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Causes, cure and prevention of future financial crises: an ethical analysis.

INTRODUCTION

Blame for the financial crisis has been placed on a number of individuals and institutions. Some say market failure is to blame. (1) Others say deregulation, too much or too little regulation is the cause. (2) Wall Street greed (3) and/or capitalism have been blamed by some (4) while government has been blamed by others. (5) This article examines the arguments that have been put forth and applies logic, ethical theory and economic analysis to determine the real causes of the crisis. Once the causes have been determined it is possible to recommend a cure and to determine what ethical policies can be adopted to prevent a recurrence.

The easiest allegation to dismiss is the charge that deregulation is to blame, since there were no major deregulation initiatives in the years leading up to the financial crisis. The last major piece of deregulatory legislation before the financial crisis was signed by President Clinton in 1999--the Financial Services Modernization Act of 1999, also known as the Gramm-Leach- Bliley Act, (6) which repealed the provisions of the Glass-Steagall Act (7) that prohibited banks from engaging in both commercial and investment banking at the same time. (8)

However, repealing those provisions merely put U.S. banks on an equal footing with the banks in most other countries, (9) which established a more level playing field and made it easier to compete internationally. Had those provisions not been repealed, it would not have been possible for JP Morgan to acquire Bear Stearns or the Bank of America to acquire Merrill Lynch, which would have made the crisis even worse. (10) Thus, that particular piece of deregulation actually strengthened the financial system. Subsequent research has shown that passage of that Act has had a beneficial effect on the banking, insurance and brokerage industries. (11) Thus, from the perspective of utilitarian ethics, the regulatory changes that did occur before the financial crisis were ethical because the result was a positive-sum game (more on this concept later).

The Gramm-Leach-Bliley Act (12) also made it possible for institutions and individuals to do things that they were prohibited from doing before the Act's passage, which strengthens property and contract rights. It must not be forgotten that government is force. Whenever government prohibits an activity it reduces the opportunity for individuals to exercise choice. Where there is no choice, there can be no morality, because morality involves choice. Thus, passage of the Gramm-Leach-Bliley Act expanded opportunities for making choices (to engage in both investment banking and commercial banking).

Wall Street greed can also be dismissed as a cause. The amount of greed in society is more or less constant. It does not change much from year to year. People who are greedy are going to continue to be greedy and people who are not greedy will not all of a sudden become greedy. There was no sudden surge in greed to cause the financial crisis.

Although greed might have been present, it was not the cause of the financial crisis. Even if greed did exist on Wall Street, that is not necessarily a bad thing, as Adam Smith pointed out in 1776. (13) Merely acting in one's self interest while playing within the rules has a beneficial effect on society. (14) Greed becomes a problem to other individuals or society only when the individual does not play within the rules.

People who act only in their own self interest often benefit society more than they intend by offering a higher quality product or service at a lower price than the competition. Offering higher quality and/or lower prices are the two main ways to gain profits and market share. The fact that the individuals who do so might act from the perspective of greed rather than altruism is irrelevant from the perspective of utilitarian ethics because the result is still a positive-sum game regardless of motive (Kant would disagree. (15) If the activity is voluntary it does not violate property or contract rights, and so is not unethical from the perspective of rights theory (more on this theory below).

It might be argued that the people who traded complex financial derivatives and bundled subprime mortgage securities were acting unethically because their activity constituted fraud. But while that might be true in some cases, it was not true in all cases. Merely trading in such instruments does not constitute fraud or unethical activity. Where there was no intent to defraud it cannot be said that engaging in such trading constituted unethical conduct unless some other element is involved.

The fraud argument would be strengthened if one points out that there was sometimes an element of negligence or deception on the part of those who bundled high and acceptable quality mortgage instruments with mortgage instruments of lower quality. The fact that some components of those bundled securities were poor investments, coupled with the fact that their low quality was not disclosed, or was even hidden, might lead one to reasonably conclude that fraud was present in at least some cases. But in many other cases it was simply negligence (not making a sufficient attempt to determine the quality of the underlying financial instrument) or incompetence (not being able to place a value on the instruments due to lack of background or intelligence).

It might be pointed out that not all of that negligence and incompetence originated on Wall Street. Some of it emanated from the halls of Congress and the offices of Fannie Mae and Freddie Mac, two quasi-governmental agencies that pushed the sale of subprime mortgage backed securities. (16)

Was market failure to blame or was it government failure? Richard Rahn, chairman of the Institute for Global Economic Growth, answers that question with a question of his own:
   If government agencies pressure banks to give loans to people who
   are poor credit risks, do you view this as a failure of capitalism
   or a failure of government? (17)


The better view is that government policy caused the financial crisis. Several presidents have expounded on the desire to spread opportunities for home ownership, which they sometimes refer to as the American dream. While it might be a dream of many Americans to own their own homes, it does not follow that the federal, state or local government should help them to attain this dream, especially if it comes at the expense of someone else. In fact, it is questionable from the perspectives of ethics and political philosophy whether it is a legitimate function of government to use the force it has at its disposal to punish or reward private non-rights violating behavior of any kind. Yet the federal government of the united States has enacted a number of laws and regulations that subsidize home ownership, often at the expense of landlords, renters and taxpayers. It rewards home owners at the expense of everyone else.

Ethical aspects of government intervention into the home ownership market have been almost totally ignored in both the literature and the public debate. Yet subsidizing home ownership requires someone to pay for part of the cost of owning a home that would otherwise be borne by the homeowners themselves, which seems inherently unfair. Using the force of government to encourage people to purchase homes also punishes landlords, since it reduces demand for rental properties. Worse yet, the landlords are forced to pay taxes to support this homeowner subsidy. Pressuring banks to grant below prime loans reduces their profits and increases defaults, which harms both the banks and their shareholders. It also harms other home owners, since mortgage loan defaults cause the market to become flooded with repos, which puts downward pressure on the price of homes that are not in default. It is a negative-sum game, which cannot be justified on utilitarian ethical grounds. It also violates the rights of those who are forced to subsidize the home purchases of others.

Renters are also forced, through their tax payments, to subsidize the purchase of homes by others. And since there is a tendency for homes to be purchased by those who have above-average incomes, some of the renters who are subsidizing those home purchases are actually subsidizing people who have higher incomes than they do, which results in the poorer classes subsidizing the richer classes.

The current financial situation cannot be blamed on market failure. Markets are not to blame for failing to regulate a market that is permeated with restrictive regulations and subsidies. Monetary policy, subsidies, misguided government regulations and financial safety nets have prevented the market mechanism from working. (18) It is a government failure, not a market failure.

METHODS OF ANALYSIS

This paper will employ two methods of analysis, utilitarian ethics and rights theory. The two methods overlap to a certain extent. However, they do not overlap 100 percent. (19) There are several reasons why both methods are employed. The utilitarian approach is used because the vast majority of economists take a utilitarian approach, either predominantly or exclusively. Portions of the U.S. and other legal systems are partially utilitarian based. (20) The General Welfare Clause of the United States Constitution is an example of how utilitarian philosophy is embedded into the legal system. The General Welfare Clause is the constitutional provision regulators use to justify their actions when they can find no other constitutional authority. Many other national constitutions contain their own version of the General Welfare Clause

The subfield of welfare economics is utilitarian based and many of the criticisms that have been made of welfare economics can also be made of utilitarian analysis. (21) Thus, utilitarian analysis suffers from some structural deficiencies. However, failure to consider utilitarian arguments would result in ignoring some of the main arguments that have been put forth on both sides of the financial crisis debate, so some utilitarian analysis is called for in spite of its structural deficiencies. Applying rights theory overcomes the structural deficiencies of utilitarian ethics. However, rights theory is also an imperfect tool of ethical analysis, as is discussed below.

Utilitarian Ethics

Utilitarian ethics may be summarized by the following flow chart. (22)

[ILLUSTRATION OMITTED]

Utilitarian ethics contains some structural defects that cannot be overcome by merely fine- tuning the theory. (23) For example, it is not always possible to measure gains and losses precisely, (24) which makes it difficult or impossible to determine with a high degree of reliability whether the gains exceed the losses or whether the result is a positive-sum or negative-sum game. One must make estimates and the accuracy of those estimates may leave something to be desired. (25) This measurement problem also occurs in cases where a small minority benefit greatly by a policy while the vast majority lose just a little, (26) which is the case with restrictive trade policies and most other special interest legislation. It also is not possible to measure interpersonal utilities, (27) which makes it impossible to determine in a one winner, one loser situation whether the result is a positive-sum game.

Early utilitarians such as Bentham (28) and Mill (29) believed that a policy is good if it results in the greatest good for the greatest number. Although this view appears sound on the surface, a mathematician would be quick to point out that it is mathematically impossible to maximize more than one variable at the same time. (30) One may adopt a policy that achieves the greatest good or one may choose a policy that benefits the greatest number but one may not have a policy that does both at the same time. One goal must yield to another goal.

Another inherent problem with utilitarian approaches is that it is not always possible to identify all the groups and individuals who may be affected. Some groups may be easy to identify while others may be difficult or impossible to identify. Frederic Bastiat (1801- 1850) provides an excellent example of this problem in his essay, What Is Seen and What Is Not Seen. (31)

The essay begins with a parable, which has come to be known as The Broken Window Fallacy. The story is about a young hooligan who throws a rock through a window. A crowd gathers and begins to discuss what has happened. One spectator points out that some good has resulted from this destruction because it provides employment for glaziers. If no windows were ever broken, there would be no work for glaziers. What is seen is an expansion of employment in the glass making industry. Thus, some glazier wins. If one were to stop there, one might conclude that destruction is good because it benefits the economy. Those who have argued that war is good for the economy stop their analysis at this point.

If one continues to analyze the situation it is possible to identify a loser--the owner of the window. At this point an economist might conclude that the breaking of the window constitutes a zero-sum game because there is one winner and one loser.

But that analysis is also incomplete. There are really two losers. The owner of the window loses but so does the cobbler because the owner of the window would have used the six francs it cost to replace the window to purchase a pair of shoes. But instead of having a window and a new pair of shoes, the window owner now has only a window. He is not able to buy the shoes because he had to spend six francs to replace the window.

The point of the parable is to show that some individuals and groups may be identified but others may not. No one except the owner of the window knows that the cobbler has lost as a result of the broken window, and even the owner of the broken window may not be able to identify the cobbler as a loser if he has not yet decided what he would have done with those six francs. But analysts must attempt to identify all winners and losers, or at least those who would be foreseeable. Failure to do so results in an incomplete utilitarian analysis.

Bastiat goes so far as to say that the failure to make this attempt is what separates a good economist from a bad economist.
   There is only one difference between a bad economist and a good
   one: the bad economist confines himself to the visible effect; the
   good economist takes into account both the effect that can be seen
   and those effects that must be foreseen. (32)


Thus, if we do not at least attempt to identify all affected individuals and groups and try to determine the effect a policy has on them we are being bad economists. As we shall see below, several of the policies that have been adopted over the years leading up to the financial crisis were the result of bad economics because those who advocated and adopted the policies failed to identify all affected individuals and groups and failed to take into consideration the effect the proposed policy would have on them.

Some philosophers, legal theorists and policy analysts believe that a policy is ethical if the result is an increase in efficiency. Richard Posner, a prolific American jurist and a co-founder of the law and economics movement, is one such theorist. (33)

The efficient society is wealthier than the inefficient--that is what efficiency means. (34)
   ... the criterion for judging whether acts and institutions are
   just or good is whether they maximize the wealth of society. This
   approach allows a reconciliation among utility, liberty, and even
   equality as competing ethical principles. (35)


Some ethicists disagree with the ethics as efficiency argument. (36) For example, a government that finds a more efficient way to kill people or violate rights is not acting ethically. Hoppe (37) argues that efficiency can be maximized only with a strong property rights regime, and that economic efficiency can be justified, but on the basis of property rights rather than utilitarian ethics, a conclusion with which Norton (38) and Knight (39) would agree..

Another structural flaw with any purely utilitarian analysis, perhaps the major flaw from the perspectives of ethics and political philosophy, is that it totally ignores all rights, (40) including property and contract rights and even the right to life in some cases. For example, if two wolves and one sheep vote to determine what is for dinner, a utilitarian would conclude that whatever outcome that benefits the majority is the correct outcome. Rights theorists would take the position that the rights of the one sheep are superior to the desires of a thousand wolves.

The contrast between utilitarian ethics and rights based ethics has also permeated literature. For example, in The Brothers Karamazov, Dostoevsky (41) asks whether it would be permissible to torture one baby to death if the result would be happiness for every other member of the human race forever. A more recent variant of this contrast may be seen in the argument about whether it is permissible to torture alleged enemy combatants if doing so would result in extracting information that would save lives.

Rights-Based Ethics

The rights approach may be summarized by the following flow chart. (42)

[ILLUSTRATION OMITTED]

According to rights theory, all acts or policies that violate rights are automatically unethical, regardless of the utilitarian outcome. (43) One advantage of the rights approach is that it negates the need to make estimates about relative gains and losses. It is not necessary to identify all affected groups. All that need be determined is whether anyone's rights have been violated.

The rights approach is also embedded in the U.S. Constitution and the constitutions of many other countries. Portions of the Bill of Rights contained in the first ten amendments to the U.S. Constitution are some examples that might be given. The right to free speech, free press, assembly, religion, and so forth do not include any utilitarian escape clause. The rights of one individual are superior to the wishes of the whole world.

Although the rights approach overcomes the structural flaws of utilitarianism, the rights approach is not perfect. It merely makes it possible to identify acts and policies that are unethical. It does not help us to decide whether non-rights violating activities are ethical or unethical. Prostitution, gambling, taking certain drugs, working on the Sabbath and so forth may or may not constitute unethical or immoral conduct but we cannot apply rights theory to arrive at any conclusions. All we can conclude is that no rights are violated by these practices. We must apply some other criteria to determine whether the acts are ethical.

The rights approach has been criticized by utilitarians. Bentham, for example, takes the position that there is no such thing as inherent rights; all rights come from government. (44) He even goes so far as to state that rights are "nonsense on stilts." (45) One wonders whether Bentham would continue to hold this position if he were a sheep confronted by two hungry wolves.

Although Bastiat often applied a full and complete version of utilitarian ethics to analyze public policy issues, he did not limit himself to utilitarian analyses. He also employed rights theory at times. (46) He also identified rent seeking activity wherever he found it.

The most complete exposition of his rights position was laid out in The Law. (47) In it, Bastiat points out that the law can be perverted to be a tool of legal plunder.
   Under the pretense of organization, regulation, protection, or
   encouragement, the law takes property from one person and gives it
   to another; the law takes the wealth of all and gives it to a few
   --whether farmers, manufacturers, shipowners, artists, or
   comedians. (48)


Economists would call this practice rent-seeking, or using the law to feather the nests of the few (special interests) at the expense of the many. (49)

But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.

Then abolish this law without delay, for it is not only an evil itself, but also it is a fertile source for further evils because it invites reprisals. if such a law--which may be an isolated case--is not abolished immediately, it will spread, multiply, and develop into a system. (50)

In summary, this paper employs two approaches--utilitarian ethics and rights based ethics--in order to have a fuller and more complete analysis. Omitting either of the approaches results in an incomplete analysis. The next few sections will examine some of the alleged causes of the financial crisis. The examination will take place through the lens of utilitarian ethics and rights theory.

THE COMMUNITY REINVESTMENT ACT

The Community Reinvestment Act (51) was passed during the Carter administration to encourage (pressure?) banks to provide credit to the communities where they are located. While such a requirement might seem harmless, such is not always the case. For example, what if a bank establishes a branch in a community where a large proportion of residents are unemployed, underemployed and/or otherwise poor? Such people generally have a difficult time paying their rent on time. Presumably they would also have difficulty paying a mortgage, especially if the mortgage payment is higher than their rent payment. Yet the Community Reinvestment Act (CRA) pressures banks to make loans to such uncreditworthy customers as a condition of doing business.

The main provisions of the law are summarized in Sec. 802 of the Act:

SEC. 802. (a) The Congress finds that--

(1) regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business;

(2) the convenience and needs of communities include the need for credit services as well as deposit services; and

(3) regulated financial institutions have continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.

(b) It is the purpose of this title to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.

One might criticize the very premises of the Act on philosophical and ethical grounds. Companies are generally in business to make a profit, which includes servicing the communities in which they do business. If they do a good job they are rewarded with profits and if they do a bad job they are punished with losses and perhaps bankruptcy. The market already does an excellent job of regulating performance by rewarding those who service consumers well and punishing those who do not. (52) There is no need to pass a law requiring companies to serve their communities. However, there is a danger of making such a law, and the Community Reinvestment Act (CRA) serves as an excellent example of what can happen when politics is injected into the market process.

The CRA was passed in response to evidence that some banks were "redlining," or drawing red lines on a map around low-income neighborhoods deemed not to be credit worthy. (53) The original 1977 act was more concerned with reporting data than with enforcement. However, amendments enacted during the Clinton administration put some teeth into the law and pressured banks into making a certain percentage of their total loans to customers who would not otherwise have qualified because of low income and/or poor credit ratings.

One impetus for the CRA was the perception that banks were discriminating along racial lines. However, one of the main studies that reached that conclusion did so using flawed data. (54) Other studies have found that discrimination in lending practices tended to be based on credit worthiness rather than race. (55)

One alleged reason for the passage of the CRA was to increase the availability of credit to poor and minority communities. However, there was seldom a lack of competition for lending in these communities. Thus, from the perspective of enhancing credit opportunities, the argument for passage of the Act does not hold up to analysis. Various scholars (56) have pointed out this fact. White (57) goes so far as to say that the CRA is ill advised, redundant, and shackles the banking system while providing opportunities for various groups to extract tribute.

Complying with the provisions of the CRA is not a costless venture. Both the direct and indirect costs can be substantial. Some direct costs include preparing the various government reports, hiring compliance officers, dealing with CRA examiners and meeting with various community groups that threaten to complain to the government if the bank does not grant a certain number of loans to local members of the community who have poor credit scores. (58)

One study found that the CRA cost relatively small banks an average of 4.5 percent of their pretax income and 0.25 percent of their total assets. (59) There is evidence to suggest that the financial soundness of banks decreases as they better conform to CRA rules. Studies comparing bank CRA ratings to their CAMELS rating (a formula bank regulators use to assign safety and soundness of lending institutions) found that the better a lender was rated according to CRA standards, the worse its CAMELS rating was. (60) These studies provide strong evidence that the Community Reinvestment Act weakened the banking system.

Benston (61) identified three important adverse effects that the CRA has had on borrowers and distressed neighborhoods.

* Banks that try to fulfill their CRA obligations tend to siphon off customers from other banks, sometimes on less beneficial terms to the borrowers. Minority owned banks have complained that they have to compete against banks that subsidize their loans through CRA pressure in order to obtain regulatory approval for mergers or acquisitions.

* The CRA makes it very difficult for banks to close branches that are in distressed neighborhoods. Because that is the case, it serves as a negative incentive for other banks to enter those neighborhoods and offering their services to minorities.

* Some borrowers may be harmed because of the CRA policy that requires banks to lend to members of certain specified groups. For example, banks that have experience lending to members of other groups, such as Polish-Americans or Chinese-Americans or to other groups that the CRA does not consider to be disadvantaged, might have to reduce their services to those groups in order to shift their resources to the CRA preferred groups.

Allowing politics to enter the realm of bank lending also provides opportunities for special interest groups to engage in rent seeking activities. Community organizers and groups like ACORN (Association of Community Organizations for Reform Now) can threaten to oppose proposed bank expansions or mergers by filing complaints with various federal government agencies. Sometimes banks find it easier to donate hundreds of thousands of dollars to such groups to buy their silence. (62) Time is of the essence in mergers. Delays can cost money even if the delay is for a short time. ACORN and other groups realize this fact and use it to their advantage. One ACORN representative has stated: "When you're talking a billion-dollar merger, every day of delay costs lots of money. It's cheaper to negotiate than fight." (63) The CRA has been used as a form of legalized extortion by these groups to coerce contributions out of banks and to force them to make subprime loans to uncreditworthy people.

Pressuring and intimidating banks into making below market loans may be criticized on several counts. From the perspectives of ethics and political philosophy, using the force of government to coerce law abiding business people into channeling their assets and the assets of their shareholders into relatively unproductive, inefficient and risky uses is not a legitimate function of government in any conceivable liberal democracy.

Since there is a limited amount of credit to go around, funds that are lent to less credit worthy customers cannot be lent to more credit worthy customers. Such practices discriminate against the prudent and reward the less prudent. Forcing banks to lend to some groups at the expense of other groups violates the bank's property rights and also the contract rights of both banks and their more credit worthy customers. It also violates utilitarian ethics, since it forces banks to operate less efficiently and results in negative-sum games, since there are more losers than winners. Banks and their shareholders lose, as do their more credit worthy clients who are no longer able to borrow the funds they need, and taxpayers lose because they are ultimately called upon to pay for the defaults. As foreclosures increase, housing prices in the entire community decline as the supply of housing that is for sale increases. The only winners are the less credit worthy customers and the politicians who have purchased their votes with promises of low interest mortgages.

Another unethical aspect of this practice of subsidizing mortgage loans is that it is off the books. If the government adopts a policy of subsidizing mortgage loans, it should at least make it a budget item rather than hiding it. (64) Making it part of the federal budget would at least force Congress to acknowledge that the policy is not cost-free and would force the government to at least disclose what the true cost is.

Macey and Miller (65) conducted a major economic study of the CRA and concluded that it does more harm than good. They found that it allocates credit inefficiently, encourages banks to make risky and unprofitable investment and product-line decisions, penalizes banks that try to reduce costs by consolidating services or closing or relocating branches, deters transactions that would improve efficiency and solvency, impairs the safety and soundness of the banking system, selectively taxes certain depository institutions, imposes significant compliance costs, and harms the very groups the Act was intended to help. In other words, the Act violates utilitarian ethics. One might also point out that it violates property rights because it uses coercion, threats and intimidation to force bankers to invest shareholder assets in places that would not otherwise receive them in the absence of coercion.

Bierman, Fraser and Zardkoohi (66) examined the Macey and Miller study (67) and were in major agreement with it. They point out that, ironically, banks that have high CRA ratings may actually harm the communities they are supposed to help because some of their policy choices may result in having less funds available to lend in the community.

Economists are divided about what should be done. Some economists call for mere reform, (68) perhaps because they believe that outright repeal is not feasible. (69) Overby (70) advocates extending the CRA to finance companies and mortgage companies. Klausner (71) advocates a system of tradable obligations.

Others have called for repeal. In fact, calls for repeal have been made since the mid-1990s, (72) before the most damaging provisions of the CRA became generally known.

White (73) suggests several alternatives to the CRA. If discrimination is the problem, the solution is vigorous enforcement of antidiscrimination laws. If lack of credit availability is the problem, the rules that restrict interstate and branch banking should be loosened to increase competition. If it is determined that low income neighborhoods still are not being adequately served, direct subsidies by the federal government should be used rather than regulation, the reason being that direct subsidies would be more open and transparent and a better, cleaner form of government.

Repeal seems to be the best solution to the problem of subprime loans and misallocation of resources. Anything less than repeal would allow credit to continue to be misallocated and would allow special interest groups such as ACORN to legally extort millions of dollars from banks and their shareholders. The present situation violates utilitarian ethics because it misallocates resources, causing the economy to work less efficiently. The present result is a negative- sum game because there are more losers than winners. The present regime also violates the property and contract rights of bankers, shareholders and potential customers who are unable to obtain bank credit because credit is being channeled to others through coercion.

FREDDIE MAC AND FANNIE MAE

Freddie Mac and Fannie Mae were government creations. They were founded in order to increase the number of mortgage loans to people with low income. The Department of Housing and Urban Development (HUD) gave Freddie and Fannie explicit targets to achieve. In 1996, the target was that 42 percent of their mortgage loans had to go to borrowers whose income was below the median income in their area. This target increased to 50 percent in 2000 and to 52 percent in 2005. (74)

HUD also required Fannie and Freddie to purchase a certain percentage of mortgages from borrowers whose incomes were less than 60 percent of the median income in the areas where they live. That percentage was 12 percent of all mortgage purchases in 1996, and rose to 20 percent in 2000 and 22 percent in 2005. That goal was to increase to 28 percent in 2008. As a result, they funded hundreds of billions of dollars of loans, many of them at subprime rates. Many of the borrowers purchased homes with less than 10 percent down payments. Fannie and Freddie fueled much of the demand for subprime securities. (75) These subsidies were all off budget. If private banks have tried to omit this volume of loans from their balance sheets, the bank officers would have gone to jail for fraud. Yet when the government resorts to the practice of off balance sheet financing it is business as usual. This is exactly the kind of practice Frederic Bastiat warned against in the 1840s ["See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime." (76)

Freddie and Fannie have squandered hundreds of billions of dollars by channeling funds into relatively unproductive uses. They have helped fund the housing bubble and misallocated resources. It is time for the federal government to get out of the mortgage business.

Economists and policy analysts are split on what to do about Freddie Mac and Fannie Mae. Some advocate reform while others advocate abolition (77) or privatization. (78) One thing that is clear is that doing nothing--the status quo--is not acceptable. Pouring more money into those institutions would also be an improper policy, since they have proven they are not capable of investing capital efficiently.

From an ethical perspective the choice is quite clear. Any form of government subsidy violates someone's property rights because it forces one group of individuals to pay for the benefits of other individuals. Furthermore, forcing credit to flow into areas where it would not otherwise flow causes credit to be misallocated, which decreases efficiency, thus violating utilitarian ethics. The only ethical choice is abolition. There are a few ways to accomplish this goal. One way would be to just shut them down. Another option would be to privatize them by selling them to the highest bidder.

OTHER FEDERAL LENDING PROGRAMS

Although this paper cites the Community Reinvestment Act, Freddie Mac and Fannie Mae as part of the problem, other federal lending programs could also be mentioned and analyzed if space permitted. The Small Business Administration lending program, Ginnie Mae and the CDFI (Community Development Financial Institutions) program also distort credit markets. The Federal Housing Administration continues to use its power to loosen downpayment standards. The Department of Housing and Urban Development continues to abuse its power by pressuring lenders to grant mortgage loans to uncreditworthy customers. (79) There is no need for these agencies to exist. Their only reason for existence is to subsidize some groups at the expense of the general public. They should also be abolished.

THE FEDERAL RESERVE BOARD

A number of economists have blamed expansive monetary policy for being one of the primary causes of the financial crisis. (80) Alan Greenspan, the former chairman of the U.S. Federal Reserve Board, established a policy of keeping interest rates below the market level. The purpose was worthy. Low interest rates make it easier for businesses to borrow and expand, thus creating jobs. Low rates make it easier for individuals to purchase homes. It seemed like a win-win situation.

However, regulating interest rates so they are below the rates that would be present in a free market has its downside. Low interest rates lead to overexpansion of credit. Businesses that would find it unprofitable to invest in certain projects if interest rates were at the market level find it profitable to invest in some marginal projects if interest rates are below the market level. Individuals who would not otherwise be able to purchase a home on credit now find it possible to purchase a home. Those who already have a home now find it possible to purchase a larger home. The housing market expands beyond what would be the case in a market where interest rates are not kept artificially low. Housing prices are artificially increased because of the excess demand, causing a market bubble. The housing bubble would not have been possible without the Fed's expansive monetary policy.

This overexpansion of credit leads to market distortion, which eventually leads to a reversal, causing either a recession or a depression, depending on the severity of the reversal. F.A. Hayek won the Nobel Prize in economics in 1974 for his work in this area, (81) but his work was basically just an extension of the work done by Ludwig von Mises before World War I. (82)

There is a common belief among economic historians that the Federal Reserve Board's mistakes in the area of monetary policy of the 1920s led to the Great Depression of the 1930s. (83) Some economists believe that it was the primary or only cause (84) while others argue that it merely deepened the depression. (85) The evidence is clear that the Fed played a role.

One of the arguments put forth to keep the Fed is because of the stabilizing role it plays in the economy. It supposedly regulates interest rates in the public interest, keeps the money supply growing at the appropriate rate and reduces the severity of economic fluctuations. However, the massive study by Milton Friedman and Anna J. Schwartz of U.S. monetary history (86) dispels that notion. In fact, they found that since the creation of the Federal Reserve Board in 1913 there have been more frequent and more severe economic fluctuations than before the creation of the Fed.

If the Fed is to blame, what is the solution? The Fed is nominally independent of the federal government. However, its chairman is appointed by the president and confirmed by the Senate. One proposed solution by Milton Friedman is to end this independence and make it part of the U.S. Treasury. (87) However, that is Friedman's second best solution. His first choice would be to end the Fed. (88)

After President Andrew Jackson failed to renew the charter for the first central bank in the 1830s the united States did quite well without a central bank. (89) The nineteenth century was an almost continuous period of economic growth. The present Federal Reserve Bank was not established until 1913, so it cannot be said that a central bank is essential to a country's economic growth because it is not.

Abolishing the Federal Reserve Board might sound like a radical idea, but actually there is a lot of high-powered intellectual support for it. Milton Friedman and F.A. Hayek, both Nobel Prize winning economists, have called for its abolition. (90) A number of economists have explained how the functions of the Fed could be performed by the market. (91) The clearing function could be taken over easily by the twelve regional banks.

The main thing the Fed would no longer be able to do would be to make mistakes in monetary policy, since this function would be assumed by the market. Lawrence H. White (not to be confused with Lawrence J. White) has written two books that outline how free banking has worked in the past (92) and how competing currencies would function. (93) F.A. Hayek (94) outlined a plan for competing currencies that would be created in the private sector and that would be based on some defined basket of goods and services.

The theory of competing currencies has its foundation in monopoly theory. Two inherent characteristics of monopoly are that the cost is higher and the quality is lower than what would be the case under competition. If the Fed is the only legal creator of money, it is a monopolist. If a number of private issuers, such as Citibank, Bank of America, Barclays, and so forth each issue their own money, the monopoly is broken and the doors of competition are open, leading to higher quality money at reduced cost. One might raise the Gresham's Law argument, that bad money drives good money out of circulation. However, Gresham's Law only applies when exchange rates are fixed. Since the collapse of the Bretton Woods Agreement and the reintroduction of flexible exchange rates, there is no longer any need to worry about the Gresham's Law effect. Superior money would be traded at a premium and inferior money would trade at a discount

Space does not permit a full exposition of the theory. Hayek (95) gave us a basic outline in 140 pages and White (96) expanded on the idea with 260 pages of additional analysis. George Selgin (97) has also written a book on the subject and White and Selgin co-authored an article available on the internet that provides the basic outline, with links to additional publications. (98)

Suffice it to say that it is an idea worth exploring. If the Fed played a decisive role in the present financial crisis by its cheap money policy, and if the abolition of the Fed's monetary policy function could prevent such mistakes from happening again, the concept of competing currencies and the denationalization of the money supply appear to be a good alternative to the status quo.

The idea of competing currencies meets both the utilitarian ethics test and the rights test. Competing currencies would improve quality and reduce cost, thus increasing efficiency. The fact that the government monopoly would be broken strengthens property and contract rights, since the present government monopoly punishes private money issuers and prevents them from entering into contracts and trading the property they have for the property they want. Hulsmann, (99) writing from the perspective of Christian ethics, holds that the present government monopoly monetary system creates unjust incomes, destroys wealth, subverts the moral foundations of society and ultimately paves the way for hyperinflation and totalitarianism.

FEDERAL TAX LAW

Several provisions of the federal tax code (100) subsidize home purchases. Perhaps the largest and most visible subsidy is the provision that allows taxpayers to deduct mortgage interest and real estate taxes on their primary homes and, in some cases, on secondary homes as well. For people in the 25 percent tax bracket, monthly interest and tax payments of $2000 reduce their tax liability by $500.

Many people in the lower income brackets do not pay any federal income taxes, or if they do pay taxes, they take the standard deduction rather than itemize their deductions, which means that many people with low incomes are not able to take advantage of this subsidy. The federal mortgage interest and real estate tax deduction are beneficial mostly to middle and upper income individuals. At least one study (101) has found that eliminating the mortgage interest deduction would increase horizontal equity. (102)

This subsidy distorts both the housing market and the credit market. Making homes artificially cheaper on an after-tax basis causes home price inflation. Diverting capital into the mortgage market also results in less capital being available for other types of loans, including business loans, thus increasing the cost of capital to businesses and making it more difficult to stay in business and to compete internationally.

What is not seen is the depressing effect the subsidy has on rental property. If the demand for homes increases, the demand for rental units must decrease, leading to reduced profits in the real estate rental market and increased bankruptcies, as marginal providers are unable to generate sufficient revenue to stay in business. Landlords who do survive will have fewer funds available to maintain and improve their properties, to both their detriment and the detriment of their tenants.

There are several ways to eliminate this subsidy. One solution would be to repeal the provision that allows homeowners to deduct their mortgage interest and property taxes. However, doing so would result in a tax increase for those affected by the repeal, which is not a good idea, given the fact that taxes are already taking too much money out of the private economy. If this solution were tried, it would be necessary to reduce tax rates so that the change would not result in a heavier tax burden.

Another solution would be to allow renters to deduct the cost of their rent. Doing so would level the playing field between those who rent and those who own. It would also increase the desirability of rental housing, which would remove the present bias against landlords. The problem with this solution, from an ethical and philosophical perspective, is that it is a form of subsidy, which is a step in exactly the wrong direction. Subsidies result in market distortion and housing subsidies of any kind artificially inflate housing prices, leading to bubbles in the housing market. The best policy would be to abolish all subsidies and adjust taxes downward to offset what would otherwise be tax increases.

Another, lesser known effect of interest deductibility is the effect it has on income shifting from mortgage holders to banks. A study by Harris and Kilic (103) found that mortgage rates vary positively with both banks' tax costs and mortgage holders' interest tax deductions, with the effect that banks are able to pass on their tax costs to consumers and also capture a portion of their borrowers' tax benefits. The annual magnitude of this tax shift was estimated to be $23 billion.

The federal government has enacted a number of tax credits to encourage potential home buyers to purchase a home. The rules in this area are changing rapidly and the rules about to be discussed may be replaced or supplemented by other rules by the time this article appears in print, so this discussion should be considered as an example of how the Internal Revenue Code is used to subsidize home purchases rather than an up-to-date tax treatise that can be relied on for investment purposes.

The Housing and Economic Recovery Act of 2008 (104) established a $7500 tax credit for first-time home buyers. The American Recovery and Reinvestment Act of 2009 (105) increased that amount to $8,000 and changed the repayment and qualification rules. (106) The Worker, Homeownership and Business Assistance Act of 2009 (107) extended the tax credit into 2010 and expanded the rules by allowing existing homeowners to get the credit as well. (108) IRS Form 5405 can be used to claim the credit. The effect of the credit is to increase demand for homes, which leads to an artificially induced boom in housing prices. It also makes it easier for uncreditworthy individuals to purchase homes that they otherwise would not be able to afford.

Some governments at the sub-federal level also subsidize mortgage interest payments. Some states issue Mortgage Credit Certificates, which allow homeowners to take a tax credit rather than a tax deduction for home mortgage interest. (109)

Another federal tax provision that encourages debt is the business interest deduction. Businesses are allowed to deduct interest but not dividend payments, leading to an after-tax reduction in the cost of debt capital relative to equity capital. As a result, businesses are encouraged to use debt rather than equity to finance their operations. Increasing the ratio of debt also results in increasing the return on equity capital, since there is less of it. However, it also increases the after-tax cost of equity capital.

This bias in favor of debt financing is especially relevant for banks, since the debt bias encourages them to become less solvent. It is obvious that less solvent banks pose a threat to the financial system, yet federal tax policy encourages banks to become less solvent.

The federal government also gives special tax breaks to certain lenders, such as credit unions, Fannie Mae, Freddie Mac and the Federal Home Loan Banks, a practice that is inherently unfair to other lenders. These tax breaks are little more than subsidies. In the case of Fannie Mae and Freddie Mac they are subsidies that reward poor performance. They should be eliminated in the interests of fairness and efficiency.

MARK-TO-MARKET ACCOUNTING

Mark-to-market accounting, the financial reporting rule that requires companies to list certain assets on their balance sheets at current market value instead of historical cost, has been cited as one of the contributing causes of the financial crisis. (110) In a sense, the allegation has some merit. If the market value of investments falls far below historical cost, and if the companies holding those investments are forced to disclose that fact to the public in their annual and quarterly reports, investors and analysts who read those reports could decide to sell their shares in those companies, thus causing a decline in stock price. If a sufficient number of investors decide to sell it could lead to insolvency. (111)

But that is only part of the story. One reason why some securities declined so much in value is because of the rise and increased popularity of some derivatives and securitized mortgage instruments. Combining thousands of subprime mortgages that are thought to be federally secured into a single instrument causes valuation problems that are not easy to unwrap. Many of those complex financial instruments were issued before the market became aware of their flaws. Neither the designer of those instruments nor their purchasers understood the risks. (112) As those risks started to become known, the prices of those instruments declined and the mark-to-market accounting rule required corporate holders of those securities to report them at current market value rather than historical cost. Mark-to-market accounting merely exposed these bad investment decisions to the light of day. It is a case of the messenger being blamed for reporting the collapse of market values. (113)

That is not to say that the mark-to-market rule could not be amended to take temporary declines into account, provided one can be reasonably sure that the decline is only temporary. One might even make the case that debt securities, which have a clearly defined maturity date, should not be included in the list of securities that should be listed at current market value, since their market value and maturity value will be identical at the maturity date. But arguing that merely reporting the facts about market values "caused" the financial crisis is a losing argument. What is the alternative? To not report the facts in order to avert or delay the crisis, which would only allow the situation to fester and get worse over time? If one is to look for causes and cures, requiring companies to report their investments at historical costs when their value has declined is not a good policy option. It also is not honest because it results in deliberately reporting inaccurate numbers.

THE ETHICS OF BAILOUTS
   The state is the great fictitious entity by which everyone seeks to
   live at the expense of everyone else. (114)

   The illegitimate use of a state by economic interests for their own
   ends is based upon a preexisting illegitimate power of the state to
   enrich some persons at the expense of others. (115)

   Through the years, some men have discovered how to satisfy their
   wants at the expense of others without being accused of theft: they
   ask their government to do the stealing for them. (116)


Corporate bailouts are always and everywhere a violation of both utilitarian ethics and rights. They necessarily violate utilitarian ethics because they cause assets to be taken from the more productive sectors of the economy and transferred to the less productive sectors. They violate property rights because taxpayers are forced to part with their property (money) to pay for it.

Bailouts are inherently unfair because they force the productive and successful members of the community to subsidize (reward) the inefficient and the incompetent. Bailouts are nothing more than special interest legislation that benefits some favored minority interest at the expense of the general public. Bailouts serve to socialize risks and privatize gains. They also create moral hazards. Bankers feel they can make riskier loans if they know they will be bailed out. Insurance executives are less restrained in insuring risky ventures if government regulators tell them they are too big to fail.

One might argue that some bailouts are justified on economic grounds because they prevent worse things from happening. The auto bailout saved jobs. The banking and insurance industry bailouts prevented a collapse of the financial system.

Such arguments sound plausible on the surface. However, if one digs below the surface one soon realizes that such arguments are incomplete and that those who advocate them are acting as what Bastiat referred to as bad economists (117) because they fail to take into account the effect the policy would have on all groups, both in the short-run and in the long-run.

One must remember that government has no resources of its own. Whatever resources it has it must first take from someone. If some government program pumps $500 billion into a particular failing industry, it must take the money out of some other sectors of the economy. The sector that receives the funds expands and prospers while the sectors that have the capital sucked out of them must necessarily shrink.

However, the shift from the productive sector to the relatively unproductive sector is not a zero-sum game. It is a negative-sum game because resources are being shifted from sectors that are relatively productive to a sector that is relatively unproductive. This shift can be illustrated mathematically as follows: (118)

If: a = the rate of return in the average industry, b = the rate of return in the bailed out industry, c = cash injection, m = multiplier, and b < a, then bcm - acm < 0

If we set: a = 5%, b = 1%, c = $1 trillion, and m = 5, then bcm - acm = 0.01($1 trillion)(5) - 0.05($1 trillion)(5) < 0

All bailouts thus fail the Pareto, Posnerian (119) and Primeaux and Stieber (120) efficiency tests. They also violate property rights, since the property transfers are not voluntary.

THE CURE

The financial crisis could have been prevented by applying utilitarian ethical principles and rights theory--Don't do anything that results in negative-sum games and don't violate property or contract rights. The cure starts by undoing all the things that got us into this mess. End all subsidies. Abolish any federal agency that produces negative-sum games or that violates property or contract rights.

Those who call for more regulation almost unanimously assume that it is the government that must be the regulator. However, such is not necessarily the case. The market can also act as a regulator. In fact, the market can be a very good regulator. The market did an excellent job of punishing the accounting firm of Arthur Andersen for its failed audits of Enron. The market acted much more swiftly and efficiently than did the government. Once the word got out that Arthur Andersen conducted a bad audit, its audit clients left in droves, well before the government lawsuits got to court, a process that took years. So it cannot be assumed that the government is the only regulator of corporate behavior. The market has a track record of being a very efficient regulator. (121)

If the goal is to make it more difficult and costly for banks and other financial institutions to engage in risky and speculative schemes, why not take away the government created safety nets that subsidize this behavior and make those institutions subject to market discipline? If financial institutions knew that the government would not insure them or bail them out if they failed, they would be far less likely to engage in risky ventures. The moral hazard problem would be greatly reduced.

(1) No triumphant return of the state. Financial Times, January 1, 2010 online edition; Robert Gordon, Did Liberals Cause the Sub-Prime Crisis? The American Prospect, online edition, April 7, 2008. Accessed 22 January 2010; Christopher A. Richardson, The Community Reinvestment Act and the Economics of Regulatory Policy, 29 Fordham Urban L.J. 1607-1632 (2002).

(2) Jagadeesh Gokhale & Peter Van Doren, Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis? Policy Analysis No. 648, October 8, 2009. Washington, DC: Cato Institute; Robert Gordon, Did Liberals Cause the Sub-Prime Crisis? The American Prospect, online edition, April 7, 2008. Accessed 22 January 2010; Johan Norberg, Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis (2009); Thomas E. Woods, Jr., Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (2009).

(3) Philip Augar, The Greed Merchants: How the Investment Banks Played the Free Market Game (2006); Barry Ritholtz, Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy (2009).

(4) Loong Wong, The crisis: a return to political economy? 5(1/2) Critical Perspectives Int'l Bus. 56-77 (2009).

(5) Bert Ely, Bad Rules Produce Bad Outcomes: Underlying Public-Policy Causes of the U.S. Financial Crisis. 29 Cato J. 93-114 (2009); Johan Norberg, Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis (2009); John B. Taylor, How Government Created the Financial Crisis, Wall Street J. February 9, 2009 at A19; John B. Taylor, Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis (2009); Thomas E. Woods, Jr., Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (2009).

(6) Gramm-Leach-Bliley Act (a.k.a. Financial Services Modernization Act of 1999), Pub.L. No. 106-102, 113 Stat. 1338 (1999).

(7) Glass-Steagall Act (a.k.a. the Banking Act of 1933). 12 U.S.C. 24; 48 Stat. 162 (1933).

(8) Allan H. Meltzer, Reflections on the Financial Crisis. 29 Cato J. 25-30 (2009).

(9) George Benston. The Separation of Investment and Commercial Banking (1990).

(10) Lawrence H. White, How Did We Get into This Financial Mess? Cato Institute Briefing Papers No. 110, November 18, 2008. Washington, DC: Cato Institute.

(11) Aigbe Akhigbe & Ann Marie Whyte, The Market's Assessment of the Financial Services Modernization Act of 1999, 36(2) Fin. Rev. 119-138 (2005).

(12) Gramm-Leach-Bliley Act (a.k.a. Financial Services Modernization Act of 1999), Pub.L. No. 106-102, 113 Stat. 1338 (1999).

(13) Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776/1937).

(14) Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776/1937); Ayn Rand, The Virtue of Selfishness (1964).

(15) See Immanuel Kant, Critique of Practical Reason (1997); Immanuel Kant, Groundwork for the Metaphysics of Morals (1998); Immanuel Kant, Lectures on Ethics (2001); Immanuel Kant, The Metaphysical Elements of Ethics (2009); Sally Sedgwick, Kant's Groundwork for the Metaphysics of Morals: An Introduction (2008); Roger J. Sullivan, Immanuel Kant's Moral Theory (1989); Roger J. Sullivan, An Introduction to Kant's Ethics (1994).

(16) Anna J. Schwartz, Origins of the Financial Market Crisis of 2008, 29 Cato J. 19-23 (2009).

(17) Richard W. Rahn, Lies or Ignorance? The Washington Times. October 1, 2008 online edition. Accessed 22 January 2010.

(18) Bert Ely, Bad Rules Produce Bad Outcomes: Underlying Public-Policy Causes of the U.S. Financial Crisis. 29 Cato J. 93-114 (2009); Jagadeesh Gokhale & Peter Van Doren, Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis? Policy Analysis No. 648, October 8, 2009. Washington, DC: Cato Institute; Robert L. Hetzel, Should Increased Regulation of Bank Risk-Taking Come from Regulators or from the Market? 95(2) Econ. Q. 161-200 (2009); Robert L. Hetzel, Monetary Policy in the 2008-2009 Recession. 95(1) Econ. Q. 201-233 (2009); Jeffrey M. Lacker, What Lessons Can We Learn from the Boom and Turmoil? 29 Cato J. 53-63 (2009); Allan H. Meltzer, Reflections on the Financial Crisis. 29 Cato J. 25-30 (2009); Johan Norberg, Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis (2009); Anna J. Schwartz, Origins of the Financial Market Crisis of 2008, 29 Cato J. 19-23 (2009); Lawrence H. White, How Did We Get into This Financial Mess? Cato Institute Briefing Papers No. 110, November 18, 2008. Washington, DC: Cato Institute; Thomas E. Woods, Jr., Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (2009).

(19) Robert W. McGee, Property Rights vs. Utilitarianism: Two Views of Ethics, 27 Reason Papers 87-115 (2004).

(20) Richard A. Posner, Utilitarianism, Economics, and Legal Theory, 8 J. Legal Stud. 103-140 (1979).

(21) Kenneth J. Arrow, Little's Critique of Welfare Economics, 41 Am. Econ. Rev. 923-934 (1951); A.E.C. Hare, The Theory of Effort and Welfare Economics, 18 Economica 69-82 (1951); Botond IKoszegi & Matthew Rabin, Mistakes in Choice-Based Welfare Analysis, 97 Am. Econ. Rev. 477-481 (2007); I.M.D. Little, A Critique of Welfare Economics (1950/2002); Arthur C. Pigou, Some Aspects of Welfare Economics, 41 Am. Econ. Rev. 287-302 (1951); Arthur C. Pigou, The Economics of Welfare, 4th edition (1958); Charles K. Rowley & Alan T. Peacock, Welfare Economics: A Liberal Restatement (1975); Tibor Scitovski, The State of Welfare Economics, 41 Am. Econ. Rev. 303-315 (1951); Jacob Viner, The Utility Concept in Value Theory and Its Critics, 33 J. Pol. Econ. 638-659 (1925).

(22) Robert W. McGee, Analyzing Insider Trading from the Perspectives of Utilitarian Ethics and Rights Theory, 91 J. Bus. Ethics 65-82 (2010).

(23) Robert W. McGee, The Fatal Flaw in NAFTA, GATT and All Other Trade Agreements, 14 Nw. J. Int'l L. & Bus. 549-565 (1994); Robert W. McGee, The Fatal Flaw in the Methodology of Law & Economics, 1 Commentaries L. & Econ 209-223 (1997).

(24) J.C.C. Smart & Bernard Williams, Utilitarianism--For and Against (1973).

(25) Murray N. Rothbard, Man, Economy and State (1970).

(26) William H. Shaw, Contemporary Ethics: Taking Account of Utilitarianism (1999).

(27) Nicholas Kaldor, Welfare Propositions in Economics and Interpersonal Comparisons of Utility, 49 Econ. J. 549-552 (1939); Murray N. Rothbard, Man, Economy and State (1970); Murray N. Rothbard, The Logic of Action One: Method, Money, and the Austrian School (1997).

(28) Jeremy Bentham, The Principles of Morals and Legislation (1988).

(29) John Stuart Mill, On Liberty and Utilitarianism (1993).

(30) John von Neumann & Oskar Morgenstern, Theory of Games and Economic Behavior (1947), at 11; G. Hardin, The Tragedy of the Commons. 162 Science 1243-1248 (1968).

(31) Frederic Bastiat, Selected Essays on Political Economy (1964), at 1-50. This essay was first published as a pamphlet and is reprinted in Oeuvres Completes de Frederic Bastiat, Vol. V, Paris: Guillaumin et Cie, 1862: 336-392.

(32) Frederic Bastiat, Selected Essays on Political Economy (1964), at 1.

(33) Robin F. Grant, Judge Richard Posner's Wealth Maximization Principle: Another Form of Utilitarianism? 10 Cardozo L. Rev. 815-845 (1989); Richard A. Posner, Utilitarianism, Economics, and Legal Theory, 8 J. Legal Stud. 103-140 (1979); Richard A. Posner, The Economics of Justice (1983), at 88-115; Richard A. Posner, Economic Analysis of Law, 5th edition (1998), at 284-287.

(34) Richard A. Posner, The Economics of Justice (1983), at 205.

(35) Id, at 115.

(36) John B. Egger, Comment: Efficiency is not a Substitute for Ethics. In Uncertainty and Disequilibrium 117-125 (Mario J. Rizzo, ed., 1979).

(37) Hans-Hermann Hoppe, The Ethics and Economics of Private Property (1993).

(38) Seth W. Norton, Poverty, Property Rights and Human Well-Being: A Cross- National Study, 18 Cato J. 233-245 (1998).

(39) Frank H. Knight, Risk, Uncertainty and Profit (1971).

(40) Utility and Rights (R.G. Frey, ed., 1984); Robert W. McGee, The Fatal Flaw in NAFTA, GATT and All Other Trade Agreements, 14 Nw. J. Int'l L. & Bus. 549-565 (1994); Robert W. McGee, The Fatal Flaw in the Methodology of Law & Economics, 1 Commentaries L. & Econ 209-223 (1997); Robert W. McGee, Property Rights vs. Utilitarianism: Two Views of Ethics, 27 Reason Papers 87-115 (2004); Murray N. Rothbard, Man, Economy and State (1970).

(41) Fyodor Dostoevsky, The Brothers Karamazov (1984).

(42) Robert W. McGee, Analyzing Insider Trading from the Perspectives of Utilitarian Ethics and Rights Theory, 91 J. Bus. Ethics 65-82 (2010).

(43) Robert W. McGee, Property Rights vs. Utilitarianism: Two Views of Ethics, 27 Reason Papers 87-115 (2004).

(44) Jeremy Bentham, The Principles of Morals and Legislation (1988).

(45) Jeremy Bentham, The Principles of Morals and Legislation (1988); Nonsense upon Stilts: Bentham, Burke and Marx on the Rights of Man (Jeremy Waldron, ed., 1987).

(46) Frederic Bastiat, The Law (1968). Originally published in 1850 as a pamphlet, La Loi. Reprinted in Sophismes Economiques, Ouevres Completes de Frederic Bastiat, Vol. I, 4th edition. Paris: Guillaumin et Cie, 1878: 343-394.

(47) Id.

(48) Id., at 17.

(49) Towards a Theory of a Rent-Seeking Society (James M. Buchanan, Robert Tollison & Gordon Tullock, eds., 1980); 40 Years of Research on Rent Seeking 2: Applications: Rent Seeking in Practice (R.D. Congleton, A.L. Hillman & A. Konrad, eds., 2008); Efficient Rent-Seeking: Chronicles of an Intellectual Quagmire (A. Lockhard & Gordon Tullock, eds. 2001); The Political Economy of Rent-Seeking (Charles K. Rowley, Robert Tollison & Gordon Tullock, eds., 1988); Gordon Tullock, Private Wants, Public Means: An Economic Analysis of the Desirable Scope of Government (1970); Gordon Tullock, The Economics of Special Privilege and Rent Seeking (1989); Gordon Tullock, Rent Seeking (1993).

(50) Frederic Bastiat, The Law (1968), at 21.

(51) Community Reinvestment Act. 1977. 12 U.S.C. [section][section]2901-2907 (1977); Pub.L. No. 95-128; 91 Stat. 1147 (1977), effective October 12, 1977. Also see www.fdic.gov/regulations/laws/rules/6500- 2515.html.

(52) Ludwig von Mises, Human Action: A Treatise on Economics (2008).

(53) J.I. Brannon, Renovating the CRA, 23(2) Regulation 8-9; Michelle Minton, The Community Reinvestment Act's Harmful Legacy: How It Hampers Access to Credit. CEI On Point No. 132 (March 20, 2008). Washington, DC: Competitive Enterprise Institute.

(54) Michelle Minton, The Community Reinvestment Act's Harmful Legacy: How It Hampers Access to Credit. CEI On Point No. 132 (March 20, 2008). Washington, DC: Competitive Enterprise Institute; Fred J. Phillips-Patrick & Clifford V. Rossi, Statistical Evidence of Mortgage Redlining? A Cautionary Tale, 11 J. Real Estate Res. 13-23 (1996).

(55) George J. Benston, The Community Reinvestment Act: Looking for Discrimination That Isn't There. Policy Analysis No. 354, October 6, 1999. Washington, DC: Cato Institute; Andrew Holmes & Paul Horvitz, Mortgage Redlining: Race, Risk and Demand, 49 J. Fin. 81-99 (1994); Andrew Holmes & Joe F. James, Discrimination, Lending Practice and Housing Values: Preliminary Evidence from the Houston Market, 11 J. Real Estate Res. 25-37 (1996).

(56) Jeffery W. Gunther, Should CRA Stand for "Community Redundancy Act"? 23(3) Regulation 56-60 (2000); Vern McKinley, Community Reinvestment Act: Ensuring Credit Adequacy or Enforcing Credit Allocation? 17(4) Regulation 25-37 (1994); Lawrence J. White, The Community Reinvestment Act: Good Intentions Headed in the Wrong Direction. 20 Fordham Urban L.J. 281-292 (1993).

(57) Lawrence J. White, The Community Reinvestment Act: Good Intentions Headed in the Wrong Direction. 20 Fordham Urban L.J. 281-292 (1993).

George J. Benston, The Community Reinvestment Act: Looking for Discrimination That Isn't There. Policy Analysis No. 354, October 6, 1999. Washington, DC: Cato Institute.

(58) George J. Benston, The Community Reinvestment Act: Looking for Discrimination That Isn't There. Policy Analysis No. 354, October 6, 1999. Washington, DC: Cato Institute.

(59) George J. Benston, The Community Reinvestment Act: Looking for Discrimination That Isn't There. Policy Analysis No. 354, October 6, 1999. Washington, DC: Cato Institute, at 10; Anjan V. Thakor & Jess C. Beltz, An Empirical Analysis of the Costs of Regulatory Compliance, in Proceedings of the 29th Annual Conference on Bank Structure and Competition, May 1993, Chicago: Federal Reserve Bank of Chicago, 549-568. Cited by George J. Benston, The Community Reinvestment Act: Looking for Discrimination That Isn't There. Policy Analysis No. 354, October 6, 1999. Washington, DC: Cato Institute at p. 10.

(60) Jeffery W. Gunther, Should CRA Stand for "Community Redundancy Act"? 23(3) Regulation 56-60 (2000); Michelle Minton, The Community Reinvestment Act's Harmful Legacy: How It Hampers Access to Credit. CEI On Point No. 132 (March 20, 2008). Washington, DC: Competitive Enterprise Institute.

(61) George J. Benston, The Community Reinvestment Act: Looking for Discrimination That Isn't There. Policy Analysis No. 354, October 6, 1999. Washington, DC: Cato Institute.

(62) Michelle Minton, The Community Reinvestment Act's Harmful Legacy: How It Hampers Access to Credit. CEI On Point No. 132 (March 20, 2008). Washington, DC: Competitive Enterprise Institute.

(63) Vern McKinley, Community Reinvestment Act: Ensuring Credit Adequacy or Enforcing Credit Allocation? 17(4) Regulation 25-37 (1994), at 34-35.

(64) Allan H. Meltzer, Reflections on the Financial Crisis. 29 Cato J. 25-30 (2009).

(65) Jonathan R. Macey & Geoffrey P. Miller, The Community Reinvestment Act: An Economic Analysis, 79 Va. L. Rev. 291-348 (1993).

(66) Leonard Bierman, Donald R. Fraser & Asghar Zardkoohi, The Community Reinvestment Act: A Preliminary Empirical Analysis, 45 Hastings L.J. 383-412 (1994).

(67) Jonathan R. Macey & Geoffrey P. Miller, The Community Reinvestment Act: An Economic Analysis, 79 Va. L. Rev. 291-348 (1993).

(68) Christopher A. Richardson, The Community Reinvestment Act and the Economics of Regulatory Policy, 29 Fordham Urban L.J. 1607-1632 (2002).

(69) J.I. Brannon, Renovating the CRA, 23(2) Regulation (2001) 8-9.

(70) A. Brooke Overby, The Community Reinvestment Act Reconsidered, 143 U. Pa. L. Rev. 1431-1531 (1995).

(71) Michael Klausner, Market Failure and Community Investment: A Market- Oriented Alternative to the Community Reinvestment Act, 143 U. Pa. L. Rev. 1561-1593 (1995).

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