Posts tagged with: markets & morality

The Italian online daily 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

As part of its First Principles series in Political Thought, the Heritage Foundation has published The Moral Basis for Economic Liberty by the Rev. Robert A. Sirico, president and co-founder of the Acton Institute. You can read the paper online or download as a PDF.


Today, those who defend free markets and capitalism often do so solely on managerial or technical grounds, but economic liberty needs a moral defense as well. Defense of economic liberty without reference to morality will ultimately prove injurious to liberty itself. Rightly understood, capitalism is simply the name for the economic component of the natural order of liberty. It means expansive ownership of property, fair and equal rules for all, economic security through prosperity, strict adherence to the boundaries of ownership, opportunity for charity, wise resource use, creativity, growth, development, prosperity, abundance. Most of all, it means the economic application of the principle that every human person has dignity and should have that dignity respected.

And a key insight:

So long as economic liberty—and its requisite institutions of private property, free exchange, capital accumulation, and contract enforcement—is not backed by a generally held set of norms by which it can be defended, it cannot be sustained over the long term. Into the moral vacuum left by capitalism’s defenders rush notions hostile to economic liberty, notions drawn largely from the values and vocabularies of interventionism and socialism.

Further, if a principled defense of markets based on the sanctity of private property and the virtue of voluntarism is absent from public life, it is very likely that the moral center of the buying public has begun to slip as well. In any market, the kinds of goods and services producers provide reflect the values of the consuming public. What consumers are willing to purchase will determine what kinds of goods and services are most prominent in the market.

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…)

The family friendly Movieguide published my review of Michael Moore’s trashing of the market economy, “Capitalism: A Love Story.” Excerpt:

Perhaps the most egregious bit of manipulative effort Moore displays in his latest attempt, which by all reports has failed miserably at the box office, is his attempt to use religion, in particular the social teachings of the Catholic Church, to grant an imprimatur to his un-nuanced critique of the business economy.

Having come out of his Catholic closet (who knew Moore ever considered himself a serious Catholic?), he enlists Catholic priests (among them two bishops!) to lend credibility to an unequivocal denunciation of capitalism as intrinsically, irrevocably and wholly evil. The problem is, that one of the priests and one of the bishops have no standing in the Catholic Church. The one “bishop”, James Wilkowski, is neither a Roman Catholic bishop nor even a Roman Catholic, but rather a member of something called the “Evangelical Catholic Church.” The man identified as the priest who performed Mr. Moore’s marriage is not listed in the US Directory of Catholic priests.

The other two clerics are indeed priests, both being from the most left-wing extreme of the Catholic Church. They are certainly entitled to their opinions, but the opinions they offer in the film are far from representative of the official position of the Church.

Read “Socialist Lies Sink to a New Low” on MovieGuide.

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…)

How do we restore confidence in free markets? Formulate a robust explanation of their moral value. Read Economic Liberalism and its Discontents on Public Discourse.

In his recent book The Creation and Destruction of Value, Princeton University’s Harold James observes that the 2008 financial crisis resulted in more than the devastation of economic value. It also facilitated a collapse of values in the sense of people’s faith in particular ideas, institutions, and practices. Among these, few would question that economic Liberalism’s credibility was significantly undermined.

As time passes, more people may recognize that the financial crisis owed much to factors that had little to do with markets as such. As several scholars illustrated in the 2009 monograph Verdict on the Crash, the causes included regulations that encouraged irresponsible behavior by banks, imprudent central bank policies, not to mention outright collusion between politicians and government-sponsored enterprises such as Fannie Mae and Freddie Mac.

Unfortunately for promoters of free markets, knowledge of these facts will take time to counter the widespread perception that economic liberalism—manifested in financial liberalization, privatization, deregulation, and increased competition—contributed significantly to the 2008 crisis.

In the meantime, those committed to economic liberalism have a chance to rethink and reformulate the case for markets. Certainly the efficiency arguments for economic freedom will be revisited, refined, and rearticulated. But it’s also an opportunity for economic liberals to reexamine what is often a weakness in their position—the principled case for markets.