APEE panel on the ethics of the financial crisis
At this year’s APEE conference, I am chairing a session on “Ethics and the Financial Crisis.” The rationale for the session: Many conferences and debates are focusing on the economics and politics of the crisis, but much less attention is being focused on the core ethics issues involved.
Here are the participants and the titles and abstracts of their talks.
Ethics and the Financial Crisis
Chair: Stephen Hicks, Rockford College
Alexei Marcoux, Loyola University Chicago
Title: “The Financial Crisis and the University-Based Business School”
Abstract: The current financial crisis is foremost a failure of public policy. Federally chartered corporations like Fannie Mae and Freddie Mac, legislation like the Community Reinvestment Act, aggressive and short-sighted enforcement of the latter by the United States Department of Justice, and protection of the former by key legislators worked together to create and burst the housing bubble lying at the heart of the current crisis. However, I argue that these public policy failures were exacerbated by some of the worst tendencies of private sector actors, many of whom are products of university-based business school education. It is popular to lament the moral education business students receive. However, it isn’t (only) the moral education business schools provide that set the stage for a stunning economic collapse. Instead, a widespread failure of prudence is to blame. Although human imprudence informs virtually all financial calamity throughout human history (think, for example, of the Tulip Mania), business schools are usually understood to be academies for inculcating prudent business judgment. To the contrary, I will argue that business schools are informed by and teach a form of rationalism that is, in fact, incompatible with prudent business judgment. This is an ethical failing, but it isn’t what most prominent business school critics have in mind when they say business schools should be reformed.
Shawn Klein, Rockford College
Title: “Home, Sweet Home? The Paternalism of Expanding Homeownership”
Abstract: One of the main sources of the recent financial crisis was the government created institutions, such as Fannie Mae, and legislation, such Community Reinvestment Act. Part of the way these contributed to and brought about the crisis was in twisting incentives in order to expand homeownership. This paper will analyze one of the main justifications for these institutions: paternalism. Paternalism is the view that it is justifiable to interfere in the actions of individuals, against their will, for the well-being of those individuals. Most agree that it is appropriate for political authority to be exercised against those who interfere with the liberty of individuals, as in the case of theft or rape. Paternalism, however, seeks to justify the use of political authority to curtail an individual’s liberty in the absence of a harm being done to anyone else if this will make that individual better off. The two main questions this paper will address: (1) are these homeownership expanding institutions and legislation paternalistic? And (2) if they are paternalistic, and if paternalism itself is not justified, does this undermine the moral authority of these institutions and legislation?
Jeff Scott, Cognilytics
Title: “Kleptosclerosis: Banking Crises and Corruption”
Abstract: The U.S. mortgage market once again features prominently in the latest financial crisis. From Right to Left, blame is directed at the unintended consequences of welfare policies in housing. From Left to Right, blame is directed toward crony capitalists. Both accusations hold a grain of truth but both are fundamentally mistaken since they don’t identify the hierarchy of causation. Public policies geared toward fueling the housing market for the marginal class of borrowers intensified the boom. That in turn, focused the debate on forms of constituency service (CRA) to traditionally Democratic voters. Alternately, politically-connected bankers benefited mightily during both the boom and the bailout, claiming events were beyond their control, and have prompted Milken-esque searches for retrospective criminality and financial chicanery among the most elite institutions.
However, the cause that made all of these other contributing causes possible is the system of banking itself, of consumer deposits made available for lending, which holds a fraction of consumer deposits in reserve against potential future losses. Leveraged deposits are the essential element of the boom, the crack cocaine of the financial industry. The central bank effectively lowers the perceived risk of lending and investment strategies by protecting deposits and by artificially reducing the cost and variability of funding. By maintaining an expectation of plentiful, indiscriminate and unvarying funding, combined with political favoritism, the central banking system induced an investment monoculture. The dominant portfolio strategy consisted of a one-way bet on the continued rise of housing prices. The subsequent rush to the exits was a reminder of how layers of moral hazard can explode. Financial gatekeeper functions eroded at every possible level, from borrowers and their representatives all the way to the chairmen of the world’s largest banks. The reaction to the bust has intensified all of the wrong trends: more indiscriminate liquidity, more policies to drive up house prices, more political control over mortgage contracts, more risk assets held by the central bank, more danger to the currency, more regulatory forbearance for the zombie institutions, more executive discretion over the flow of capital. Instead of wringing the failure out of the system and punishing financial mismanagement and accelerating bankruptcy and reorganization, U.S. policies pursue the opposite and will entrench “Captain Renault” corruption in the banking system. As long as gatekeepers continue to look the other way, in unison, and benefit collectively from willful negligence, the financial markets will be increasingly managed with regard to constituency service. I call this economic condition “kleptosclerosis,” the redirection of financial capital to the corrupt.
Will Thomas, Director of Programs, The Atlas Society
Title: “Greed, Reason, and Risky Business”
Abstract: Is greed is to blame for bad and risky behavior, and for the 2008 credit crisis in particular? A distinction needs to be drawn between rational greed and irrational greed. Greed, in its basic sense is the desire for more self-centered benefit. Plainly, this can be morally right: a hunger for life, for living well, for happiness, and for the means to these ends. What is thought of as morally wrong is short-sightedness, a grasping moral solipsism, or a miser’s quest for riches detached from non-monetary ends. A rational approach is the opposite of short-sightedness, social indifference, or blind obsession. Means and risks must be rationally assessed. It is here that many capitalists failed.
The conference will be held from April 11-13, 2010 at Caesars Palace, Las Vegas, Nevada. (Aside from the stimulating intellectual discussions, wonder if there’s anything else to do there.)
The first meeting will be on Friday, January 22 at 1 p.m. in the Center for Ethics and Entrepreneurship office in the Burpee Center. Here is a 
A PDF version of Kaizen is available at the 
In honor of the new academic year, linked below is the snazzy trifold brochure for the Department of Philosophy, Rockford College. 
The 
Kaizen also recently published my extended 
