This week we witnessed a major transformation of the relationship between the state and free markets. Besides a month long frenzy of buy out/support of Freddie Mac and Fannie Mae, with a Bear Sterns bail out by the Feds, now we see one of the largest insurance companies — AIG — being underwritten by the Fed Government while others are allowed to fail.
For many years, the policy policy makers of the US have articulated an ideological perspective of a “state -free” intervention position (except for the Resolution Trust Co. of the early 1990s). This month, and notably this week, we see major governmental intervention to stabilize, and even now possibly manage, the financial markets. This weekend the US Government will debate the creation of a new regulatory framework and agency to maintain market stability with a $700 billion bail out of certain financial industries.
How can this intervention be justified by those in DC and on Wall Street who want State-free markets?
Does this recent action by the Feds find any relationship to Catholic social thought….especially any insights on how one’s faith is to be lived in the world?
In the Compendium of the Social Doctrine of the Church, the Vatican Pontifical Commisson on Justice and Peace, writes:
“352. The fundamental task of the State in economic matters is that of determining an appropriate juridical framework for regulating economic affairs, in order to safeguard “the prerequisites of a free economy, which presumes a certain equality between the parties, such that one party would not be so powerful as practically to reduce the other to subservience”. Economic activity, above all in a free market context, cannot be conducted in an institutional, juridical or political vacuum. “On the contrary, it presupposes sure guarantees of individual freedom and private property, as well as a stable currency and efficient public services”. To fulfil this task, the State must adopt suitable legislation but at the same time it must direct economic and social policies in such a way that it does not become abusively involved in the various market activities, the carrying out of which is and must remain free of authoritarian — or worse, totalitarian — superstructures and constraints.
353. It is necessary for the market and the State to act in concert, one with the other, and to complement each other mutually. In fact, the free market can have a beneficial influence on the general public only when the State is organized in such a manner that it defines and gives direction to economic development, promoting the observation of fair and transparent rules, and making direct interventions — only for the length of time strictly necessary  — when the market is not able to obtain the desired efficiency and when it is a question of putting the principle of redistribution into effect. There exist certain sectors in which the market, making use of the mechanisms at its disposal, is not able to guarantee an equitable distribution of the goods and services that are essential for the human growth of citizens. In such cases the complementarities of State and market are needed more than ever.
354. The State can encourage citizens and businesses to promote the common good by enacting an economic policy that fosters the participation of all citizens in the activities of production. Respect of the principle of subsidiarity must prompt public authorities to seek conditions that encourage the development of individual capacities of initiative, autonomy and personal responsibility in citizens, avoiding any interference which would unduly condition business forces.
With a view to the common good, it is necessary to pursue always and with untiring determination the goal of a proper equilibrium between private freedom and public action, understood both as direct intervention in economic matters and as activity supportive of economic development. In any case, public intervention must be carried out with equity, rationality and effectiveness, and without replacing the action of individuals, which would be contrary to their right to the free exercise of economic initiative. In such cases, the State becomes detrimental to society: a direct intervention that is too extensive ends up depriving citizens of responsibility and creates excessive growth in public agencies guided more by bureaucratic logic than by the goal of satisfying the needs of the person.“
369. A financial economy that is an end unto itself is destined to contradict its goals, since it is no longer in touch with its roots and has lost sight of its constitutive purpose. In other words, it has abandoned its original and essential role of serving the real economy and, ultimately, of contributing to the development of people and the human community. In light of the extreme imbalance that characterizes the international financial system, the overall picture appears more disconcerting still: the processes of deregulation of financial markets and innovation tend to be consolidated only in certain parts of the world. This is a source of serious ethical concern, since the countries excluded from these processes do not enjoy the benefits brought about but are still exposed to the eventual negative consequences that financial instability can cause for their real economic systems, above all if they are weak or suffering from delayed development.[760 ]
The sudden acceleration of these processes, such as the enormous increase in the value of the administrative portfolios of financial institutions and the rapid proliferation of new and sophisticated financial instruments, makes it more urgent than ever to find institutional solutions capable of effectively fostering the stability of the system without reducing its potential and efficiency. It is therefore indispensable to introduce a normative and regulatory framework that will protect the stability of the system in all its intricate expressions, foster competition among intermediaries and ensure the greatest transparency to the benefit of investors.”
The common good must always be the goal of the economy. Persons always are the most important part.
David Brooks in an editorial on Friday Sept 12, 2008 in the New York Times focuses on the ideological assumptions underway in current US thinking. He calls for a new way of thinking that is less individualistic and more socially oriented. This has been the perspective of the Catholic community for centuries: individualism and consumer/profit driven ideologies are incomplete theories inadequate for the full development of persons and societies. We need as a country and culture a new way of thinking about social issues and the relationship betweent the State and markets.
Hopefully this week’s and month’s actions by the federal government will allow us as faithful persons to engage each of us individually and socially to re-think the proper role of the state, regulations and laws, when it comes to a free market that sometimes might lead to failure based on goals other than the common good.
So what do you think?
Filed under: Economic Policy