THE YEAR was 1933, and banks in Detroit were on the verge of collapse. As part of a scheme to recapitalize some of Michigan’s largest financial institutions, officials from the U.S. government met with Henry Ford to ask him to subordinate into a new loan some of the money owed him by the troubled Union Guardian Trust Co. of Detroit. Yet despite the officials’ protestations that the bank’s failure would hurt Ford’s business, his workers and his hometown, the auto magnate flatly refused. “Mr. Ford said that the people here, and all people, might have to go through the experience of a crash,” recalled Francis Gloyd Awalt, acting comptroller of currency at the U.S. Treasury during the Banking Cvrisis of 1932–33. “The general effect would be that everybody would have to get to work a little sooner, and that might be a very good thing.”
Seventy-five years on, the notion that hard times are punishment for some collective character flaw is still with us. With the financial system in crisis, economic moralists come out of the woodwork to cackle that the sinners—American bankers (lately), hedge fund operators, subprime borrowers—are at long last getting their just deserts. Hence the outrage you hear over bailouts like the government-backed one of Bear Stearns in mid-March, or here in Canada over the use of CCAA to salvage the asset-backed commercial paper market. Ford-like, many cry “moral hazard,” charging that saving the hides of those who made this mess will only encourage them to make another.
This is a charmingly righteous way of looking at markets, but really neither accurate nor fair. After all, the easy money and financial innovation that some blame for the credit crunch also helped fuel a period of economic growth whose benefits have been generally enjoyed—not just by Americans, but by millions around the world. To a certain extent, we are all complicit in the current crisis. And if America and its banking system comprise the epicentre of the spreading subprime mess, then that grants the rest of us neither moral superiority nor, sadly, immunity from its ill effects. (A point made all too clear by the Eastern Canadian businesspeople whom writer Joe Castaldo met for our special report “The mood of a nation,” which begins on page 56.)
Instead of crying foul, we should applaud the efforts of Ben Bernanke or Purdy Crawford (who has been instrumental in the ABCP restructuring) as important and necessary—and pray that they work. Because whoever started this mess, we’re all in it together now.