Guest Commentary: Free — For Me
Sep 29th, 2008 • Posted in: Commentaryby 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
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