Friday, November 14, 2008

Some Thoughts on the Bailout and Consequentialism

It seems clear to me that the underlying justification for the economic bailout we're seeing right now is consquentialistic in nature, and is in no way based any conception of rights that the recipients of aid have to what they'll be getting. The idea, then, is that if we don't let the bailout go through, then a lot of people will suffer and have their goals frustrated, and that this would be a bad thing. In order to avoid this terrible consequence, then, we are morally obligated to undertake measures that would lessen the negative impacts on the people who are being hurt by the current financial situation. And we are obligated to do this even if we know that by trying to lessen these negative impacts, we set in motion events which will cause significant personal loss to those who would not have been significantly affected by the economic crisis.

Now, political economy of that kind is not really my specialty, and I don't really want to get into a discussion of what I specifically think should be done from a public policy standpoint. I don't really know, to be honest, and my opinion is basically worthless on this. But I was reflecting on this earlier, and I immediately thought of something John Simmons said in his totally unrelated (but nevertheless very interesting) essay, "On the Territorial Rights of States":
...one of the fundamental problems with all varieties of consequentialism is the way in which they permit their conclusions to be strongly influenced by the weight of frustrated expectations and desires, however unjustified these might be, and by considerations of simple convenience...

I don't mean to suggest that I think that convenience or frustrated expectations and desires are morally irrelevant, and I'm sure that Simmons would agree. But it is interesting to note that when we think only in terms of consequences, we often lose sight of the fact that there are other things that matter, e.g., the fact that the money that's being used to help these people who screwed up belongs to other people who worked hard for it and earned it, or that people may be frustrated because of their own poor judgment.

I'm not among the people who believes that there's no role for coercion in order to promote positive consequences. I do, however, think that we need to think long and hard about the fact that this bailout is not being used only to save lives and protect people from the worst kind of poverty and loss, but also to protect people from bearing the consequences of entirely unreasonable and irresponsible decisions that they made without giving proper thought to the risks that they were incurring and doing so, and to protect firms which unscrupulously invested in products which were founded in deception and predatory opportunism, and which are now being penalized for their lack of foresight and integrity.

I'm certainly not saying that everyone's mistakes were proportionate to the losses which they will likely incur as their result. But we live in neither a meritocracy nor a desert-based social order, and proportionality has nothing to do with the way that we live our lives. If I'm walking down the street and I accidentally step awkwardly on a crack, causing me to severely sprain my ankle, it seems fair to say that any absentmindedness I might have displayed in failing to watch where I put my feet would not make a severe ankle sprain my just deserts. But that doesn't mean that I could legitimately hobble into a nearby house and write myself a check for the price of crutches. As communities, perhaps we have an obligation to help people out when they're in need, and I would certainly think that if someone sprained their ankle in front of me, I ought to help them out in some way. But the idea that we have an enforceable responsibility to make people whole again when, in some cosmic sense, they don't deserve their fates seems odd to me, and somehow antithetical to the way we ordinarily think about our responsibilities to other people.

So ultimately, I'm not sure what to say about an ideal economic policy. It's not really my specialty. But what I will say is that from an ethical standpoint, there's something fishy going on.

4 comments:

neverfox said...

I think in a sense it's important to distinguish between apparent consequentialism and real consequentialism. Just because they say that certain acts will lead to the best consequences doesn't mean they actually will.

I actually think that if they do the deontologically correct thing here they actually will achieve the best consequences. Why is this? Because the freed market is good because it aligns deontology and consequentialism. The closer our solution gets to what a freed market would entail, the better will be the ethical outcome from both views.

As for policy, I will here list what I think needs to be done (borrowed from the Market Ticker):

1. Repeal Gramm-Leach-Bliley. This was the law that repealed the Glass-Steagall act (the majority of it, anyway.)

2. Reinstate the leverage limit of 12:1 that used to apply to investment banks (the dropping of which is the proximate cause of this mess, and which Henry Paulson was directly responsible for through his lobbying and requests) and apply it to all institutions doing business in The United States. While this sounds like market interference, it will approximate the level of leverage a truly freed market would allow. We force a reak freed market overnight but we can come closer with simply reverting policy.

3. Repeal the 2005 "Bankruptcy Abuse Prevention" act.

4. Repeal the TARP/EESA, and do everything to stop the expenditure of any further funds under the existing law, and direct Treasury to reverse the tax changes that granted $150 billion in "preferences" without a vote of Congress or even public notice.

5. Require the SEC, OTS, and OCC to compel all assets and liabilities to be consolidated upon a firm's balance sheet and direct all marking methods, formulas and variables along with each asset held be disclosed accurately for every firm that operates in the United States.

6. Direct The Federal Reserve by executive order to comply with the FOIA filed by Bloomberg and disclose, immediately and forever into the future, all loans issued, to whom, the specifics of the collateral pledged, and the discount or "haircut" applied. Such information will be published via The Web at the point of issuance of Fed Credit and all actions taken by The Federal Reserve or any of its district banks shall be undertaken in the full sunshine of the public view. If The Fed should refuse, pledge to send up to Congress a bill to repeal The Federal Reserve Act of 1913, and replace The Federal Reserve system entirely with an entity that will under penalty of federal law operate 100% "in the sunshine. Again more quick and dirty attempts to get things somewhat like they would be under a stateless system in the short-term.

7. Perform cram-downs and force stockholders and bondholders to take the fall and see what comes out on the other side. Lehman survived it and so will other banks that are worth of staying in business.

Again none of these are purely freed market policies but they stop the bleeding fast.

Danny Shahar said...

Eep! Thanks for the thoughtful response, though I really don't know how to approach it. I guess in the way of a coherent reply, I'd point out that consequentialists would likely want to say that their views are deontologically correct. On this, you might be interested in this post. But I definitely hear your basic point, and think it's a good one.

Unfortunately, I'm in no position to evaluate any of your policy prescriptions, as I have little to no idea what they even mean. I do like the sound of "performing cram-downs," though, and therefore I will agree with whatever policy involves the most of them.

Not that very many people actually read my blog, but if you'd like to have your recommendations put out into the open, I would be happy to put them up as a guest post. I just feel badly that I won't be able to give you any feedback, given the amount of work you clearly put into your response, so I'd be happy to see if anyone else reading my blog would care to venture a reply.

Danny Shahar said...

Umm...oops.

When I said "this post" in the previous comment, I actually meant THIS post.

Danny Shahar said...

...except that it appears that you've already found it. Never mind!

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