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.

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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.

5 comments so far

  1. Heberto X. Peterson R. on

    Dear Chris, A friend send me an article from LA Times “Hey U.S., welcome to the Third World!”, refering to the financial crisis in the US, I´m sending you the link. The article mention that the crisis is product or result of bad decisions in a line of time. The consecuences, or some of the consecuences is the financial crisis. Hope you Like the article.Best.Heberto Peterson(Universidad Iberoamericana Tijuana http://www.tij.uia.mx/ethos)http://www.latimes.com/business/investing/la-oe-brooks18-2008sep18,0,464692.column

  2. BusinessEthicsResources on

    Hello,There is an article in NY Times by David Stout titled “The Wall Street Bailout Plan, Explained” in a Q&A format with little number crunching and fairly plain language. I think it is helpful at least to understand what the bailout plan is about. Here is the link:http://www.nytimes.com/2008/09/21/business/21qanda.html?ref=businessSincerely,Y. Fahir Zulfikar(BusinessEthicsResources.com)

  3. David Dzidzikashvili on

    It’s a quite difficult decision for any politician choosing between more bailout packages or letting the free market economic principles take care of the failed businesses, whether it is the financial institutions or automakers. The main focus should be defending the interests of middle-class Americans and creating a stable economic system that will guarantee long-term stability and sustainability. But here we also can face more challenges, since right now the Washington politicians are talking about the second large bailout package. If we bailout financial institutions and other industries again, when are they going to ask for the third bailout package? Or fourth? Maybe this is a time to let free market economy work rather than keep bailing out large, failed corporations? After all, it is the small and medium size businesses that create vast majority of middle-class jobs in America, not the large corporations. Maybe the government is better off to replace banks in lending practices and directly give loan packages with low interest rates to small and medium size businesses? That might work better and have a direct, immediate impact on economy and the middle-class America…

  4. Bruce Judson on

    Chris:I created an explanation of the causes of the crisis for teens but I have found that thousands of adults have read it. You can see it at http://www.TheFinancialStorm.us.Bruce JudsonSenior Faculty Fellow, Yale School of Management

  5. Chris MacDonald on

    Bruce:Thanks very much!Chris.


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