I have known Guillermo Montes, a devout Catholic and first rate economist, for several years. Last week, during my sojourn in Rochester NY for the annual Chesterton Conference, I met him for the first time in quite awhile. We discussed such topics as libertarianism, the so-called “free” market, and government interference in the market. Here is his answer to one of the key issues dividing libertarians and subsidiarists regarding the respective roles of the market and the government in the recent economic meltdown.

   Free market libertarians argue that economic recession is caused primarily by government interference in the workings of the so-called “free” market, could you respond to these libertarian claims?

This is partially true. At any given time, in the economies of the size and complexity we have there are many ways in which government is interfering with the functioning of markets. This is typically ignored when the markets are doing well; but when the markets do poorly it becomes a salient issue for many. Thus, as a rule, it is not difficult to find causes for recessions in government regulatory practices after the fact. There are very few or no predictions before the fact that a particular government regulation will lead to crisis. Hindsight is 20/20, as they say.

Having said that, there is little doubt that the US government placed incentives to lend money to people who could not be reasonably expected to pay it back. Yet, people and businesses can act morally and resist such ill-conceived incentives. Many people did and refused to enter into mortgages that they could not see how they could repay in the future.

Some people may have been misled by aggressive private lenders eager to make a sale. In part, we have aggressive corporate policies to provide mortgages on very risky terms, knowing full well that those risky mortgages could then be securitized and sold in the market, and thus the lender institution was unlikely to bear the risk for that particular mortgage.  To blame only the government for this type of behavior is to claim business people are incapable of behaving in restrained manner in the face of greed. This is also not true. Indeed, many small banks refused to make such loans and were quite stable before and after the crisis.

Other banks decided at some level, whether in the boardroom or in the bank floor, that they were in the business of selling mortgages regardless of whether the client was a reasonable risk, because after all that client was not their risk. They failed to act in a socially responsible manner orienting their actions to the common good; rather they chose their own private good instead often because of money. The moral responsibility here varies from the employee who felt he had no choice, to the one who felt this was the best way to improve his personal finances. Many, many people were involved in this structures of sin and many of them worked for private entities and not the government. 

Most consumers, as said before, acted responsibly and refused to take the risky products. Others however obtained and benefited from the loans. Some did not know any better, some felt they ‘had no choice” if they wanted to live in the gated community, while others simply purchased a less expensive property and commuted. A particular kind of customer deserves more scrutiny: the speculator who got the risky loans with the exclusive purpose to ride the bubble and sell the house in short order at a higher price. It is hard not to see some moral responsibility for the subsequent crash in these cases. If you ride the bubble to make money regardless of risk or consequences to society, you cannot argue you were looking out for the common good or even for your neighbor.

Then we have the people who became quite wealthy on the securitization of he mortgage products. While the  basic idea of bundling risks to increase access to loans is praiseworthy, some of these people had to know the tremendous risks that were occurring. Did they alert anyone? Did they act in any way responsibly? Some did, but many did not.

So you see, general immorality is the cause, in my view; to blame the government while tacitly praising the unlimited pursuit of money at all levels from the consumer to the largest corporation  is to fail to call for the change of consciences that Christian duty demands. At each of these stages, and many more that could have been detailed, we have examples of people acting responsibly and others not. although we do not judge anyone’s particular case, we certainly accept the proposition that if more had acted responsibly the results would have been better.

Loving your neighbor implies acting in all actions with a light towards the common good. This is Catholic dogma. Legislators, responsible for the public good, should do so by crafting reasonable regulations; but every private agent should do so as well in every transaction. The real story is the stories of all those consumers who acted rightly even though money was offered to them, to those who managed banks as a community trust as well as for-profit enterprise, and those who alerted competent authorities when they became aware of the problem.