Economics & Finance
August Thu 12, 2010
The financial crisis that brought world markets to their knees in recent years can be traced to the bursting of the American housing bubble. But does the buck stop with finance?
Especially in a world of free markets, anthropology and economy are inseparable. 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?
Most importantly, given this interrelation, is it possible to solve our financial problems without getting to the bottom of our cultural ones?
To answer these pressing questions, ilsussidiario.net spoke with Rev. Robert A. Sirico, President and founder of the Acton Institute for the Study of Religion and Liberty. Rev. Sirico founded the Institute to address the lack of education religious studies students receive in fundamental economic principles, which, he feared, left them poorly equipped to grapple with today’s social problems.
Rev. Sirico has provided an authoritative voice on economics, civil rights, and religion for many news outlets, among them the New York Times, Forbes, the London Times, the BBC, and CNN. In speaking with us he shed light on the intersection of culture and markets, where the two went off the rails in the current crisis, and where we need to focus repairs in order to get the ball rolling again.
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.
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