October 3, 2008
We make men without chests and expect of them virtue and enterprise. We laugh at honor and are shocked to find traitors in our midst. We castrate and bid the geldings to be fruitful. — C.S. Lewis
At long last, the chickens have come home to roost. And what a mess they're making.
From Wall Street to Main Street you can hear wailing and gnashing of teeth as investors—big and small—review the balances in their stock portfolios and 401(k) plans.
Corporations are failing, the government is bailing, and white-knuckled investors are holding their breath wondering when and where the market will find its bottom. Foreclosures are up, and employment is down. Workers are being laid off even as retirees are looking for jobs.
Once proud corporate chieftains—long time advocates of free markets—stand with hat in hand asking the government to bail them out. Politicians are paralyzed with fear, and the public is mad as hell.
The bloom is off the rose. Irrational exuberance is a faded memory. Bears rule.
Perhaps you think the problems causing the market meltdown are economic and financial in nature. If so, think again. Such problems are mere symptoms of the malady. The root causes are moral and ethical in nature.
For decades, secularists in America scoffed at religion and her offspring, morality and ethics. They removed religion from the realm of "truth" and reduced it to mere "opinion." Truth was limited to that which could be objectified, quantified, and verified. Since that could not be accomplished with religion (at least on this side of eternity), "religious truth" was deemed an oxymoron. Absolutes were out, relativism was in. Morals became "relative" and ethics became "situational." Virtue was rejected as an antiquated notion. Results were all that mattered.
These ideas began to permeate society, including Wall Street. And since ideas have consequences, they began to influence the way business was conducted on the Street.
Unconstrained by morality or ethics, the marketplace became a veritable free for all—especially the housing market. The ends justified the means. Greed was good. Transparency became obsolete. Honesty was out of fashion. Deception was acceptable. The doctrine of caveat emptor was elevated to a new level. Mortgage brokers and underwriters gained large commissions by approving high-risk loans and passing the risk down the line. Investment banks packed high-risk mortgages into attractive packages and sold them off as "securities" to unsuspecting investors.
Politicians aided and abetted the new business model. Under the guise of deregulation, the market was left to the devices of the men behind the curtain. The payment of millions in campaign contributions aided their efforts. Not content with reduced accountability to government regulators, Big Business sought to immunize itself from accountability to shareholders and consumers as well. "Tort reform" became the mantra. Demonization of trial lawyers became the means. Affirmative action for wrongdoers became the method. The words "corporate welfare" took on a whole new meaning.
But greed and deception were not confined to Wall Street. They also infected Main Street. A new consumerism reined. Consumers and speculators thought they deserved more house than they could afford, and they were willing to lie about their creditworthiness on loan applications. After all, why defer gratification when you can have it now? It has been estimated that as many as 70% of defaulted mortgages contain "some kind of misrepresentation by the borrower, lender or broker, or some combination of the three." The FBI recently reported that "suspicious mortgage activity increased tenfold from 2001 through 2007, and rose another 42 percent in the first quarter of 2008." But why worry about the ability to repay? The government—thanks to the work of high powered business lobbyists—had implicitly guaranteed the risk of loss. That guarantee has now become explicit—thanks, once again, to the work of high-powered lobbyists.
Fearful of the collapse of the entire economy, gurus within the government (who, not coincidentally, hail from Wall Street) are now urging lawmakers to step in and interrupt the natural consequences of these corrupt business practices. They argue that many of the perpetrators are simply "too big to fail" and that innocent parties will suffer from the ripple effect of the failure of these giants. Former advocates for free market forces now want to suspend those forces because they deem the price to be too high.
Only time will tell what the outcome of this whole debacle will be. But in the meantime, there are some valuable lessons that we should learn:
- Virtue may be its own reward, but there are other rewards that flow from it as well. Virtue in the marketplace should be encouraged and applauded, not mocked and ridiculed.
- Honesty, accountability, and transparency are essential to the survival of free markets. Unless those virtues undergird the markets, they will collapse under the weight of greed, avarice, and deceit.
- Men are not angels (as James Madison rightly observed). Therefore, government has an obligation to ensure honesty, transparency, and accountability in the marketplace. Reasonable regulations in pursuit of such virtues should be welcomed by reasonable people from all quarters of the market.
- Material misrepresentations about one's products or services or financial condition constitute fraud and should not be tolerated. Perpetrators of fraud should be prosecuted by government.
- Victims of fraud and deceit should be permitted to pursue remedies aimed at recovering the full measure of their damages along with other remedies designed to punish wrongdoers and to deter a repetition of such misconduct in the future. Even at its best, government is inadequate to protect consumers and investors. Innocent victims should always be afforded a remedy for their loss.
In the aftermath of the market meltdown, morality and ethics may well make a comeback. Hopefully, people will soon come to realize that virtue is never out of fashion. If they don't, we will undoubtedly have more rocky times ahead.
The financial world needs to return to honesty, transparency, and accountability in its dealings. Unrestrained greed, ambition, and immediate gratification will only lead to more crises like the current sub-prime mess. Our government must live up to its responsibility to hold criminals accountable for their crimes, and we need to relearn the responsible thrift of our forebears who learned this same lesson after the Great Depression. That calamity taught them the importance of saving and the danger of living on credit. If we do not learn that same lesson now, we will learn it the hard way in the future.
Ken Connor is a lawyer and co-author of "Sinful Silence: When Christians Neglect Their Civic Duty" He is also Chairman of the Center for a Just Society. For more articles and resources from Mr. Connor and the Center for a Just Society, go to www.centerforajustsociety.org