For more information, see this week’s Research Report.

by Ethics Newsline™ editor Carl Hausman

There’s a compelling ethical text and subtext to the current economic implosion.

At the most basic level, there are several salient moral controversies, including the oft-repeated warning of “moral hazard” — bailing out reckless investors and therefore encouraging more recklessness. There’s also an obvious do-the-ends-justify-the-means dilemma, illustrated by critics who normally deplore government intervention in the economy but concede that the current meltdown is so ominous that a federal bailout is justified.

Fairness issues abound, too. Is it equitable to bail out investment banks but not individual homeowners who face foreclosure? Or what about a scenario that reverses the picture? And clearly, there is a long-term-versus-short-term debate wrapped in this quandary. Does a bailout constitute a quick fix that will culminate in a bigger disaster down the road?

Vital points, all, but I wonder if we’re missing a broader ethical subtext in all of this. As the late social critic Neil Postman pointed out, our language sometimes gets in the way of our thinking. We think by using words and then deceive ourselves into thinking that our vocabulary is neutral and unedited, when in fact the way we subtly define words sets our mental table for us.

And that’s why I’m fascinated by arguments that invoke the “free market.”

First, a disclaimer: I am no expert in economics or high finance, as my accountant will attest. But I do know something about government regulation in the news industry, an area I beat to death in a couple of books I wrote a decade ago, and I remember the same “free market” assumption being invoked and, oddly, never challenged.

Basically, it goes like this: Back in the early days of broadcasting, the government confected a system in a massive congressional act whereby licenses were granted to companies to operate a broadcast station over public airwaves. Those licenses were sarcastically (but more or less accurately) characterized as licenses to print money.

However, about a half-century later, when the same government insisted that television stations devote a certain amount of time to news and public service programming, station owners would complain about the affront to the free market.

During that time of sweeping deregulation in the industry, I did not fundamentally disagree with some of the owners’ views, but neither did I buy their free-market rationalization. It rings hollow. Broadcast licenses don’t exist in nature. They were created by regulation, their resultant profits were enforced by regulation, and virtual monopoly protection over a particular broadcast frequency was granted by legislation that profoundly restricted “freedom” of other people to operate on the same channel.

We’re frequently making the same sloppy assumption when we argue about the nature of free markets in the current financial crisis. Corporations don’t exist in nature, either. They were created by regulation and endowed with artificial superpowers: They are potentially immortal, they have wide latitude in procuring tax advantages, and most important they allow investment by the public without risk beyond losing the original investment.

In other words, because of provisions of corporate regulation and structure I can invest $100 in the stock of a corporation — say, in a company that makes wheels — and have only my $100 at risk. If I, as a sole proprietor, open a store to sell wheels and the wheels prove defective, I face a lifetime of liability and possible debt. But as a stockholder, my risk is limited to my $100.

This is a pretty good idea. But regulatory shielding of investor from risk was ramped up to extremes in the last few years, and that artificial invention of regulation has propelled us into our current mess.

It started when investors looked for new ways to capitalize on the soaring housing market. An inventive investment vehicle was devised that took risky mortgages, sliced and diced them into various portfolio offerings, and moved them through so many layers that it was doubtful any individual mortgage could be traced back to its originator.

This brought about a profound change in lending practices: No longer did local bank presidents have to keep a nervous eye on their mortgage holders. (As did the president of the bank that held my first mortgage; he knew every mortgage holder and could, if prompted, recite the names alphabetically.) Instead, under the new system of repackaging mortgage debt, the risk was passed along to other investors seeking a quick profit.

There’s nothing inherently wrong with profit. But there is something wrong about writing mortgages that obviously could not be repaid because the repackaging of the investment would make it somebody else’s problem — a problem residing on some distant level of the house of cards. And there’s something profoundly wrong about turning a blind eye to all this on the assumption that reckless and rapacious pursuit of profit is somehow justified by the “free market.”

Investment bankers chose to be free when they wanted to be, but relied on shaky financial vehicles created and allowed by regulation when it suited their purpose (in other words, when the profits were flowing).

Regulators, including the U.S. Securities and Exchange Commission, chose a freedom of convenience when they employed an oxymoronic strategy termed, apparently without irony, “voluntary supervision.” (By the way, they’ve admitted it didn’t work.)

I don’t have a solution to the economic crisis, and I’m beginning to suspect the same overseers who let it fester don’t, either. But I do think we have learned one lesson from all of this: We’d better stop employing the conceit that “free” is good when it means “free for me.”

©2008 Institute for Global Ethics

Questions or comments? Write to newsline@globalethics.org.

“The last six months have made it abundantly clear that voluntary regulation does not work.”

– U.S. Securities and Exchange Commission chairman Christopher Cox, speaking last week in a statement following the release of a report by the agency’s inspector general that strongly criticizes the SEC’s “performance in monitoring Bear Stearns before it collapsed in March,” according to the New York Times

Source: New York Times, Sep. 26.

At issue: Acceptable level of freedom in free markets, clamping down on executive compensation, and whether it’s ethical to profit from short selling

NEW YORK and LONDON
Ethics angles on the U.S. economic crisis were at the top of the news last week as the U.S. Congress repeatedly failed to pass the proposed $700 billion bailout of Wall Street. Among the stories:

• The chairman of the U.S. Securities and Exchange Commission, who had been a vocal advocate of financial deregulation, last week said that the voluntary supervision program for Wall Street banks had not worked and had in fact contributed to the global financial crisis. According to the New York Times, Christopher Cox conceded that the program, which allowed investment banks to opt out of oversight, was “fundamentally flawed.” Cox has now shut down the program. The decision, the Times notes, is largely academic because the major independent Wall Street firms have virtually disappeared in the current collapse, and under reformatted structures will be regulated by the Treasury.
• While U.S. lawmakers are insisting that Wall Street moguls take part of the same financial hit as taxpayers in the proposed $700 billion bailout, Reuters reports that experts interviewed by the world press differ on whether that will become a reality. One analyst notes that compensation has soared in recent decades despite several attempts to curb it, pointing to a measure enacted by Bill Clinton that imposed tax penalties on high corporate pay, but which also inadvertently opened the door to massive stock option perks. But another Reuters analysis counters that because the reorganization of investment banks will force them to take more conservative strategies, compensation is likely to be reined in as well.
• The BBC reports that the Church of England may rethink its rules on investment of church funds after the archbishop of Canterbury condemned the practice of short selling. According to the report, the BBC might add short selling, a financial manipulation in which shares are borrowed and sold on speculation that they will lose money, to its list of other prohibited investments, such as companies that are involved in tobacco, arms, or pornography.

Sources: New York Times, Sep. 26 — BBC, Sep. 26 — Reuters, Sep. 26.

For more information, see: Related Newsline story, Sep. 22 — Related Newsline story, Sep. 8 — Related Newsline story, Aug. 25 — Related Newsline story, Aug. 11 — Related Newsline story, July 7.

Britain falls down the Transparency International list; New Zealand, Denmark, and Sweden rated least corrupt; Somalia, Myanmar, Iraq and Haiti at bottom

BERLIN
An annual index of global corruption published by watchdog group Transparency International (TI) shows many of the same nations as last year near the top and bottom of the list, but features a noticeable slippage among some European nations.

Britain, for example, is seen as more corrupt than at any time in the last 13 years, slipping from 12th to 16th place. London’s Daily Telegraph reports that at least part of the slippage in perceived corruption was an ongoing investigation into allegations that defense contractor BAE was involved in a series of bribery incidents.

Also cited, according to the Telegraph, were concerns stemming from the recent “cash for peerages” scandal in which it was alleged that seats in the House of Lords were granted in exchange for political contributions.

The report ranks a total of 180 countries, measuring perceptions of how easy or difficult it is to do business or deliver aid in terms of dealing with corruption.

While Germany moved up two spots to 14th place in the ranking, with TI praising the government for rooting out the massive Siemens scandal, the report did urge the government to take a larger role in fighting political corruption, according to a summary from Berlin-based Deutsche Welle.

Somalia was at the bottom of the list, followed by Myanmar, Iraq, and Haiti — a similar lineup to that in recent years.

However some African nations, such as Nigeria, which rose to 177th place, showed significant improvement. But Osita Nnamani Ogbu, Nigeria’s secretary general of Transparency, said corruption remains “intolerably high,” putting some of the blame on weak anticorruption agencies, according to the Lagos Daily Sun.

India scored near the middle of the pack, falling several rankings this year to 85th place, a drop attributed in part to a recent cash-for-votes scandal, according to the Times of India.

New Zealand, Denmark, and Sweden finished at the top of the list in a three-way tie. Canada finished 8th, and the United States finished 18th.

This year’s survey recommends that foreign aid be more carefully monitored to ensure that it flows to the intended recipients, according to a report from the Voice of America.

Sources: Times of India, Sep. 24 — International Herald Tribune, Sep. 23 — Telegraph, Sep. 23 — Deutsche Welle, Sep. 23 — Voice of America, Sep. 23 — Daily Sun, Sep. 23.

For more information, see: Related Newsline story, Sep. 8 — Related Newsline story, Aug. 4 — Related Newsline story, July 21 — Related Newsline story, June 30 — Related Newsline story, June 16 — Transparency International report, Sep. 23.

He claims evidence was withheld from defense attorneys

WASHINGTON
A U.S. military prosecutor pursuing a case against a Guantánamo detainee quit last week, citing ethics concerns.

Army Lt. Col. Darrel Vanderveld said he was concerned about the government’s case against an Afghan detainee and about his office’s alleged failure to turn over materials to defense attorneys, UPI reports.

According to the McClatchy news syndicate, Vanderveld is the fourth prosecutor known to have resigned from the administration’s controversial program of trying detainees before military commissions.

Vanderveld, an Army reservist, filed a four-page declaration in which he claimed that “potentially exculpatory” evidence had not been provided to defense attorneys for Mohammed Jawad, a 23-year-old man accused of throwing a grenade into a jeep transporting troops, inuring two soldiers and an interpreter, reports the Los Angeles Times.

Vanderveld has declined requests for interviews and his declaration was not made public.

A Pentagon spokesman declined specific comment on the case but told the Agence France-Presse that “hundreds of thousands of pages” of documents had been turned over to defense attorneys in the 22 military commission cases currently under way.

Sources: UPI, Sep. 26 — McClatchy Washington Bureau, Sep. 26 — Los Angeles Times, Sep. 26 — AFP, Sep. 26.

For more information, see: Related Newsline story, June 23 — Related Newsline story, June 16 — Related Newsline story, May 12 — Related Newsline story, Nov. 5, 2007 — Related Newsline story, Aug. 6, 2007.

Scientists report breakthrough in “ethical” stem-cell technology; Australia may grant patent to disgraced South Korean researcher; federal authorities probe drug test

VARIOUS DATELINES
Developments in bioethics were featured in several world-press reports last week. Among them:

• Scientists last week reported that they have developed a new procedure that will allow use of embryonic stem cells for research while avoiding the ethical and political problems associated with using cells from early-stage embryos. The Washington Post reports that a team of researchers based in New England claims to have found a way to make adult cells regress into an embryonic state. Some researchers say they believe embryonic stem cells can be manipulated into producing any type of cell found in the body, providing sources for replacement tissues and body parts without the difficulties of immune-system rejection.
• Disgraced stem-cell scientist Hwang Woo-suk is back in the news, as officials in Australia consider whether to grant a patent for a stem-cell line that was at the center of the scandal propelling his downfall. According to the Seoul-based Chosun Ilbo, several other nations to which Hwang submitted his patents rejected them because he violated South Korea’s bioethics protocol and because subsequent investigations cast doubt on the validity of his experiments. But Australian officials tell the U.K. Press Association that Australian law provides no basis for rejecting a patent based on disputes over scientific research, and that no formal protest against the patent has been filed. While earlier reports said the patent was granted, officials now tell the Press Association that the matter is “still under review.”
• Federal authorities are investigating a study of a medical therapy to see if patients given an experimental drug were adequately informed of the dangers, according to the Wall Street Journal. The study involves a controversial treatment called chelation, in which heavy metals are removed from the body. According to the Journal, the study is continuing, but new patients are not being enrolled until the investigation is resolved. The leader of the study says it is safe and ethical and that patients are adequately protected.

Sources: Washington Post, Sept 26 — Wall Street Journal, Sep. 26 — Sky News, Sep. 26 — U.K. Press Association, Sep. 25 — Chosun Ilbo, Sep. 25.

For more information, see: Related Newsline story, Aug. 11 — Related Newsline story, July 28 — Related Newsline story, June 2 — Related Newsline story, May 27 — Related Newsline story, Aug. 25.

Analysts say latest adulteration incident symptomatic of more than just weak regulation; one observer says social norms must be altered

NEW YORK and BEIJING
China’s premier, reacting to a growing crisis over contaminated milk, last week vowed to “draw a lesson” from the incident and promote better business ethics.

The state-run China Daily newspaper quoted Chinese premier Wen Jiabao: “Only by combining such tangible things as technologies, products, and management with ideals, ethics, and responsibility can we build the DNA of our economy.”

Jiabao’s remarks, made at a United Nations function, came as the fallout from the tainted milk scandal spread, with tainted crackers uncovered in South Korea, two more illnesses reported in Hong Kong, a British grocery chain pulling Chinese products from store shelves, and widespread purging of Chinese products from stores in Japan, according to reports from CNN and MarketWatch.

The current scandal is traced back to adulteration of milk products with melamine, which is typically used in plastic and fertilizer production. It is believed that the melamine, which causes a chemical reaction that boosts the apparent protein level in liquid, was added to watered-down milk to fool quality checks. Roughly 54,000 babies reportedly have been sickened by contaminated milk powder.

An analysis from the Christian Science Monitor cites a variety of experts who say the scandal reveals more than just a regulatory problem.

“China has the problems of any transitional economy,” Yanzhong Huang, a global health expert at New Jersey’s Seton Hall University, told the Monitor. “But the deeper and more fundamental challenge China faces is a systematic lack of business ethics.”

“You cannot fully police the whole food chain,” added Dali Yang, a politics professor at the University of Chicago. “A lot depends on changes in social norms. People have to recognize that integrity does matter.”

Sources: CNN, Sep. 25 — China Daily, Sep. 25 — MarketWatch, Sep. 19 — Christian Science Monitor, Sep. 17.

For more information, see: Related Newsline story, Sep. 22 — Related Newsline story, Sep. 15 — Related Newsline story, Sep. 8 — Related Newsline story, Aug. 11 — Related Newsline story, Aug. 11.

House Ethics Committee begins probe of Ways and Means chairman; New Jersey gets tough on ethics; Irish politicians debate privacy laws, but study shows most of the complaints about intrusion come from politicians; economic collapse seems to force presidential campaigns off the low road, posits one editorial page

VARIOUS DATELINES
Last week marked a brisk season in stories from the busy intersection of politics and ethics. Among the items:

• The Ethics Committee in the U.S. House of Representatives last week voted to begin an investigation into whether the chairman of the Ways and Means Committee, New York Rep. Charles Rangel, violated House rules in matters involving unpaid taxes, use of rent-controlled apartments, and allegations of improper fundraising, USA Today reports. Rangel, a Democrat, says he has done nothing wrong and is the target of a GOP “guerilla war.” Rangel has refused Republican calls to step down as chairman of the influential committee.
• The state of New Jersey, roiled by a series of ethics scandals, adopted four ethics-related executive orders last week that will impose controls on contributions by firms and individuals who do business with the state, set new contribution limits, and create a task force to recommend ways to strengthen ethics, reports the Asbury Park Press. In an editorial, the Newark Star-Ledger said it spports the move, saying it “will go a long way toward eliminating many of the practices that have resulted in a parade of officials marching from town hall offices to prison cells.”
• Irish politicians are crusading for tougher privacy laws — but, according to a report from the Irish Independent, it appears that there may be a measure of self-interest involved. An analysis of privacy complaints against the media shows that a vast majority of privacy complaints are coming from politicians themselves, prompting criticism that toughening of the privacy laws is essentially a mechanism to muzzle the press. The study, conducted by Dublin University’s Institute of Ethics, examined parliamentary debates and formal complaints filed with various regulatory agencies.
• San Francisco Chronicle editorial page editor John Diaz, analyzing last week’s debate between U.S. presidential candidates John McCain and Barack Obama, in which both candidates focused partly on the economy, argues that the recent financial bombshells have actually raised the ethics bar for the level of discourse by the campaigns. “It’s hard to imagine that either campaign would dare go back to the triviality and ‘gotcha’ tactics that had pervaded the campaign in recent months,” Diaz writes.

Sources: San Francisco Chronicle, Sep. 28 — Star-Ledger, Sep. 27 — Asbury Park Press, Sep. 26 — Irish Independent, Sep. 26 — USA Today, Sep. 24.

For more information, see: Related Newsline story, Sep. 22 — Related Newsline story, Sep. 15 — Related Newsline story, Sep. 15 — Related Newsline story, July 28 — Related Newsline story, Sep. 10, 2007.

As tough times overtake U.S. economy, public appears to be turning inward to domestic concerns

From the Pew Research Center:

“The public is feeling much better about how the war in Iraq is going these days, but at the same time has a sharply diminished appetite for U.S. efforts to deal with an array of global problems. Fewer people than at any point in this decade assign high priority to such foreign policy goals as preventing genocide, strengthening the United Nations, promoting and defending human rights, and reducing the global spread of AIDS and other infectious diseases.

“There also is decreased support for an assertive national security policy. Fully 45% say that reducing U.S. overseas military commitments should be a top policy priority, up 10 points since 2004. Notably, even the goal of halting the proliferation of weapons of mass destruction — a widely shared objective for nearly two decades — is now viewed as less important.

“A new nationwide survey on foreign policy attitudes by the Pew Research Center for the People & the Press, conducted in collaboration with the Council on Foreign Relations, finds a striking rise in public optimism about the situation in Iraq. Nearly six-in-ten Americans (58%) say the U.S. military effort there is going well, the highest percentage in more than four years. Yet improving perceptions about the situation in Iraq have done little to increase support for maintaining U.S. troops there.

“Half of the public views the war as the wrong decision, while the same percentage favors withdrawing U.S. forces from Iraq as soon as possible…. By contrast, there is strong public support for maintaining U.S. forces in Afghanistan — a notable exception to the broader trend against global engagement.

“The public’s top long-term foreign policy goals are decidedly America-centric. Defending the country against terrorism, protecting U.S. jobs, and weaning the country from imported energy all draw extensive bipartisan support….

“The survey … finds that 76% rate reducing U.S. dependence on foreign energy sources as a top foreign policy priority, up 13 points from July 2004. The public’s willingness to consider policies to achieve that objective appears to be practically open-ended….

“More Americans say that Iran represents the greatest danger to the United States than mention any other country. About one-in-five (21%) volunteers Iran as the greatest danger, in an open-ended format; 16% mention China, while 14% cite Russia. The proportion naming Russia has jumped substantially since February 2007 (from 2% to 14%)….”

For the full release from Pew, Sep. 24, click here.

“The quest for riches darkens the sense of right and wrong.”

– Antiphanes (Greece-based poet, circa 408-334 BCE)