The Economic Crisis

Social Justice and the Marianist Family In Light of Current Economic Problems

Victor M. Forlani, SM – October 2004

 

Situation / Symptoms / Causes

          We in the USA have been living beyond our means as shown by our double-digit deficits which some commentators are labeling “Leverage Lunacy.”  We are consuming more than we are producing and then charging it, resulting in debts to foreign countries, their firms, and to our growing national debt.

 

          Democracy is taking a back seat to special interests as evidenced by the power of lobbyists and the influence of large campaign contributors.  Too often, those who have economic power expect support of their particular agendas in return for their donations and delivering their constituencies. The general welfare is not their priority.

 

          Our society’s values (consumerism, power, fame) are partly to blame for this ongoing buying binge as they affect our expected lifestyles. Outsized executive pay is also evidence of such values.

 

          Advertising plus media attention to celebrities foster the drive to keep growing, accumulate more, get richer and entice consumers to purchase more than they can afford.   This has led to over-extension of credit and predatory lending which impacts the working poor in particular.  Diminution of health care coverage also hurts the poor more than others.

 

          Home mortgages for families who cannot afford the payments have led to high rates of foreclosure.  Increased home buying, second homes, and expensive home refurbishing led to a serious run up in house prices. The sense that house values would just keep going up led to relaxed loan requirements and ultimately the precipitous fall in housing prices we have just seen. 

 

          Banks treated these suspicious loans as assets and sold them to Freddie Mac and Fannie Mae and other secondary mortgage holders.  When housing tanked, so did all these investment instruments.  Many economists would say that derivatives and swaps were ways of avoiding a reckoning.  Our financial institutions used them to trade transparency for opacity and complexity. They were hoping the crisis would pass before the frailty of these financing ploys became evident.  We were allowing lenders to avoid risk by selling loans as assets.  Seemingly there were no consequences for their actions. As the tenuousness of our financial markets became evident we lost confidence in these banks, insurers and brokers. Bankruptcies and buyouts with very large losses ensued. 

         

Ruminations

          The situation has been exacerbated by the ranting of the Right and Left in the media without much attempt to dialogue or seek constructive solutions.

 

          A set of attitudes, beliefs and values were underlying these trends.  First, we had no sense of limits, which results in creation of speculative bubbles, which over-value assets and eventually burst.  Such bull markets are powered by greed and overly optimistic economic assumptions.  But it is important to realize that greed and fear are endemic to the human condition and not unique to capitalism. Proponents of all systems must be on guard against these weaknesses.

         

          We have very little sense of the common good and our obligation to it until we’re in a crisis.  The Chicago School of Economics dominates our securities market. Its almost exclusive focus on profit has led to a lack of corporate missions to inspire employees with a vision of the common good.  Moreover, there is a lack of executive commitment to the firm and its stakeholders because of focus on job and pay security and attendant fame and notoriety.  These factors have led to a failure to assess impact of corporate actions on all stakeholders in the intermediate and long term.

         

          The Chicago School of Economics eschews involvement by government, stating the market irons out inequities in the long run.  Adherents pay little heed to the safety net created as result of the 1930’s depression, i.e., Social Security, FDIC, Unemployment Insurance, National Labor Relations Act, the Securities and Exchange Commission, and public works.   These economists have recently changed their tune, however, now that society sees more clearly the need for government regulation and the importance of the general welfare to everyone’s agenda. 

         

          Times such as these remind us that the business cycle has not been cancelled; the stock market is not the same as the economy; and that we have created false wealth based on manipulations of finance rather than by creating useful and beneficial goods and services.

 

          What about remedies?  No single, simple silver bullet will solve this.  Our current plight requires a multi-faceted approach wherein all stakeholders must collaborate, contribute, and live within their means.  Working with other players, each must determine what their unique capabilities are and be ready to collaborate with others whose capabilities are also unique but different from ours.

 

          Realize that the best government is not one that governs least – that would be one that does not exist leaving no one accountable for the general welfare.  Rather, we must see that government is capable of good and evil, of competence and ineptitude.  It needs to be wise, not non-existent.

 

Some Specifics

·        Selective Regulation: Extend appropriate bank regulations to the shadow banking system.  Realize that freedom is not the same as deregulation.  A healthy focus is free to, not free from.

·        Require the banking system to build up equity capital during expansion times thus avoiding large write offs and bankruptcies.

·        Target fiscal stimulus programs, not tax cuts, to rebuild our physical infrastructure.  Tax savings tend to be saved and not spent.  Better to hire people to repair bridges, roads, and other needs, thus increasing employment and attending to important needs.

·        Replace our “socialism for the rich” in which executives are given outsized compensation and departure packages and the upper upper classes benefit most from tax breaks.

·        Do not allow financial corporations like Freddie Mac and Fannie Mae to become too big to fail.  Spread the risk by capping growth and founding others.

 

To Readers with a Social Conscience

Consider this picture against the values embedded in Catholic Social Teaching (CST).  Which of these principles of CST are adhered to and which not and how?

 

1.     The economy exists for the person, not the person for the economy.

2.     All economic life should be shaped by moral principles. Economic choices and institutions must be judged by how they protect or undermine the life and dignity of the human person, support the family, and serve the common good.

3.     A fundamental moral measure of any economy is how the poor and vulnerable are faring.

4.     All people have the right to life and to secure the basic necessities of life (e.g., food, clothing, shelter, education, health care, safe environment, economic security).

5.     All people have the right to economic initiative, to productive work, to just wages and benefits, to decent working conditions, as well as to organize and join unions and other associations.

6.     All people, to the extent they are able, have a corresponding duty to work, a responsibility to provide for the needs of their families, and an obligation to contribute to the broader society.

7.     In economic life, free markets have both clear advantages and limits; government has essential responsibilities and limitations; voluntary groups have irreplaceable roles, but cannot substitute for the proper working of the market and the just policies of the state.

8.     Society has a moral obligation, including governmental action where necessary, to assure opportunity, meet basic human needs, and pursue justice in economic life.

9.     Workers, owners, managers, stockholders, and consumers are moral agents in economic life. By our choices, initiative, creativity, and investment, we enhance or diminish economic opportunity, community life, and social justice.  There is no wall between these two facets of our involvement.

10. The global economy has moral dimensions and human consequences. Decisions on investment, trade, aid, and development should protect human life and promote human rights, especially for those most in need wherever they might live on this globe.