When it comes to ethics, economics and politics, most people rely on their feelings rather than an integrated philosophy to guide their thinking, values and action. But feelings and intuitions are not a valid means of gaining knowledge about the world.
To set upon a course of action while engaging in the willful evasion of reality and reason is always to court destruction and disaster. To move forward on a path to a goal while disparaging or ignoring the identification and guidance of valid principles to help to get you there is to act on the premise that anything goes. In all areas of life, including business and politics, such pragmatism ensures that whim and corruption will rule the day.
Unfortunately this mode of thinking and operating is endemic amongst today’s self-proclaimed elite, both in business and politics. Right now in Washington, D.C., for example, as far as I can tell, when it comes to ethics, economics and politics, principled thinking has been willfully abandoned and an atmosphere of damning the facts exists. This method of operation is creating a situation rife with epistemological and moral corruption, where anything goes.
One of the biggest recent stories of governmental moral malpractice is the ongoing bailout, management and oversight of the government owned entities Fanny Mae and Freddie Mac. The WSJ’s January 4, 2010 Opinion Piece “The Biggest Losers” reports on what they have dubbed “the Treasury’s Christmas Eve taxpayers massacre.” The massacre refers to “the Treasury’s Christmas Eve…lifting of the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.”
In essence, the U.S. Treasury Department has removed all limits on the U.S. government’s acquisition of private housing property through Fanny and Freddie. The WSJ writes:
The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."
The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures…. Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.
The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.
Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.
While all of this looting by elected politicians of its nation’s citizens may be legal in today’s morally nihilistic world, I eagerly await an explanation by anyone - including those in the “business ethics” profession - to justify how such behaviour by some people against others is ethical. Ethical principles are ethical principles, so whatever those principles are, they must apply to all people – politicians included. Otherwise, it just isn’t ethics. The same goes for economic principles and political principles. Principles are, by their nature, objective and universal in scope.
One businessman and potential politician of note has come forward recently to proclaim his outrage – entrepreneur, author (Crash-Proof 2.0) and 2010 United States Senate candidate for Connecticut, Peter Schiff.
Mr. Schiff used the unlimited Treasury bailout commitment for Fanny and Freddie as the launching pad for a more principled economic/political argument as to why government bailouts are bad. Here is my transcription of his extemporaneous comments from his weekly webcast, Wall Street Unspun With Peter Schiff, December 30, 2009.
The way capitalism works is that when you are generating a profit, that means you are doing something right. You are combining resources in an effective way and you are generating a profit.
The profit is the market’s way of rewarding you for doing the right thing, and the companies that are making profits can expand and get bigger because they are doing the right thing. But the other way, if you do the wrong thing you lose money, you get a loss. And what happens then is that activity ceases. You can’t keep losing money forever. So that fact that you’re losing money is a sign that you’re doing something wrong.
Now obviously General Motors Acceptance - GMAC - is doing something horribly wrong because now they’ve had to be bailed out [by the U.S. Treasury Department] for a third time. But instead of letting the market put that company out of its misery, they keep perpetuating it so it can do even more damage to the US economy; they [the U.S. government] can squander even more resources. And in order to keep GMAC in business they have to take resources away from other companies that are doing it right, that would otherwise be growing and expanding and benefiting the economy. Instead they [successful companies] suffer so we can prop up these [failing] companies. The same thing is going on with Freddie and Fanny.
Every business that the government decides to bail out is a business that the economy would be better off without. It’s just enforcing all the wrong things. It’s the reverse of Darwinism and we’ve got to get our leaders to understand the capitalistic system. They’re not in the politburo there – this is the United Stated of America – and they need to understand what that means…
When [Fanny and Freddie] were initially in trouble and they bailed them out when they should have let them fail, the government said we stand behind these entities to the tune of 200 billion dollars each – we will cover the first $200 billion in losses of each company - which is a staggering amount of money. But now last week they said that isn’t even enough – we’re going to cover it all. Even if they lose $500 billion – even if they lose a trillion – the American taxpayers have got it covered. Unbelievable!
And the fact that they would even raise it shows that they know this is going to happen because there were obviously some problems in the bond market…people didn’t want to buy the Freddie and Fanny debt because they began to realize the guarantee only covered $200 billion and they could see the problem was bigger than that, so in order to get people to buy these bonds they had to guarantee everything. So despite the fact that the government is trying to tell us that the housing market is improving, the fact that they had to guarantee all their liabilities shows you that it’s not improving but that it’s getting worse.
Mr. Schiff’s ability to analyze and explain clearly and logically in economic fundamentals makes him a great teacher of economics for the educated layperson and I highly recommend you subscribe to his weekly investment podcast to gain a better understanding of economics.
The underlying causes and solution to all of these economic and political problems we face today has its roots philosophy, especially epistemology and ethics. If, as individuals, we are to promote and engage in civilized societal renewal, we must first embrace reason as our means to understanding, and then identify and define sound ethical principles to guide human action. Only then can we apply those principles to guide the other human sciences, the most important of which are economics and politics.
Abandon or neglect ethical principles and you will enable and create human misery and destruction. And it does seem that our politicians are hell-bent on creating destruction, their declarations of good intentions notwithstanding.
When it comes to politics, I’m always reminded of a line by singer/songwriter Bruce Cockburn: the trouble with normal is it always gets worse.
Copyright 2010, Barry L. Linetsky, All Rights Reserved
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