Posts tagged with: financial crisis

Blog author: kschmiesing
posted by on Thursday, October 16, 2008

While efforts to explain the financial crisis will continue for years (historians are still debating the causes of the Great Depression, eight decades later), it seems certain that its genesis cannot be fully understood without some recourse to the moral dimension of human action in the economy. Acton Institute commentators—Jonathan Witt, David Milroy, Sam Gregg—have already weighed in on the question.

Economists have long deplored the poor savings rate in the United States, arguing that our ever-increasing debt load (national and personal) would eventually come back to haunt us. British intellectual Peter Heslam points out that this problem is essentially moral, a failure to value the traditional virtue of thrift.

He writes:

Hebrew and Christian scriptures support a theology of thrift. Literally, thrift means ‘prosperity’ or ‘well-being’, meanings encompassed in the Hebrew notion of shalom, which is central to the biblical theme of redemption. True, Jesus warned against laying up treasure on earth. But his warning is against greed and miserliness, which undermine thrift.

The only puzzling note Heslam hits is his final exhortation for government to push the sale of bonds. Granted that treasury bonds represent savings on the part of their buyers and granted that this is a better use of income than gambling, the other side of the coin is that bonds represent government borrowing from its people—not a good strategy for decreasing national indebtedness.

Better to put the money into stocks, corporate bonds, even passbook savings and certificates of deposit. This kind of saving is investment, the lifeblood of the market economy.

(The point here dovetails with Jordan Ballor’s endorsement of stewardship, posted as I typed this.)

Blog author: kschmiesing
posted by on Thursday, September 18, 2008

As the US-incited global financial situation continues to worsen, ever shriller assertions of blame will be cast on one culprit or another. It’s my belief that any development of this magnitude always stems from multiple and interacting causes, but that doesn’t make very good copy.

Thomas Frank in the Wall Street Journal yesterday fingers deregulation (and by explicit implication the Republicans who champion it) as the criminal instigator of the financial crisis. Six weeks from election day, Frank has a transparently political goal, but let’s leave that aside. He writes:

There is simply no way to blame this disaster, as Republicans used to do, on labor unions or over-regulation. No, this is the conservatives’ beloved financial system doing what comes naturally. Freed from the intrusive meddling of government, just as generations of supply-siders and entrepreneurial exuberants demanded it be, the American financial establishment has proceeded to cheat and deceive and beggar itself — and us — to the edge of Armageddon. It is as though Wall Street was run by a troupe of historical re-enactors determined to stage all the classic panics of the 19th century.

I don’t pretend to be an expert in financial sector regulation, and it may well be that some more (or different? or fewer?) regulations could have played some role in averting this catastrophe. But I suspect there are a couple other causes that are equally or more important, and that call into question the contention that more government involvement will prevent such problems in the future.

1. If the crisis is in large part due to overly risky loan practices and the investment vehicles connected to them, then might the existence of federal backing (e.g., its de facto guarantee of Freddie Mac and Fannie Mae) and the promise of such backing (based on the fact of past bailouts and the belief that more bailouts might be forthcoming) have caused or at least aggravated the problem? In other words, government involvement helped to create the bad incentives that got us here. If financial dealers had known that the market would operate in a truly free fashion, they would never have made the decisions they did.

2. If greed played a role in the creation of the crisis, which most people of every political persuasion seem willing to grant, then what is regulation to do about it? Financial whizzes are notoriously good at circumventing government regulation. If this kind of “capitalism” needs to be curbed, moral sensibility is going to make more progress than regulatory manipulation. I’m not saying that greed can ever be eliminated, just that we need to be realistic about the prospects of success for regulation, which is fraught with unintended consequences, makes life more difficult for conscientious law-abiders, and creates a drag on the economy (the last thing we need at the moment). As Sam Gregg aptly put it at the conclusion of his Acton Commentary this week: “Could there be a better demonstration that there can be no markets without morality?”