"Causes of the Credit Crisis - A Lesson for Today"

Sydney M. Williams

Thought of the Day

“Causes of the Credit Crisis – A Lesson for Today”

August 22, 2011

Gretchen Morgenson concludes her column, “Finger-Pointing in the Fog,” in yesterday’s New York Times, “…we still don’t know the whole story of this mess, even four years after it erupted…” There is, as she also writes, “plenty of blame to go around.”

Congress initiated inquiries, perhaps with the intent to understand the causes, but the effect has been more political than informative – the humiliation of high-profile bankers on national TV plays well to the home crowd and helps secure the next re-election. The press has been equally active and vigilant, and has uncovered some gems, as Ms. Morgenson did on Sunday. She writes of five Wisconsin school boards (who were shy $400 million in promised but unfunded entitlements) that lost $200 million in an investment in 2006. To me, the most amazing part of the story was that the money invested had been borrowed. Ms. Morgenson does not elaborate on that aspect of the story, but why would a school system whose budget is based on tax revenues borrow $200 million for an investment in any deal? One can understand borrowing money for operating expenses or capital expenditures, but to borrow to make a speculative investment?

It is the answer to that question that, in my opinion, leads to the root of the cause of the credit collapse – a problem that persists to this day – a loss of a moral sense. I don’t mean a moral sense in a religious context. I mean society’s moral compass appears to no longer provide any sensible frame of reference. It speaks to the moral hazard that concerned so many when banks (and bankers) were bailed out in 2008 – banks and bankers who were rewarded for being right, yet not punished when wrong.

As our country grew in wealth, it recognized an obligation to the elderly, the sick and the destitute. That concern arose to the forefront in the depths of the Great Depression; thus was born Social Security, insurance for depositors and protection for investors via the S.E.C. Over the next few decades government expanded its mandate until today it intrudes overly aggressively into our daily lives. The consequences have been a decrease in personal responsibility, an increase in dependency and a rise in moral turpitude.

While there is no question that dishonest and greedy bankers and mortgage brokers took advantage of consumers and others (like Wisconsin school boards) to assume obligations common sense would normally deny, the conditions that permitted such activity had been years in the making. The fault lies with families, schools and, perhaps most importantly, with government, which set the tone. The consequence has been the inability to differentiate between right and wrong – the lack of a moral certainty that transcends religion and politics.

Entitlements, as mentioned above, are a natural outgrowth of a wealthy nation, but, in extremis, they serve to make people too reliant on the perceived hand of benevolent government. And, as we are now learning, when those entitlements are based on false accounting, their modification or removal can be harsh and unsettling.

Government has been adamant in pushing the concept of fairness, which can result in people believing something is their due without earning it. When government deems it has a responsibility to protect people from themselves, they cross an invisible barrier. The effect on people is not unlike that felt by Jabez Stone, in The Devil and Daniel Webster, who, because of years of bad luck, sold his soul to the devil. Unlike Jabez, we don’t have a Daniel Webster to defend us against Mr. Scratch. In Walden, Henry David Thoreau wrote, “If I knew for certainty that a man was coming to my house with the conscious design of doing good, I would run for my life.” The greatest gift our Constitution provides is the gift of individual freedom. That includes the freedom to succeed or fail. We are an amalgam of people with different abilities, aspirations and work ethics. Outcomes will never be equal.

In the years following World War II, Western Europe and Japan adopted a form of social democracy. It has much to recommend it; it places a great emphasis on personal comfort and well-being. But it serves to protect people against themselves and it hinders initiative and reduces competitiveness. As we look to the future, it is not Europe that will be our competitor. It will be China, India, Brazil and Indonesia – countries that are today in the formative stages of capitalism, whose youths are becoming educated, who are ambitious and willing to work long hours, attributes that their society prizes and rewards. And characteristics we once did as well.

We can spend years delving into and debating the causes of the credit collapse that devastated our financial markets three years ago, but until we address the cultural and moral aspects of our lives that gave birth to those conditions, we will remain within their clutches. Government must foster an atmosphere conducive for resilient, innovative risk takers willing to commit time, labor and money. Let failure be punished and success rewarded. It has not only been Mr. Buffett who has been coddled, it has been most of us who have become overly reliant on a friendly government. With the recent emergence of so many fledgling capitalist countries – with their people eager to learn, willing to work hard and anxious for success – are we willing to compete?

The lead editorial in today’s New York Times, which calls for further measures to curb home foreclosures, is exactly wrong – both in terms of fixing the problem and addressing its cause. To keep homes off the market only defers the inevitable, but more importantly, in terms of addressing the cause, it rewards borrowers who overextended and sends the wrong message to future miscreants. Further, it punishes those who saved, and/or who lived within their means. In the same manner, the printing of money and the extending of quantitative easing rewards the profligate and punishes the thrifty.

As to what were the true causes of the credit collapse during which unscrupulous bankers, operating under legislation approved by Congress encouraged borrowers to take on debt they could not afford? Pogo had the answer when he said: “We have met the enemy and he is us.” The lesson of increasing dependency and decreasing personal responsibility appears to have been lost on this President. Until that message changes the moral lassitude that helped create the problem will remain in place.