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Economists on the U.S. Financial Crisis, and Bailout

Is Wall Street unethical, or just foolish? I mean that in general, not referring to any particular trader or firm. Clearly, there are ethical & unethical firms and traders, as well as smart and foolish ones. But from a business ethics point of view, the question everyone is asking is whether the current (growing) crisis is the result of a series of culpable negligence, or just a series of bad errors in judgment.

I wish I understood better the current U.S. financial crisis, and the federal government’s proposed bailout plan. I’m a philosopher who reads a reasonable amount of economics, but I can’t pretend to understand fully what’s going on. That’s embarrassing for me, as someone who works in business ethics; but I suspect it also means that a very, very high percentage of the public likewise doesn’t understand what’s going on.

I wanted to be able to post some clever commentary. For now, I’ll settle on pointing to people who understand this stuff better. Most of them are economists.

Over at the Marginal Revolution blog, Tyler Cowan discusses the Paulson plan vs. Dodd plan

For a critical commentary, see: Why You Should Hate the Treasury Bailout Proposal

Economists are at least somewhat divided… Via the blog of Harvard economist Greg Mankiw, here’s A Defense of the Paulson Plan

Then from yesterday’s NY Times, 192 economists speak against the current bailout plan: Economists Of The World, Unite! (Basically, these economists argue that the current plan is unfair, ambiguous, and could have worrisome long-term effects.)

It’s worth noting that a lot of economists are calling this bailout plan unfair. One reason this is worth noting is that economists — as economists — usually don’t have a lot to say about fairness. The key normative concept for most economists is efficiency, although some definitions of efficiency (such as Pareto Efficiency) seem to bundle in some notion of fairness. It’s not that economists don’t care about fairness — everyone does — it’s just that the tools of academic economics tend to have a different focus. Simply put, economists aren’t (usually) experts on fairness. So what do we make of this apparent expert opinion, coming from so many economists, that the current bailout plan is both likely-ineffective and unfair?

One point is that economists are (standard jokes aside) moral human beings like the rest of us. They care about fairness, and they have a moral reaction when they see unfairness. Their opinions about fairness matter (though not more than anyone else’s). You don’t need advanced expertise in various philosophical theories of justice to see that, if the fat-cats who are responsible for this mess get well taken care of, while millions of average folks get left in the lurch, that’s unfair.

But more importantly, perhaps, and the thing that might reasonably be taken as giving economists’ pronouncements on fairness in situations like this more weight, is that they are better qualified than most to understand the factual underpinnings of the claim that “this bailout is unfair.” Economists are better able than I am, certainly to predict just what the effects, short-term and long-term, of this bailout will be. And such predictions (on which there is unfortunately not consensus) are a crucial part of assessing the fairness of this plan.

p.s. a final note: I’m having trouble finding a good, non-technical explanation of the source of this crisis and the U.S. government’s plan, on-line. Anyone know of one? Sometimes The Economist or the NY Times does features like that, but I haven’t found one yet.


  • The reason that all of these speculative investments are crushing banks finances can be directly attributed to the 1999 Financial Services Modernization Act. Because of brevity considerations, I’ll just say that you should start your research there. You will soon understand how it was this “Chicago Boy” like repealing of crucial regulatory aspects of the 1933 Glass-Steagall Banking Act that opened the floodgates to this mess.

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