The moral challenge of the economic crisis

My colleague Mark Mitchell, a government professor at Patrick Henry College and currently a visiting scholar at Princeton, has written a penetrating and morally challenging essay on the economic crisis and the bailout. Read it at the website of the Center for a Just Society. It’s entitled “Ten Questions and a Modest Proposal.” Here are the ten questions. Follow the link for the modest proposal:

1. Is it a fundamental problem when a corporation becomes so big that its failure threatens to bring down the national economy? Could it be that scale matters? Can institutions become so large that their potential harm outweighs their actual (or occasional) good? If yes, then are there measures that could help ensure that economic power is decentralized and therefore less dangerous?

2. The bailout was ostensibly necessary to protect our “American way of life.” That such a reason was offered without justification indicates that our way of life is an axiom that must be assumed but never questioned. But is it too much to consider, if only for a moment, that perhaps our way of life is precisely the problem? Of course, a way of life is a complex thing, but insofar as the “American way of life” consists in living beyond our means, it is unsustainable. To the extent that consumer credit is at an all-time high and personal savings is at an all-time low, the “American way of life” is irresponsible.

3. Public debt mirrors private debt. Both publicly and privately, we have become a nation that demands immediate gratification. Is such a national disposition healthy? Psychologists tell us that adults are capable of delaying their gratification. If so, then publicly and privately we are, according to this measurement, behaving like a nation of children.

4. The best part of the American tradition is characterized by a can-do attitude and a willingness to face the consequences of our decisions. Consider, then, the fact that in many states home loans are, by law, non-recourse. This means that if a borrower cannot afford to make the payment, he can simply walk away from the deal. The property returns to the lender, and its value may or may not cover the outstanding debt. In essence, the bank runs the risk and the borrower runs away. If such laws were eliminated, borrowers would take care not to borrow more than they can afford. Does the fact that it is legal to walk away from a home mortgage make doing so morally right? Is a system based on no-risk credit and legal irresponsibility fundamentally flawed?

5. In our private lives, we expect that our “standard of living” will be higher than that of our parents, and our children will enjoy a higher standard than us. But is that expectation warranted? Do we need a higher standard of living than our parents? Exactly how high is high enough? When will we be able to say “my standard of living is just fine”? When a society finds itself animated by a fundamental desire for more stuff, the analogy to the nursery is hard to miss.

6. We are told that the catalyst for the current economic troubles is the housing market. Consider the following: in the 1950′s the average house had one bathroom and was something under one-thousand square feet. Today, the market standard is one bathroom for every bedroom and the average square footage has more than doubled. Ironically, the size of families declined precipitously during those same decades so that the average square footage per person has risen dramatically. How big is big enough? Would the current crisis be as acute if the houses we bought were more modest?

7. For years, Republicans championed tax reduction while Democrats emphasized government programs. Both sides won the debate. Today, the presidential candidates from both parties argue about whose plan will reduce taxes the most. At the same time, both candidates promise far more government programs than they can afford. The American people want both lower taxes and increased government spending. We want it all now and we want to defer the payment until later (preferably after we are safely dead). How’s that for family values?

8. Many of us have parents or grandparents who lived through the great depression (and a few among us remember it). My grandmother raised a family during those lean years and the frugal habits she acquired by necessity stayed with her the rest of her life. She saved and mended and lived well within her means. She was grateful to have a margin between her income and her expenses and thought it was wise to live modestly. What would our grandmothers say to us now as we struggle to maintain our “American way of life”?

9. 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?

10. In Greek drama hubris plays a key role. This is the fatal pride that brings down even the greatest of men. Is hubris at the heart of this crisis? Hubris is the failure to acknowledge limits. It is the failure to live within the bounds proper to human beings. Ultimately, it is a failure of virtue. When we delay payments rather than our gratification, we reveal our ill-formed character. When our demands for more things are limited only by our insatiable imaginations, vice is running the show. When our leaders tell us that they can solve any crisis if only we grant them more power, hubris has taken center stage.

Nationalizing the banks

The Treasury department is spending $250 billion to buy stock in nine of our largest banks, thus giving them capital to lend. From The Washington Post:

The U.S. government is dramatically escalating its response to the financial crisis by planning to invest $250 billion in the country’s banks, forcing nine of the largest to accept a Treasury stake in what amounts to a partial nationalization. . . .

In pressing the bank executives to accept partial government ownership, Paulson’s message was clear: Though officially the program was voluntary, the banks had little choice in the matter. In exchange for giving the Treasury minority stakes, the nine firms would jointly receive an investment worth $125 billion. The government would make another $125 billion available for the next 30 days to thousands of other banks and thrifts across the country.

From BusinessWeek:

The substantial sums involved make clear that Uncle Sam could be on the way to owning a vast chunk of the U.S. banking sector. A government investment of $250 billion amounts to perhaps 25% to 30% of the market capitalization for publicly traded banks, says Rajiv Sobti, chief investment officer at Nomura Global Alpha, a unit of Nomura Asset Management USA. Hundreds of banks could eventually receive such equity funding.

Yesterday the stock market soared 936 points, as all of this bailing out started to encourage investors. If all of this bailing out “works” to improve the economy, would that justify the new statist/corporatist policies? Does pragmatism trump every other principle, and so is pragmatism our only ideology?

Another question: We have been having some fierce political discussion on this blog. On the posts about the economy, however, we have had very few comments praising the Bush/Congress bailout scheme. Both Republicans and Democrats, conservatives and liberals, seem to dislike it, even as our elected officials and our presidential candidates–Republicans and Democrats, conservatives and liberals–voted for it. I have posted my worries about whether Barack Obama is a socialist, but I am even more worried to see that the current Republican administration really IS socialist (nationalizing banks?). So, how about it, liberals and conservatives on this blog. Is this something we can agree on, though perhaps for different reasons (e.g., violating free enterprise economics vs. giving money to the fatcat corporations), opposing the Bush/Congress bailout? Is there anyone out there who can defend this on the basis of principle, rather than pragmatism?

If George Bailey had never lived. . .

. . .we wouldn’t be having this financial meltdown! Washington Post columnist Ross Douthat puts the blames our current financial meltdown on George Bailey, of Frank Capra’s masterpiece It’s a Wonderful Life:

Jimmy Stewart’s George Bailey was actually a pretty savvy businessman. And it’s even easier to forget the precise nature of his business: putting the downscale families of Bedford Falls into homes they couldn’t quite afford to buy.

This is the substance of the great war between Bailey and Lionel Barrymore’s Mr. Potter, the richest, meanest man in Bedford Falls. Potter is against easy credit and the suburban dream, against the rabble moving out of his tenements and buying homes, while the Bailey Building and Loan exists to make suburbia possible.

The Bailey vision is economic and moral all at once. In a mid-movie peroration, the hero lectures Potter and a gaggle of local entrepreneurs on the virtues of democratizing homeownership: “You’re all businessmen here,” he presses them, sounding for all the world like a politician defending Fannie Mae and Freddie Mac against their critics in 2004 or so. “Doesn’t it make them better citizens? Doesn’t it make them better customers? . . . What’d you say a minute ago? They had to wait and save their money before they even ought to think of a decent home. Wait? . . . Do you know how long it takes a working man to save five thousand dollars?”

In the movie, George Bailey has God on his side, but a real-life Bailey would have had Uncle Sam. “It’s a Wonderful Life” debuted in 1946, more than a decade after Franklin D. Roosevelt’s National Housing Act kicked off a half-century of federal policymaking aimed at making it dramatically easier for working-class Americans to buy and keep their homes.

It’s true that the same lenders people are condemning as “predatory” were praised not long ago for devising ways to allow lower-income people to buy their own homes. Douthat does say that George Bailey’s goal was an admirable one and worth making possible, but still, such well-intentioned schemes helped bring down the economy.

Looking to the communists to save capitalism

One of the hopes for the global financial meltdown is that China can save capitalism.

More likely, though, is that we will become like China, adopting its model of letting people make money under a state-controlled economy. In other words, letting people have wealth without freedom. I suspect that most Americans would be OK with that tradeoff.

Don’t just blame deregulation

Sebastian Mallaby, writing in “The Washington Post,” argues that, contrary to much of the rhetoric, deregulation was not to blame for the financial meltdown. Excerpt:

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways, these players were all peddling financial snake oil, but as Columbia University’s Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn’t been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part — though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

If that doesn’t convince you that deregulation is the wrong scapegoat, consider this: The appetite for toxic mortgages was fueled by Fannie Mae and Freddie Mac, the super-regulated housing finance companies. Calomiris calculates that Fannie and Freddie bought more than a third of the $3 trillion in junk mortgages created during the bubble and that they did so because heavy government oversight obliged them to push money toward marginal home purchasers. There’s a vigorous argument about whether Calomiris’s number is too high. But everyone concedes that Fannie and Freddie poured fuel on the fire to the tune of hundreds of billions of dollars.

So blaming deregulation for the financial mess is misguided. But it is dangerous, too, because one of the big challenges for the next president will be to defend markets against the inevitable backlash that follows this crisis.

History restarts, as American brand fails

I enjoy reading scholars defending their theories after they have been proven wrong. In 1989, Francis Fukuyama wrote a provocative essay entitled “The End of History.” Written at a time when communism was collapsing, Fukuyama argued that democracy and free market economics have won. There are no alternatives. That means that the conflicts that have defined history are over. We will now live happily ever after.

In this column, Fukuyama (who is a real scholar with a conservative bent) revisits his thesis in light of the new Russian aggression, the persistance of anti-democratic rule in places like China, and the new host of international conflicts. He insists that his point is still valid in that there are no IDEOLOGICAL competitors to democracy and capitalism.

He does mention Islam and nationalism, but I think he underestimates the former as an all-encompassing totalitarian ideology. And I think he misses what China may be creating: A synthesis of totalitarianism and capitalism that may well crystalize into a new ideology. (It will be similar to National Socialism, which we have seen before.)

But in his latest column, Fukuyama goes further and perhaps changes his tune. Writing after the meltdown and the bailout in the financial market, he says that the “American brand” is damaged. The financial crisis has made American-style capitalism look bad. And American-style democracy has taken a hit because of the way it is being used to justify the war in Iraq. As an alternative, he says, nations around the world might consider the “Russian model” or the “Chinese model.”