A couple of stories have recently been aired of executives who predicted a financial day of reckoning for Wall Street. In one way or another they underlined the inevitability of disaster, given the absence of on target financial oversight. 

People like former Chairman of the Federal Reserve, Alan Greenspan, however, lamented not just the resulting crisis but the demise of the principle on which his professional judgment had relied, namely, government deregulation and reliance on self-regulation through self-interest. For more than two decades, Greenspan had counselled presidents and Congresses that an economy governed by this principle was the way to prosperity and freedom.

In testimony before a Congressional House Oversight Committee in October 2008, however, the following is part of what he said: “Those of us who looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief...The whole intellectual edifice (of risk management in derivative markets)...collapsed last summer..” At the hearing, Committee Chairman Waxman pressed Greenspan: “Do you feel that your ideology pushed you to make decisions that you wish you had not made...You found your view of the world…was not right?” “Yes,” Greenspan replied, “I’ve found a flaw.

I don’t know how significant or permanent it is. But I’ve been very distressed by that fact...that’s precisely the reason I was shocked.”
The flaw that shocked Greenspan and caused him distress was the revelation that self-regulation by self-interest was an inadequate principle of market regulation. Greenspan’s faith in deregulation is traceable to his endorsement of the philosophy of the late Ayn Rand, author of (among other things) The Virtue of Selfishness.  In his biography, The Age of Turbulence, Greenspan credited Rand with being “a stabilising force” in his life, and he reaffirmed as “compelling” the “philosophy of unfettered market competition.”  

The egoist ethic or ethic of rational selfishness operative in unfettered market activity led him to assume that lending institutions would align personal gain with stockholder interest. But rational selfishness necessarily implies no such thing. In Rand’s ethic, short of force or fraud, one should pursue one’s own advantage regardless of others, because individual happiness is the highest good. What would a Rand-inspired approach have looked like in the mortgage market prior to collapse?  If I were a mortgage lender of that type, issuing risky loans unlikely to be repaid could mean good investment strategy, if I didn’t bear the burden of default.

If a secondary mortgage market allowed me to pass the risk of default to others, eg by selling the loans on that market for bundling into mortgage-backed “securities,” that would be an arrangement I wouldn’t quarrel with.
Even if a borrower went into default, my gain would remain intact. I could simply remove the loan from my books, while I pocket my commission. This was rampant practice in the mortgage market culture. Greenspan now suggests that financial institutions selling complex products like securities backed by high risk mortgages should be required to hold a substantial portion of the bonds they issue in their own portfolio.

In other words, such institutions should be required to expose themselves to the risk they market to others in order to limit the excesses of self-interest. It’s like hoping that a band-aid would staunch the spread of a progressive cancer. The real issue is that an egoist ethic with unfettered play in market operations is an inadequate foundation for economic life. What the crisis has shown is that unregulated self-interest is economically destructive. Without some essential(not just external) restraint, greed can safely be relied upon to trump rationality. Greed is not a virtue; it’s a vice; it not only undermines the general welfare (as the crisis has forcefully threatened to do) but it also destroys self-interest itself.

What Greenspan’s belief lacks is a strong conception of the common good.
If the financial crisis can be said to have anything like a silver lining, it may well be restoration of this forgotten or discarded notion to economic attention. The common good represents more than the competing goods of selfish individuals or the composite interests of special groups. The common good is “the good we have in common,” that is, the comprehensive communal conditions necessary for the moral pursuit of fulfilment by everyone in society. This is a goal to which both politics and economics contribute, or should contribute, each in its own way, within its own parameters and according to its own operational lines.

The common good is a staple notion of Catholic moral theory, but one should not think that the religious context is its only home. Classic writers as Aristotle, Aquinas and Tocqueville all understood it as the moral horizon of individual pursuit. They also held that wise governance, not just regulation, was as important as individual freedom, if living well were to be a sustainable pursuit for everyone. Contemporary writers like Robert Bellah, Stephen Carter and Amitai Etzioni also remind us of the same. They speak of a republican ideal above private interest, and summon us away from an ethic of selfish individualism towards an ethic of shared sacrifice and social virtue. One may also align much of what is advanced under the heading of the common good with elements in the thought of Amartya Sen.

Societies, like individuals, should learn from their errors. We were nearly taken under – it may even be too soon to claim rescue - by an ethic woefully inadequate to sustain the general welfare. Greenspan has argued that markets have historically made prosperity possible for countless people; and this is true. However, the unrestrained selfishness that egoism values corrupts the very environment in which a free market is supposed to flourish. Several critics accused Greenspan of naivety in this regard; but in the crisis how many can lay claim to any moral high ground? The more obviously salutary lesson for everyone is that here too, if we don’t learn from history, we simply condemn ourselves to repeat it.