Heath: Risk, Ethics, and Collateralized Debt Obligation

Yesterday at noon I attended an excellent talk by Joseph Heath from the University of Toronto, called “The Ethics of Risk: From Friendly Societies to Collateralized Debt Obligations” (sponsored by the Kenan Institute for Ethics and the Center on Leadership and Ethics at Duke.)

Most of Joe’s talk was about the relationship between risk and social benefit. John Rawls famously referred to society as a “cooperative venture for mutual advantage.” But as Joe pointed out, that leaves open the question of how, exactly, social interaction produces mutual benefits. Joe noted that the most obvious benefits of cooperation come from economies of scale. Some jobs only become possible, and others become more efficient, when more people lend a hand. But less obvious — and less frequently discussed — sources of benefit come in the form of gains from trade (when you & I engage in commercial exchange, we both end up better off) and from risk pooling (the most obvious example of which is insurance).

It’s a topic Joe knows a lot about (see e.g., his paper “The Benefits of Cooperation,” in Philosophy and Public Affairs, vol. 34, 2006). But it’s a set of ideas that turns out to be highly relevant to the current financial crisis. Joe basically argued, in the last segment of his talk, that you can’t really understand the source of the housing bubble and its collapse, nor can you assess the US government’s response to the collapse, without understanding the difference between trading in risk, on one hand, and pooling risk, on the other.

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