Debt is at the heart of the current crisis. On the one hand there’s the debt of households, consumer credit, and mortgages. On the other hand there’s the huge debt levels between financial institutions, and also the debt levels of states that have taken over or guaranteed bad private and commercial debt.

Financial relationships raise acute moral issues that suddenly appear to be at the heart of the problem. Why should burdensome obligations come with a duty to repay? Is it good to be in debt?

This isn’t a new story. In the early 1930s, the world went through a period of debt-deflation, in which the compulsion to repay forced down prices and increased the real level of debt. Today, we face a milder version of the same phenomenon as banks cut back lending to rebuild their capitalization. The resulting credit difficulties create downward pressure on prices and make for higher and less sustainable debt levels.

The problem is severe. Deflation produces radical anti-capitalism and a demand for a cancellation of debt. Revulsion against the market economy often takes the form of a specific condemnation of debt and debt instruments.

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The Saudi cleric Grand Mufti Abdelaziz Al al-Sheikh made the case that the cause of the crisis is interest on debt, and that the sharia principle of risk participation would eliminate the problem. This is a very old answer. The Old Testament famously recommended a cancellation of debt every forty-nine years in a “jubilee.” The medieval church attacked usury. Such arguments are not built on simple obscurantism. Both the medieval church and Islam distinguish between debt that is exploitative, in which individuals are tied in debt servitude, and the relationship that arises out of a sharing of entrepreneurial risk. This tradition invites us to think about how debt today may inhibit free choice and the free development of the human personality.

These critics, ancient and modern, see debt as leading to a fundamental moral flaw. Today debt is much more prominent than it was in medieval Europe. Consumers in advanced industrial countries (and in particular the United States) rely on debt in order to buy. Treasury Secretary Paulson complained that the credit crunch was “making it more expensive for families to finance everyday purchases.” But dependence on debt polarizes societies. Bailout proposals run into opposition from those who are not so highly indebted and see an overall solution as a subsidy for the improvident.

One interpretation of modernity is that we borrow from one another on an increasingly grand scale for a reason, because we are convinced that our utility schedule is more important than someone else’s. If I see a beautiful piece of jewelry or a bright new car in a shop, I am convinced that it should be mine and that it can be more usefully employed in my possession than in that of someone else. In that way greed feeds on a kind of pride or self-regard. This problematical character of debt is captured in an ambiguous phrase of the Lord’s Prayer that refers not only to spiritual offense but to actual debt and was often in the past translated as “forgive us our debts.”

The meltdown of capitalism produced a big blame game both in the 1930s, when industrial capitalism broke down, and today, when it is financially driven capitalism that has gone awry. Today the collapse is widely thought to be the responsibility of poor regulators and monetary policy makers, or unscrupulous mortgage originators, or greedy bankers. Popular commentators like to go back to stereotypes from earlier eras, such as the figure of Gordon Gekko in Oliver Stone’s movie Wall Street who memorably proclaimed that “greed is good.”

The attributions of blame do not contemplate why a little bit of greed can produce such bad effects. Greed works as a doctrine of management because it is endlessly replicated in everyday behavior, by neighbors who borrow because they want to match other people’s consumption patterns, or buy bigger houses out of a competitive spirit. Wall Street moved prices by means of a “thundering herd,” but it is not the only locus of greed. We might equally look to popular culture, to game shows, or to shopping behavior. In November 2008, the same instincts that drove financial markets produced the post-Thanksgiving shopping consumption-intoxicated herd which trampled a store clerk to death in a Long Island Wal-Mart.

Solutions to the crisis include a simplification of finance, a return to lower levels of debt, and a reduction of flows across long distances. Some natural law traditions point in a very radical direction and demand regular cancellations of debt like the “jubilee.” But how can any of this be achieved?

A less radically intrusive approach would end the incentives that created powerful motives for households and corporations to increase their debt. In particular, the tax deductibility of mortgage-interest payments led to an excessive level of household debt; and tax deductions for interest led to high levels of corporate leverage. Some countries have already experimented with ending or reducing the levels of permissible mortgage-interest deduction.

Debt reduction is not only a good way of avoiding the constant repetition of the kind of disaster that emerging markets went through in the early 1980s and the late 1990s, and the whole world has experienced after 2007. It is also an example of the way in which the application of some natural law principles might lead to a healthier economy.