15 October 2008

The Bailout of Finance Capitalism

On the Remnant Newspaper website there is an online column dealing with the recent financial crisis and how to resolve the crisis according to Catholic social teaching. It is a good article to explain and understand why the violation of Catholic principles is responsible for this mess and how by properly ordering our lives on these principles we can began to restore our economy and society at large. As neither political party is willing or able to understand the nature of the problem we are justifibly pessimistic that conditions will improve anytime soon and that a greater danger lies ahead if people start to believe that solutions are to be found along socialist lines. One interesting item he mentions is the concept of "just price." We constantly hear about a "just wage" for employees but rarely the equally important concept of "just price."

The Catholic doctrine of the just price is another moral lens through which to view these transactions. In summary, it is a violation of justice to sell something for more than (or buy something for less than) its just price. For our purposes the definition of just price can be summarized as the general estimation of the value of human needs satisfied by the thing sold. Although in a particular case this may be difficult to calculate, it is an objective standard not based on the particular needs of a transaction participant. Just because I am very hungry, does not mean you can charge more than the common estimation of the price of a sandwich merely because I am in greater need of it. Let us apply the just price theory to the housing market.

Although Americans have been indoctrinated to think that they own their homes, such a belief is a mere delusion. A simple definition of ownership encompasses the ability to retain the possession and use of a thing. All one needs to do is fail to make a mortgage payment and he will learn that he does not own the house where he lives, as millions of Americans have been realizing daily.

It takes only a modicum of common sense to realize that if I do not pay for something I do not own it (unless it has been given to me as a gift). When a bank has paid 85%, 90% or even over 100% of the purchase price (as in negative equity mortgages) of a house how can we with a straight face claim that the consumer “owns’ that house? In substance the bank has bought the house at one price (the purchase price paid to the seller) and is reselling it over time to the borrower at a higher price.

Given the staggering amounts of money repaid over a loan’s life as seen in the chart above, can we really claim that the bank is reselling the house at its just price? This is especially true when we compare the rates of residential home appreciation over long periods of time (excluding the recent artificial bubble of value growth which has popped).

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