Many commentators have suggested that the root of the financial crisis is ethical. As such they have called for a renewal of virtue in financial markets. While virtuous behaviour may well lead to better outcomes, attention to ethical issues alone will not resolve the problems that caused the crash.
Pope John Paul II - not known for utilitarian views on the market economy - once wrote that it is important for self-interest and the interests of society as a whole to be brought into fruitful harmony. Frank Field, the independent-minded Labour former minister, has expressed similar views in the context of the welfare state. Their lessons are highly relevant. Governments and regulators have distorted incentives and, as a result, the self-interest of bankers has not been in harmony with the interests of society and disaster has followed.
Nearly all financial market "busts" are preceded by monetary "booms" and this one was no exception. When central banks hold interest rates down, credit spreads become depressed, economic activity and asset prices boom and bad risks begin to look like good risks. Whether you have a moral compass or not, it becomes very difficult to distinguish between good and bad risks.