The Wall Street Crisis

After more than a year of nasty gurgling and stomach churning over sub-prime mortgages, the financial markets have recently shown themselves to be very, very sick. Normally sober folks with no investment in the media shock-a-day culture of endless hype have expressed frank worries. The current Wall Street turmoil could easily convulse the national economy¯and therefore the world economy as well. Not a news story goes by now without dark allusions to the Great Depression.

Nobody goes to a theology professor for economic analysis, so I won’t pretend to have expertise that I don’t have. But our collective anxiety and anger and soul-searching over the unfolding financial crisis tend to bring to the surface some interesting reactions. And like the trashy securities currently dragging down once proud Wall Street firms, what comes up is not pleasant to contemplate. Money has a way of encouraging self-serving moral judgments.

The first thing to notice is a general denunciation of Wall Street greed as the culprit. In a very basic but trivial sense, this must be true. The fact of the matter is that all economic systems get their dynamism and energy from a basic human desire to get ahead. This is not a new insight. As we read in the Bible, “All toil and skillful work come from a man’s envy of his neighbor” (Ecclus. 4:4). Something like greed is always part of any deep explanation of economic news, whether good or bad.

But that’s not what folks mean when they denounce Wall Street greed. Instead, they are suggesting a juxtaposition. Main Street, they imply, is somehow modestly and virtuously self-interested, while Wall Street is a place of arrogance that guides an insatiable, perverse desire for money. In other words, it’s not people like me who are responsible for the mess. It’s all the fault of moral monsters who feed on innocent lambs.

This reaction is both implausible and self-serving. By my reckoning, one finds plenty of blind greed on Main Street. What could possibly motivate a person to buy a lottery ticket other than a greedy desire for a payoff that any rational calculation would show laughably unlikely? Who doesn’t know someone who bragged on and on about how much his or her house was worth during the recent go-go years of the housing bubble? Yes, children, there is great deal of panting after profits in Anywhere, USA.

And not just greed, but also stupidity. Anyone who bought a house in the last two years was as stupid as the Bear Stearns traders who bought and held securities backed by sub-prime mortgages, which means very stupid. Buy a house in Florida for $600,000 with 5 percent down in 2006, and you’re pretty much in the same sinking boat. What could have possibly motivated such a stupid purchase? Are rentals unavailable? Did you really believe that house prices would continue to go up at two and three times the rate of increase of family incomes?

We don’t need a degree in psychology in order to know why people bought houses at the peak of the market. The dollar signs clouded vision. The go-go hype from the real estate agents and media and friends who made tons of money buying and selling houses was overwhelming. Anyway, you gotta live somewhere, and the government lets you deduct the interest payments. Banks were intensely eager to give you the money. “And what the heck,” we tell ourselves, “it can’t ever really go down too much, because there are too many home owners like me for the government to let it all go to hell.”

Substitute mortgage-backed securities for houses, and we have a pretty clear picture of the Wall Street crisis. It’s not the case that financial barons are uniquely wicked. No, they mirror us all rather well: blinded by the prospect of quick profits, victims of a herd mentality, and prone to making stupid decisions. The partners at Bear Stearns were not taking advantage of poor ol’ Main Street. On the contrary, they had their own capital in mortgage-back securities, and they were wiped out when reality caught up with the very same housing-bubble fantasies that infected Anywhere, USA.

It’s tempting to cheer when the big-money guys fall. I’ve certainly felt the urge in recent months. But then I check myself. I have a retirement account. I own a house. I need to borrow money to pay my daughter’s college tuition. If too many fall, then the system falls, and our little pieces of the American economy become immobile and illiquid¯and, because they are immobile and illiquid, they are immediately prone to radical devaluations in order to find fire-sale buyers. It was precisely to forestall this “if” that led Henry Paulson to ask Congress for a huge sum of money to bail out Wall Street.

Bail out! I’ve heard many friends express anger: “Why should the taxpayers be stuck with the bill for all those bad investment decisions made by the big financial institutions? Uncle Sam didn’t offer to pay my mortgage when times were tough. It’s not fair. Why should the people who are not responsible for this mess¯and who did not profit from its frothy sub-prime prelude¯have to step in with their tax money in order to pay for the clean-up.”

We need to look closely at this reaction, because it’s as tempting as it is wrong-headed.

The first thing to notice is that taxpayers end up paying for a great deal that is not their responsibility. For example, taxes now pay for a very expensive war in Iraq, and we do so because our leaders think us safer as a result, not because any American is responsible for the problem the war is meant to solve. The same holds for the massive federal bailout now being planned. Its moral justification is simple and eminently defensible: to secure the overall economic wellbeing of our society.

The second thing to notice is that it is largely false that taxpayers have not profited from the sub-prime craziness that has matured into a crisis. The vast majority of Americans own their homes, and all of us have seen our values go up as a result of precisely the lax lending standards that stoked the market. Those in California or Connecticut who sold their houses in the last couple of years have hundreds of thousands of dollars in windfall profits that are precisely due to the problems now afflicting Wall Street. Indeed, everybody who received dividends from real estate funds or high-yielding bond accounts juiced with mortgage-backed securities has reaped profits.

There’s more. Almost 100 percent of income tax is paid by the top earning 50 percent of the American population. These are the folks most likely to buy stocks, have 401k and IRA accounts, and own other sorts of financial assets in addition to their houses. The housing bubble and the financial shenanigans associated with financing real estate was the single most important support for financial markets after the technology bubble burst in 2000. In other words, the net worth of all Americans who have stock and bond-based assets was supported by exactly the economic dynamics that have produced the mess that we¯statistically the very same people¯are now going to pay to unwind in what I hope is an orderly fashion. My friends, most of us did profit from the sub-prime debacle.

Henry Paulson’s $700 billion plan may be poorly conceived. The plan may be corruptly executed. It’s very hard to see how any government-run bailout can avoid the sort of cronyism and log-rolling and set-asides that characterize government expenditures in general. Think bridge-to-nowhere on steroids. And who knows, it may not work.

So, when it comes to the details, there is and will be plenty to criticize. We need to pay very close attention. The Paulson plan, no matter what its final form, will be huge. And because it’s huge, it will be fatefully consequential for our future economic and political system. We need to get this right, or at least as right as possible. That’s all the more reason to focus on the details rather than grandstanding about Wall Street greed and bellyaching about the supposed unfairness of a government bailout.

R.R. Reno is features editor of First Things and associate professor of theology at Creighton University.