Markets and Politics

Not long ago a certain stream of pro-market philosophers made a noisy public case for the creative synergy between capitalism and democracy. The growth of free-market capitalism, they argued, would inevitably bring democracy. Then came the financial crisis of 2007 and the rescue of the financial markets by individual nations, the European Union and the International Monetary Fund. Financial markets failed, and government came to the rescue. Of course, though it is hidden in the footnotes of economics textbooks and ignored by free-market-oriented think tanks, that is what is supposed to happen in democratic capitalism. But what are we to do when the financial markets saved by states threaten to bring down governments unless they do what the mercurial markets demand?

The Republic of Ireland faced that question last month, when after weeks of resistance it accepted an 85-billion euro line of credit from the European Central Bank. In doing so, it effectively surrendered its sovereignty, yielding its national budget, national priorities and government services to the direction of outside auditors. The Irish government’s big mistake was to bail out the country’s banks when they failed in the Great Recession. Now it must accept government by bankruptcy accountants. Has democracy been undone by capitalism? For the most part.


The Irish government, led on by the conventional wisdom promoted by the banks, the building industry and the business press, certainly had a role in the collapse by establishing policies that inflated the speculative real estate bubble before it burst. But unlike the banks and other business sectors, the government accepted responsibility and took on the debt of the failing banks. Then it adopted one of the most austere budgets in Europe to make good on its outstanding obligations. Now, because of “the market’s” fear of the impact of Irish indebtedness on the euro zone, the European Central Bank has forced Ireland to accept an outsized line of credit at the price of even more draconian budget cuts.

Of the many object lessons to be drawn from this latest drama in the Great Recession, two in particular demand consideration. First, the primary perpetrators in the collapse have not borne the burden of their offenses. Second, the myth of the synergy between capitalism and democracy is shattered. They are lessons that apply to the United States no less than to Ireland.

In Ireland prosecutors have yet to announce whether they will prosecute officers of the Anglo-Irish Bank for fraud. But by and large the geniuses behind the Celtic Tiger’s unnatural growth will not be held accountable, just as in the United States most of those responsible for the inflated housing market, bundled mortgages and other infernal investment devices will not be held liable for the irreparable harm they worked in tens of millions of lives. Indeed, once rescued by public largesse, financiers seem to flaunt their continued prosperity without exhibiting the least sign of social responsibility. The people shouldering the burden will be politicians, the taxpaying public and society’s weakest and most vulnerable members.

The second lesson is that free-market capitalism and democracy are not always mutually re-enforcing. The success of China’s entrepreneurial government since Deng Xiaopeng took it down the capitalist road should be proof enough. But the events of the Great Recession have proved that once financial markets use governments to pay for market abuses, financial leaders can also turn on governments and demand the last drop of citizens’ blood. To be sure, neither governments nor their publics lack responsibility in this tragedy. Governments (and regulators) established the business-friendly environment that brought prosperity; prosperity brought them popularity; and the public enjoyed the apparent growth in household wealth and higher lifestyles. But ultimately the major responsibility lies with “the masters of the universe,” the financial titans who with few exceptions created the conditions for this crisis by bending laws to their purposes. The powerful financial class that benefitted from public rescues continues today to fight against re-regulation (at least in the United States), wallowing in renewed profitability and bringing governments to their knees.

How can free-market capitalism, especially financial markets, be made less inimical to democracy? The future of democratic government requires greater distance between finance and government, not an easy task given the modern expectation that government manages the economy. It also requires a rebirth of social responsibility and concern for the common good on the part of corporations and their leaders, and a renewed sense of moderation on the part of the public at large. But since government and the public continue to measure well-being almost solely in terms of economic growth, such moderation too may be out of reach—until the markets bring on a collapse too great for even a government rescue.

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William Atkinson
8 years 3 months ago
Americas Editor should be concentrating all efforts on upcoming global strategies by NAtO, US, Russia, China to avert or neutralize hugh threat of two rouge unstable nations (Iran and N.Korea) to now deliver by multi-stage neuclear warheads catastrophical damage to their neighbors, by far totaly upsetting world economical and political (also religious) stabilities,  2011 will become the most advent in all history as the world seeks to neutralize hugh global threats like never seen in history.  the catholic church, in the past being a hugh force of stability and peace, is currently neutralized by enourmous internal moral and ethical processes making its efforts negliable in influencing world stability.
Mike Evans
8 years 3 months ago
Let us be careful that we are not pandering to the rugged individualists and self-made rich who (erroneously) claim that all their success is due to their own efforts. There is certainly a place for national central economic planning, if only to protect the vulnerable from the wild exigencies of a free market. Some control is needed and consensus should be built around minimum standards of living, entitlements and responsibility to pay taxes according to means. Quality of life goes well beyond the desire for a McMansion and bigger screen TV.
James Collins
8 years 3 months ago
Your article omitted one of the major causes of the financial mess, The influence of Congress, especially Barney Frank and Chris Dodd, who used pressure to force lenders to make mortgages to people who had no chance of repaying them. Another major factor was the mismanagement and corruption of Fannie and Freddie which has yet to be addressed. Imagine a government entity making campaign contributions to the very people who were supposed to oversee them!
Robert Oberle
8 years 3 months ago
The central tenet of democracy is not good or effective or even just government.  It is that the government is answeable to the governed.

What is completely absent in the editor's assessment is that the government was immediately compelled to call for elections owing to the fact that the move was deeply unpopular with the electorate. Oddly enough this is how democracies work.

One can argue that a set of poor choices underlay an economic bubble which was destined to burst; however the statement that democracy has been undone by capitalism is a ridiculous overeach.
Eileen Gould
8 years 3 months ago
The first four commenters do not appear to agree with you, Editors, but I do.   Anyone moved by the needs of social justice cannot help to grieve for the poor and about to be poor when observing the outsized spending habits of the newly rich (as opposed to the old rich where this is just not done.)   I always admired you Jesuits for your "smarts"; as a Franciscan at heart, I am heartened by your stepping up to the plate.           Eileen Quin Gould
8 years 3 months ago
Governments have a responsibility to limit the risks of society by reasonable, but firm, regulation.  As an example, the "Financial Reform" bill should have limited the amount of money that the government would insure in a financial institution - but it didn't. 

Apparently, our legistators would rather put us at risk than to confront their corporate masters.  Does writer number three really believe the poor bankers put themselves at risk to please Chris Dodd and Barney Frank?  Those financial institutions went far beyond good banking practices and actively encouraged borrowers to take loans that put the borrower at risk so that banks could make more money.

The financial sector and Wall Street run our government.  That's why the Democrats are cowards, and the Republicans know whom to honor.  Unbridled capitalism and greed, coupled with our stupidity, have corrupted our nation and reduced us to a herd of untrusting individuals in a beleagured country. 

And to think, we claim to be a Christian nation.  What a joke.
Robert Oberle
8 years 3 months ago
As a note to Ms. Gould, please do not misunderstand. I do not revel in the fact that the many Irish, Greek,  Americans and others have been adversely impacted by the downturn.  It is our duty as part of the Body of Christ to work for justice for all. I believe this and I believe most of us try to live this in our daily lives.

I do not see that making a statement that is factually absurd, advances justice for anyone. Nor does this give insight into how we might inspire ourselves and others to be in service to all.
Robert Asselin
8 years 3 months ago
Wow! Your main arguments are facil and overdrawn ("...democracy undone by capitalism") or inaccurate ("financial markets saved by the state threaton to bring down governments").  Both democracy and capitalism are good systems, in fact the best, as recognized in encyclicals.  But their working well depend on individuals putting the common good above private gain. Those who failed miserably in this were bankers and financiers, regulators and politicians but also greedy borrowers.  It is true the first three are not paying a price, even suffering the public's shame. But their failure is not the failure of democracy and capitalism. Please, more on individual responsibility.
Christine Villecco
8 years 3 months ago
I am glad America's editors are making this bold statement. The last comment, however, seems preposterous to me since while Caritas in Veritate does say a lot about the goodness of capitalism and importance of personal responsibility, it entirely misses the broader dynamics of the cause of our global economic (and political) dissolution. But here's to a UN with teeth!
Tom Maher
8 years 3 months ago

This editorial badly misinforms the reader on what is going on in world economics and why and what the real economic realitiies are.  This editorial is a work of fiction, void of any reliable basis of fact or objectivity.  Once against America editors have produced a badly muddled account of world economics.

Firstly let's get casue an effect straight.  Capitalism does not casue decocracy.  Capitalism is not like Marxism where the Red Army comes in and encforces Marxist socialism on a captive nations.  Captialism is voluntary.  People knowingly and willingly want to  get and use credit.  Ireland and other states such California or New York City in the 1970s have quite on thier own and without coercion accumulated hugh amounts of indebtedness they are not able to manage.

The real relation that might be explored is whether democracy has the discipline and ability to maintain manageable levels of public debt.  New York City in the 1970s was very rich but went banckrupt because its spending went out of control beyond its vast revenues.  Democracies go on spending binges. There is just so many worthy programs that governmenta just can not resist spending on.  So yes governments like New York City was bailed out by the United States after agreeing to accept a financial control board that would make sure the city qould finally repay the mountain of debt the city had accumulated and the federal bailout money, a process that took more than five years.   Repayment of debt and interest is not a "mercurial demand of the market".  Repaying of  principle and interest is an moral and necessary obligation of any institution.  Like the force of gravity the ability to repay loans can not be ignored.  Any doubt about repayment as has happened currently with Ireland casues interest on Irish debt to sharply rise.   California also can not fiancnce its debt without paying sky-high interest rates and even then few want to buy its bonds and notes because of its of the likelihood of default.  It is very ceratin that lenders want the maney they lend to be repaid.  There is no free lunch. 

It is important to recongnize that no country state, city or town can borrow an infinite amount of money.  Credit is definitely limited to amounts that the lenders beleive an entity can reliably repay.  The basic economic reality is that any resource such as credit is finite.  Resources such as credit are not infinitely available even to large countries such as the United States.  Even the United States find itself unable to finance itself if it accumulates more debt than it has ability to service.   The worry in Europe is that excessive government barrowing may cause widespread fear in Europe that may impact all European countires ability to barrow Euros at  any interest rate.  

Chris Cunningham
8 years 3 months ago
As someone who has been following the crisis and particularly the Irish crisis closely, I have to say that this is one of the best and clearest articles I have seen on the powers at currently in the global economy.
I also agree with the solution that corporations should be more socially responsible and people and governments more moderate.
Strong regulation is needed to reign in the Financial industry similar to drastic changes made after the great depression. Small changes are not enough. Seperating commercial and investment banking. Raising the equity limits for Banks. Capping salaries and bonuses. Banning them form making political donations. Raising taxes on their profits.  
The challenges to this are the influence of the rich/financial class on the political class. Another challenge is the increasing age of the population. People are looking to the financial industry to make great returns on their investments wiith their pension in mind. Unfortunatly this is leading to less favorable conditions in general for younger people. The phrase 'squeese the last drop of blood' from the article is not only describing the attitude of the financial classes, but also of their customers.
A simple example would be the person who invests his money in property and financial industry products hoping for a risk free generous return.  This drives up the price of housing for people looking for a house to live in. They cannot afford a house so the price of housing falls as it is mainly a speculative bubble. As property invesments take losses the financial industry also takes losses. The government bails out the financial industry meaning that the investors returns (from products which he may not understand such as credit default swaps) are protected. Huge debts are taken out by the government where these failed investments have to be repaid. However the people who did not make much investments in property or finacial products, mainly the younger people, have to pay too.
As an overall solution I suggest making large restricitings on speculation in the property market, such as in Italy or Signapore. This could include limiting the number of properties one person or company can own, compulsory purchase of land by the government in a bubble and regulation to stop price collusion and hoarding of zoned land by developers.
The second is to have the government garauntee a private pension fund. So if you invest for your pension then the government will pay an interest rate of 6% annualy gauranteed.
C Walter Mattingly
8 years 3 months ago
A few observations with attached questions.
Does anyone on this board doubt that Ignatius Loyola is well characterized as a "rugged individualist," as are Mother Teresa and many of the saints?
Do we agree that undermining the basics of capitalism by guaranteeing losses and providing subsidies to distort the market, thereby creating a heads-I-win tails-you-lose imbalance, is not capitalism but a form of government guidance of the economy, such as Fannie and Freddie guarantees of mortgages, huge subsidies for everything from bungalows to mansions in the form of deductible interest, demanding that banks underwrite bad mortgages for social engineering effects, etc?
What we did in the past generation or so is distort the market with subsidies and directives of various kinds which finally ballooned, the bubble prevented from being popped by government actions, guarantees, and distortions for which we are paying dearly. When you ignore, remove, or dilute the risk, the natural corrective of excessive speculation in a capitalist market, you delay that corrective mechanism to the point that you can have a blowout such as we are experiencing in place of a correction. By bailing out Long Term Capital years earlier, we allowed Lehman and Drexel to continue on a path of excessive speculation rather than suffering a huge but manageable economic corrective that would have nipped the entire financial speculation in the bud. As it was, they concluded the government would bail them out and continued until they were crushed.


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