The Economic Crisis: Roots and Remedy
by Fr. Roger Landry - December 12, 2008
There has been much written about the present economic mess of our country, but most of it has been a superficial analysis of the immediate causes rather than a penetrating examination of its deeper sources. For that reason, the various solutions being hastily implemented focus mainly on redressing symptoms of the crisis rather than the underlying issues, which leaves us all in danger that, rather than rectifying the real problems, they will compound them.
As Archbishop Celestino Migliore, the Permanent Observer of the Holy See to the United Nations, said at a U.N. sponsored meeting on development last week in Qatar, "At its root, the financial crisis is not a failure of human ingenuity, rather of moral conduct." Recent failures are not a result of a defective system — the free, market-based economy — but of irresponsible stewardship of those who comprise that system. Those on Wall Street, Main Street and both sides of Pennsylvania Avenue all share the blame, though some more than others. Unless we address these deeper moral issues at the root of the crisis, the crisis will not be remedied. This moral scrutiny is something that the relativists who overpopulate the academy and the media, the utilitarians who dominate the higher echelons of our financial sector, and the megalomaniacs who disproportionately comprise our ruling class are personally and philosophically unlikely to do on their own.
The imprudent moral decisions of a great many people have led to our present economic situation. It's easy to begin with the softest target, the financial sector. Many of the stewards of our financial system used their positions to make astronomical personal profits while leaving their shareholders, and society as a whole, with the bill. During the last five years, the five largest firms on Wall Street paid more than $3 billion to their top executives as a reward for supposed earnings; half a decade later, however, two of those five giants have gone out of business and the other three are no longer stand-alone investment firms. Some overleveraged themselves at ratios of 30-to-1, willingly selling securities they knew were based on failing subprime mortgages to investors eager to turn a quick profit. Such practices are not technically against the law, but they are clearly unethical. At the street level, lenders routinely sold loans to customers whom they either knew could not repay them or for whom they did not do even rudimentary checks to verify they could pay; they knew that these bad loans would soon be sold off to some other bank who would be left to suffer the consequences. The record level of defaults show how widespread this dereliction of responsibility was.
But the subprime mortgage implosion did not begin in Manhattan but in Washington. Capitol Hill legislators, seeking the worthy goal of increased home ownership, passed legislation that made it much easier for those with little or no means to be able to afford a home to get a federally-backed mortgage. They forgot that the American dream is achieved by hard work, stable familial structures, and savings, not by foolhardy social engineering, however well-intended. Jesus once used the image of a house built on sand and Fannie Mae and Freddie Mac are modern illustrations of it. The government is also responsible for a ridiculously loose monetary policy as well as for generally lax enforcement of complex financial fraud, which made it possible for greedy masters of the universe to use inventive accounting mechanisms to obscure their thievery. Perhaps most injurious of all, the government has set the standard for bad stewardship, by consistently sacrificing the future for the present, recklessly amassing trillions of dollars of debt and bequeathing the bill to younger generations.
A great deal of the blame for the economic troubles also rests with consumers. Since 2005, the personal savings rate has stayed around zero, the lowest rate since 1933 — coincidently in the midst of the Great Depression. Citizens have exhausted their savings and plunged themselves into debt in the pursuit of material goods — from homes, to cars, to big screen televisions — they could not afford. Home-owners mortgaged themselves unreservedly under the foolish assumption that housing prices would continue to soar. Others just kept transferring growing credit card balances from one bank to another before seeking bankruptcy protection. Like the financial institutions and government, they, too, were constructing houses on sand.
The appropriate response to these various instances of bad stewardship must go beyond a bailout. While a bailout might have been the only way to save our financial sector, and all that depends on it, from total collapse, it is a paradigm that if widely applied will only lead to a deeper economic problem. A bailout amounts, in large part, to welfare for companies with deeply flawed business plans, to investing in houses built on sand. It's not surprising that once the bailout precedent was set, we have seen various fiscally-irresponsible companies, industries and even state governments, rather than take responsibility and make the tough choices to save their entities, line up to beg for a piece of a $700 billion pie. To give non-essential, but politically influential entities a bailout after they've driven them to the point of bankruptcy, is to reward a lack of good stewardship, and would be in itself a lack of good stewardship by the federal government. Frédérick Bastiat, the 19th century French political economist, once said that many have the false impression that they can live at everyone else's expense, without recalling that sooner or later the pocket in front of them will be empty as well. Money does not grow on trees. It is unjust and immoral, as a matter of principle, to take money from those who have behaved responsibly and give it to those who have behaved recklessly, whether the creditor be those with savings today or those who hope to have savings in future generations.
To recover, we must make sure that our free-market economic system is built on rock. This means, first, that it must be tied to subjective and objective responsibility. At the subjective dimension, the system requires virtuous agents who are follow the golden rule and are thrifty, prudent, honest and temperate. Objectively, those who fail must be allowed to suffer the consequences of their failure. In the free market system, good models succeed and bad models fail. To seek to insulate those who make colossal blunders from suffering the consequences of their actions is to undermine the system as a whole. That is why a governmental takeover of the various industries under the guise of preventing their collapse is injudicious. Such a system, which seeks to minimize risk, will also minimize gain.
The proper role of government, as sketched out in Pope John Paul II's 1991 encyclical Centesimus Annus, is to set up a proper juridical framework for the free and responsible exercise of the market, and to hold economic entities impartially accountable to those standards. It's not the free market system that is the cause of our present distress, but the manipulation of it by irresponsible stewards. Therefore the proper solution is not to try to fix the system by inefficient governmental intrusion but to create the conditions to form responsible stewards and hold them accountable — which sometimes means letting bad stewards fail.
At a cultural level, we also need to address the cancer of consumerism. Consumerism is not wrong because material things are evil — they're not; God created them good — but because it makes material things an idol to be worshipped and obtained at almost any expense. In its place, we must once again encourage and reward saving, not because we're trying to build personal grain bins against what Jesus says in the Gospel, but because we are trying to prepare for our children and grandchildren a better and secure life than we ourselves have now.
Father Roger J. Landry is pastor of St. Anthony of Padua in New Bedford, MA and Executive Editor of The Anchor, the weekly newspaper of the Diocese of Fall River.
