounted marginal revenue product. In other words, they exchange their time for the money equivalent of what they produce. Why are people paid different wages? They get different wages because their output is different. The work of the person who sweeps up, while necessary or he would not have been hired, is worth less than the work of the person who puts the burgers together. The burger guy’s work is not worth as much as the trained manager who is responsible for coordinating the whole operation. None of this would be possible without the people who ponied up the money in the first place expecting a high return for the money the usage of which they were willing to forgo. If this is immoral and against the social doctrine of the Church, then I am Santa Claus. If fact, to have an economy worthy of the name at all without this investment process would be worthy only of a figure like Santa Claus.

I have long argued in my writings that churchmen who have no real economic training or understanding prescind from making remarks like this which mislead the faithful, and portray the sui generis (self-generating) free market economy as an operation run from the top by a few greedy people constantly plotting to withhold wealth from the ordinary folks.

Lastly, the Cardinal remarks, “All of us should collaborate in the good of all.” This is exactly what the market does, except for those who are not able or refuse to participate in it, much of which is caused by political interference with the process, such as governments who punish provinces in Africa which are in rebellion and refuse to allow food supplies to reach the people in those provinces, or Western politicians who, in exchange for votes, have created generations of people addicted to government checks, rather than productive work and advancement.

I wonder what His Eminence thinks of government-imposed protective tariffs the purpose of which is to keep the goods of foreign workers from competing with domestic goods, in return for support from corporations and unions in the domestic industry. This prevents globalization—it prevents the wealth of the United States and other well-off countries from going to them for the products they work to produce.

Gee, Cardinal Martino, get a clue.

Read more from Dr. Luckey at “Catholic Truths on Economics.”

Blog author: jcouretas
posted by on Monday, October 27, 2008

The famous Austrian economist, Joseph Schumpeter, despaired for the future of the free market system. The reason for this despair was that the excess wealth of the system would create educated folks who would turn on the very system that created them. Their education would make them into anti-capitalist ideologues, who would then kill the goose that laid the golden egg. He did not think that those who participated in the creation of such enormous wealth would be in any position to fight back, and this for two reasons: firstly, business people do not tend to be men of letters, so they are unable to mount arguments defending the system; secondly, the job of the business executive is the survival of the company, and thus, he will concentrate on those things required to weather the storm, not be controversial.

The man who is probably the most famous Austrian economist, Ludwig von Mises, despaired for the future of the free market system due to envy. Various sectors of society, academic, non-productive, uneducated, etc., would envy the wealth of the producers in society, and end up by finding means to take away that wealth and give it to the lesser productive people, despite the fact that they did not earn it, and therefore, are not entitled to it.

Our present political situation has a combination of both of these views. Both presidential candidates are in favor of redistribution of wealth, albeit one is more open about it. And very few business people are saying “no!” to any of it with a few exceptions, such as the president of BB&T Bank, who wrote an open letter to Congress asking why his totally solvent bank should be punished for the stupidity of the others.

But there is another culprit in this maelstrom. This culprit is the business person. Why? With tongue-in-cheek apologies to neo-classical (mathematical) economic theory, the purpose of a company is not to make a profit. As John Paul II said in Centesimus Annus, a profit is a sign of the health of a company, and therefore is good and necessary. But anyone who has taken a management course knows that the purpose of the company, aside from producing what the customers want, is to increase the wealth of the stockholders. This is different than making a profit, although profit is an integral part of it. Wealth is different than profit. Profit is a short run measurement of the short run health of the company. Wealth, by its very nature is long run. Profit appears on the financial statements of a company in mere money terms, and the accountants who produce those statements do not even take inflation into account. So a company could have an increase in profit, but not an increase in items sold, merely because they had to raise prices to accommodate the fall in the value of the dollar. But executives today are a slave to the profit line in the financial statements. They have a need to impress their boards and stockholders now by sacrificing the long term growth of the enterprise. (more…)