Learning from Our History: Evaluating the Modern Housing Finance Market in Light of Ancient Principles of Justice

Abstract

Since I first accepted an invitation to join this symposium, the subprime mortgage crisis has exploded into a systemic financial crisis. Analysis and pundits alike seem on a quest to outdo each other in using dramatic phrases to describe its historic proportions. The causes of a crisis so large must have a multiplicity of causes lying in the realms of bank regulation and supervision, the operation and regulation of the securitization market and the derivatives and insurance markets. Yet, the root and spark of the various financial reverberations initiated in the home mortgage finance market. My presentation will focus on this central cause to look for an explanation of what went wrong. In a general sense, St. Thomas Aquinas predicted the systemic freezing of the financial system which we are currently witnessing when he predicted that in a society where unjust exchange transactions dominate, eventually all exchanges will cease. I will argue that at a major reason for the financial winter we are witnessing is that the market for buying housing has been systemically violating core principles of justice. Although other factors certainly contributed to its breadth and expansion, unjust financial transactions are the root of the problem. Two aspects of natural law economic theory will be used to evaluate the home finance market developed in the Twentieth Century - usury theory and just price requirements. Through an examination of these two core economic concepts which dominated the Western intellectual tradition for over a millennium we will see that a system which generates profits for those providing the money to buy housing violates these tenets of the natural law. Thus, although not the only cause of all the aspects of the current crisis, these unjust exchange transactions have initiated a systemic breakdown.

Keywords: Subprime Mortgage, Usury, Just Price, Secured Lending, Mortgages, Financial Crisis