What we have done, and what we have failed to do

How to wade through the blizzard of news stories about the financial crisis in the U.S. and the conflicting analyses….

Here’s a pretty basic ‘what happened’.

The failure of the bailout package in Congress literally dropped jaws on Wall Street and triggered a historic selloff — including a terrifying decline of nearly 500 points in mere minutes as the vote took place, the closest thing to panic the stock market has seen in years.

The Dow Jones industrial average lost 777 points Monday, its biggest single-day fall ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11, 2001, terrorist attacks.

Make no mistake. This was a new record-setter.

As uncertainty gripped investors, the credit markets, which provide the day-to-day lending that powers business in the United States, froze up even further.

At the New York Stock Exchange, traders watched with faces tense and mouths agape as TV screens showed the House vote rejecting the Bush administration’s $700 billion plan to buy up bad debt and shore up the financial industry.

Here’s what was in the earlier account of this story, that disappeared in this later edition.

It takes an incredible amount of fear to set off such an intense reaction on Wall Street, and the worry now is that with the $700 billion plan fate uncertain, no one knows how the financfial sector hobbled by hundreds of billions of dollars in bad mortgage bets will recover.

This is the second of a two-part drama. The first part….to oversimplify a moment….began over a year ago with the sub-prime mortage crisis. The crisis building over the past two weeks has been the impact of sudden warnings that the sky was falling, and the volatile emotions of the markets susceptible to imagination by reacting to the perception and making it a reality: the sky started falling.

The analyses are abundant and conflicting. We’re either headed for a new Depression, or the markets are going to self-correct. How can experts of integrity differ so wildly?

I went in search of the moral perspective. First Things has this piece on the “Conservative Case” for the bailout plan, which is a textbook description of market panic.

From time to time, market participants become so irrational that markets cease to function because no one is willing to buy or sell. That is exactly what has happened in the mortgage-backed securities market right now. Financial institutions all over the world are holding various kinds of mortgage-backed securities, and everyone knows that these securities are worth less than people paid for them….

Right now, however, people are so panicked about mortgage-backed securities that they will either not buy such securities at all or will pay only absurdly low prices for them. Merrill Lynch, for example, sold some securities like these last July for as little as 22 cents on the dollar. We thus have the most extreme form of market failure imaginable: the total collapse of a market, not because the items traded in the market are valueless (in fact, everyone agrees that they are very valuable), but because people are too panicked to value them.

This mess fell apart because of partisan politics at the end of the (Congressional) day. But morality and social justice do not have an (R) or a (D) attached. Failure is larger than partisan politics.

The current financial crisis pummeling the United States and beyond is a sign that the so-called “new economy” and its risky investments have failed, the Vatican newspaper said.

The booming growth of financial markets did not correspond to real growth or concrete development for society because it created an artificially robust gross national product, said a Sept. 24 article in L’Osservatore Romano.

The author, an Italian economist and professor of financial ethics at a Catholic univeristy in Milan, said the U.S. meltdown is the rusult of financial greed and lack of regulations.

He said the U.S. government’s proposed bailout may stave off any worst-case scenario for its troubled financial markets, but it will not repair the root causes of the crisis.

Trouble is, by end of the House debates and contentious vote today, the bailout didn’t even pass. So not only will it not repair the root causes of the crisis…..it won’t even serve to stave off a worst-case scenario. Nothing stands in the way of that scenario, at the moment.

There’s a tough message in this article, from the perspective of Catholic social doctrine.

The article said the lesson to be learned is that nations cannot build a healthy economy or experience real development if it is not based on “balanced demographic growth.”

It said the world economy also needs to be run responsibly and transparently with precise rules.

And those rules must favor not just the industrial, manufacturing and service sectors, but the rest of society. It has to trickle down to the working classes. Ideally.

Businesses and stockholders should also engage in “value sharing” in which they choose investment opportunities not solely for their chances at reaping a profit “but as an opportunity to contribute to the common good” and sustainable development.

[Founder of ‘Socially Responsible Italia’ Giulio Gallazi] and other speakers emphasized the importance of having banking institutions and foundations concentrate on helping the local communities in which they are based.

Besides offering microcredit and small-business loans, local projects should also include scientific, humanistic and cultural initiatives that foster a person’s “full development,” the speakers said.

We have a long way to go. And hopefully don’t have to fall a lot further before realizing this goal.