The following columns on the current economic crisis were written by David Milroy, board member, and Dr. Samuel Gregg, research director, of the Acton Institute for the Study of Religion and Liberty, an ecumenical think-tank "dedicated to the study of free-market economics informed by religious faith and moral absolutes." Based in Grand Rapids, Michigan, the Institute is named after the English historian, Lord John Acton (1834-1902), best known for his remark: "Power tends to corrupt, and absolute power corrupts absolutely."

The Economic Crisis and the Cause of Freedom
By David Milroy

This has been a difficult time for those of us who extol the merits of a free market system. The current housing crisis and the strain it is putting on our banking system has nearly caused the financial system to collapse. Unfortunately, those who advocate for a larger role for government in our daily lives will be able to point to the Crisis of 2008 as "exhibit A" for why we should not be left alone to pursue our own best interests.

However, this criticism misses a critical assumption that we make when advocating a free-market economy --- it requires a virtuous people who are willing to assume personal responsibility for their actions. Without right behavior, liberty quickly descends into license.

For some time now, even a casual observer would have to be concerned about increasingly broad-based imprudent or indeed immoral behavior in the economic life of our society. While the increased incidence of this poor behavior has been disappointing, those of us who are troubled by it have taken solace in the fact that the free-market is pretty efficient at recognizing mistakes in judgment or dishonest behavior. If you cheat your customers, employees, or shareholders, you will eventually go out of business and likely to jail. If you take imprudent risks in the market, you will eventually lose money.

This current crisis is different. Instead of a situation where individuals exercising poor judgment are corrected on a case-by-case basis, this crisis has evolved into a situation where poor judgment by a sizable minority is at risk of shutting down the financial system. And as you might expect with a crisis of this magnitude, there is plenty of blame to go around.

Wall Street is the obvious and almost too easy place to start. The managers of these institutions, the stewards of our financial system, have a profound responsibility to maintain the public's trust and confidence. Collectively they have not done so. For years it has been obvious to all, except perhaps those reaping the gains, that executive compensation in many cases has been outrageous and perhaps nowhere more so than on Wall Street. Bloomberg news reports that Wall Street's five biggest firms paid more than $3 billion in the last five years to their top executives. Apparently these executives allowed their firms to take excessive risks in order to generate these gains because today two of the five are out of business and the other three no longer exist as stand alone investment firms.

Lenders have also shown signs of poor judgment. Lending provides a vital and necessary function in our economy. However, some lenders have lost sight of the fact that they have a responsibility --- to those who provide the capital they loan if to no one else --- to verify that borrowers can support the debt they take on. The record level of defaults indicates that this responsibility has been shirked.

Consumers are portrayed as victims in all of this. This is a mistake, absolving them of personal responsibility. A free system of exchange will reflect whatever values we bring to it. Today the values we bring to the market are often too materialistic. A sufficiently large minority of consumers, desiring to have more material goods than they could afford, borrowed enough money to help bring down the system.

Need a bigger house or a vacation home? No problem, just take out a floating rate negatively amortizing loan. By the way, we'll let you self-verify your employment history. Need a new car? Just sign up for these extended lease payments. Want a big screen flat panel TV? Just sign up for another credit card.

None of these purchases are bad in themselves, but if we push ourselves into financial ruin to obtain them, there is something disordered in our desires. There is only one thing that will fill our desires and, to borrow from Augustine, our hearts will be restless until they rest in Him. This society seems to increasingly lose focus on that truth.

The collapse in the real estate market triggered this crisis, but it was the behavior of market participants that laid the groundwork. As people working to advance the cause of freedom, we have to continue our efforts to explain the merits of a free economy. But we also have to think more creatively and work a little harder to emphasize the importance of virtuous behavior.

David Milroy is president of Flatrock Capital Management in Columbus, Ind., and a board member of the Acton Institute for the Study of Religion and Liberty. He attends St. Bartholomew Church in Columbus, Indiana.

No Morality, No Markets
By Samuel Gregg

"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice."

Adam Smith had it basically right when he described the essential pre-conditions for widespread economic prosperity. But if the current financial upheaval teaches us anything, it should be how much market capitalism depends upon most people developing and adhering to some rather uncontroversial moral virtues.

Smith himself always understood this. That's why his Wealth of Nations of 1776 should always be read in light of his 1759 treatise, The Theory of Moral Sentiments.

Of course, numerous economic factors underlie the financial meltdown. These include loose monetary policy, massive bank overleveraging, and the subprime-mortgage implosion, not to mention the social-engineering programs pursued by the government-sponsored, New Deal-esque behemoths Fannie Mae and Freddie Mac.

No matter that free markets have raised literally hundreds of millions of Indians and Chinese out of poverty in recent decades. Instead, continental Europeans such as Germany's finance minister, Peer Steinbrueck, loudly proclaim that "Anglo-Saxon capitalism" is "finished", while blithely ignoring the fact that many of the EU's dirigiste economies are presently lurching toward, or are already in, recession.

A little discussed fact, however, is that the financial crisis has also been driven by widespread moral lapses that have manifested themselves just as much on "Main Street" as on Wall Street. One example is the subprime-mortgage fiasco. We now know that thousands of Main Street borrowers lied about their income, assets, and liabilities when applying for subprime loans. Likewise, many lenders failed to do even the most rudimentary checks on borrowers' credit history.

Recklessness also features among the sins underlying our present financial turmoil. On Main Street, thousands of investors mortgaged themselves to the hilt on the highly-imprudent assumption that house-prices could only continue to soar. Meanwhile on Wall Street, investment banks overleveraged themselves, sometimes at ratios of 30-to-1.

Then there is the rampant materialism that has apparently permeated Main Street and Wall Street to equal degrees. The thrifty, even parsimonious Adam Smith would have been appalled by the "I-want-it-all-now" mentality that has helped the personal savings-rate in America to hover around 0 percent since 2005 --- the lowest rate since the Depression years of 1932 and 1933.

It's arguable that the same mindset encouraged many on Wall Street, anxious to enhance their bonus prospects, to sell securities they knew were based on collapsing subprime foundations to Main Street buyers blinded by the prospects of quick profits. Such actions aren't illegal. No-one, however, seems in a rush to ethically defend them.

None of these moral failures amount in themselves to conclusive arguments for re-regulation. They are, however, fuelling populist demands for a return to failed interventionist policies of the past. So far, most free-marketers have tried to stem re-regulation pressures by reminding everyone of the powerful economic arguments against such policies. But relatively few --- if any --- have engaged the financial meltdown's moral dimension.

One explanation for this silence could be that some market-advocates have embraced, consciously or otherwise, the soft relativism so prevalent in Western societies but which renders coherent moral analysis impossible. It may also be that many free-marketers have long been incapable of articulating more-than-utilitarian arguments for markets in particular and liberty in general.

Make no mistake: The modern case for the market --- so painstakingly developed against interventionists of all stripes since Smith's time --- has been set back years by the disarray on financial markets. The very same calamity, however, should remind us that if we're going to loosen the political bonds imposed on economic liberty by assorted New Dealers and Keynesians since the 1930s, then society's moral bonds require constant renewal and strengthening.

In short, we're learning the hard way that virtues like prudence, temperance, thrift, promise-keeping, honesty and humility --- not to mention a willingness not to do to others what we wouldn't want them to do to us --- can't be optional-extras in communities that value economic freedom. If markets are going to work and appropriate limits on government power maintained, then society requires substantial reserves of moral capital.

At the end of his life, Adam Smith added an entirely new section entitled, "Of the Character of Virtue", to the sixth and final edition of his Theory of Moral Sentiments. His reasons for doing so are much debated. But perhaps Smith decided that as he glimpsed a world in which the spread of free markets was already beginning to diminish poverty, he needed to re-emphasize the importance of sound moral habits for societies that aspired to be both commercial and civilized.

It's advice worth heeding today.

Dr. Samuel Gregg is research director at the Acton Institute and author, most recently, of "The Commercial Society: Foundations and Challenges in a Global Age (Studies in Ethics and Economics)" (Lexington, 2007). He attends St Thomas the Apostle Church in Ann Arbor, Michigan.