Many of my posts over the past year have aimed at making sense out of the Great Recession that began in 2008. Several of the books I’ve discussed here have dealt with it specifically: Alan Blinder’s After the Music Stopped, Michael Grunwald’s The New New Deal, Michael Pettis’s The Great Rebalancing, and Peter Temin & David Vines’s The Leaderless Economy. I have found the latter two works especially helpful in seeing the recession from a global macroeconomic perspective. For one thing, international capital flows helped produce the housing bubbles in the United States and other countries.
In this post I want to raise the question of how an understanding of large-scale economic relationships might affect one’s moral judgment about economic behavior. Once that we have a better idea how the recession happened, are we–or should we be–more critical of the policies and practices that led up to it? Do we see moral failures where we didn’t see them before? Do we appreciate how wide and deep the responsibility lies? Or are we so overwhelmed by the economic complexity of the whole thing that we give up trying to assign any moral responsibility at all?
When things go wrong in society, a natural response is to find someone to blame. During the Great Depression of the 1930s, many Americans blamed Wall Street speculators for pushing up stock prices to unsustainable levels. They also vilified Herbert Hoover for policies that made the Depression worse, and they called the shantytowns that housed the homeless and unemployed “Hoovervilles”. They celebrated Franklin Roosevelt as the hero who rescued them, making his Democratic Party the dominant political party for decades afterwards.
Our Great Recession struck a much more polarized society, making it much harder to agree on villains and heroes. A popular conservative response has been to blame homeowners who borrowed more than they could repay, along with those in government who wanted to help them. When the Obama administration proposed assistance for people who were in danger of losing their homes, CNBC reporter Rick Santelli delivered an angry rant from the floor of the Chicago Mercantile Exchange, saying that the proposal would “subsidize losers’ mortgages.” This was a variation on an old theme in American conservatism: the economically successful are the virtuous ones, and it’s the losers whose irresponsible behavior is the problem. (To be fair, many conservatives also opposed helping the big banks, but in the end, the “too big to fail” argument carried the day there.)
Progressives tend to find their villains near the top of the economic pyramid. Teddy Roosevelt attacked the “malefactors of great wealth,” describing a battle “to determine who shall rule this free country—the people through their governmental agents, or a few ruthless and domineering men whose wealth makes them peculiarly formidable because they hide behind the breastworks of corporate organization.” The Occupy Wall Street movement has focused its attack on the richest 1% of the population, and especially Wall Street bankers. More specifically, many observers blame the Great Recession on:
- Subprime lenders: In order to make more loans, lenders lowered their lending standards and made more subprime loans–loans with less favorable terms for people with shakier credit. They moved away from the traditional 30-year fixed-rate mortgage and heavily promoted more confusing arrangements like adjustable-rate mortgages with temporarily low “teaser rates.” They became less concerned about defaults because they increasingly sold off their mortgages to financial firms that packaged them for sale to other investors.
- Investment bankers: Wall Street firms bought mortgages and repackaged them as complicated Collateralized Debt Obligations (CDOs). These pools of mortgages were divided into slices called “tranches,” with varying degrees of risk. In theory, at least some of the tranches were supposed to be extremely safe; in practice, even the safest ones were riskier than they were cracked up to be.
- Rating agencies: Since the securities rating agencies were paid by the banks whose securities they rated, they had little incentive to be critical. Previously exclusive AAA ratings went to too many risky securities that ultimately collapsed.
- Regulators: Both Congress and regulatory agencies such as the SEC and Federal Reserve acquiesced to financial lobbyists and resisted calls for regulatory reform to deal with the increasingly risky financial practices. In particular, they exempted derivative securities (those like CDOs that derive their value from other securities) from regulation.
Economics and moral engagement
An economic understanding of how the housing bubble grew and then burst can help focus our moral outrage on the most responsible players. On the other hand, it could also muddy the ethical waters. After all, economics in general–and macroeconomics in particular–isn’t about personal moral decisions. It’s about impersonal economic forces like supply and demand and interest rates and global capital flows. Maybe subprime lenders and investment bankers were just responding rationally to market conditions, doing what they needed to do to make a profit. One could argue that individuals are just cogs in some gigantic economic machine, and bad things like severe recessions just happen from time to time. Maybe we should react to them the same as we react to hurricanes–we don’t like them but we can’t blame anyone for them. In other words, maybe the effect of economics is to substitute analytic detachment for moral engagement.
And yet, complete moral disengagement certainly doesn’t work, even for climate events. They are coming to be seen as partly a result of human activity, for which we need to take some responsibility. And that should be even more true for the economy, which is, after all, a human creation.
A less extreme argument for moral disengagement is that someone must take responsibility for good economic policy, but ordinary citizens lack the expertise to do so. They should leave it to the experts. The job of keeping the economic machine humming along is a job for economists and others with technical skills. This is an appealing argument. Many people seem willing to put a relatively small number of people in charge of social institutions, as long as they are selected on the basis of merit. However, Chris Hayes’s book Twilight of the Elites tries to show that even a hierarchy originally based on merit has a tendency to become self-serving and detrimental to democracy. In the aftermath of the financial crisis, economists themselves got some criticism for being too cozy with powerful financial firms, having too rosy a view of the economy, and completely missing the impending disaster.
Call me a liberal, but I think that an informed and morally engaged citizenry is essential to a democratic society. The average citizen cannot be an expert on the details of every policy issue. But each citizen can try to tell the difference between policies that serve the broad public good and those that serve some narrower interest.
Macroeconomics does not have to make ordinary people disengaged, resigned or fatalistic about economic events. What it can do is inform and shape their moral judgments, so they have a clearer and more realistic idea about what is right or wrong about economic policies and practices. It can shift the focus from a few obvious players in an economic drama to the more fundamental economic choices that societies make. That’s what I’ll be trying to illustrate as I discuss the global macroeconomics of the Great Recession in the following two posts.