We are close to the five-year anniversary of the global financial crisis, if we take Lehman’s bankruptcy as the unfortunate beginning. Trillions of dollars were lost at the low point of world financial collapse. Subsequently, trillions of words (I add 625 more today) seem to have been written on this, the first global financial catastrophe of the twenty first century. What happened, why did it happen, who caused it to happen, what can we do so it never happens again? We think we know what happened, and why. The left and the right spread blame around to their respective bogeymen and we dither about preventive measures against future similar crises.

In this issue of Moral Cents we focus on pertinent problems, policies, and reactions spawned by the financial crisis: (1) The persistent debt crisis (2) Quantitative easing (3) The flash crash  (4) Regulations (5) Regulations (6) Questioning current economic theory. The articles on each of the six topics have their own particular approach to the corresponding issues.

(1) Persistent Debt – Can States Legitimately Repudiate Debt?

Conventional wisdom and market practice holds that every promise to repay debt should be honored. Cristian Dimitriu argues there are exceptions to the duty to keep promises. In “Odious Debt”, the exceptions Dimitriu give are in, where else, finance. The citizens and future generations of a state do not have the duty to honor debts, if these debts were incurred by governments in their name, but used for private or illegitimate purposes. The portion of debts that may be legitimately repudiated is potentially huge because several different governments, both authoritarian and democratic, have used public funds for private or illegitimate purposes.

(2) Quantitative Easing – Good Outcomes?

The U.S. is now in stage 3+ of quantitative easing (QE). (Other countries such as the United Kingdom and Japan are engaging in the same monetary easing technique.) Thomas Aden’s paper, “The Ethics of Quantitative Easing” examines the goals, metrics, and results of QE. These results are relevant to his ethical analysis of QE. The reality is that QE has not produced the desired consequences, thereby making its ethics questionable.

(3) The Flash Crash – HFT and Trust in Market Integrity

The now infamous Flash Crash occurred on May 6, 2010, roughly two years after the financial crisis. After almost five months of investigations, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) concluded that the actions of high-frequency trading firms contributed to volatility during the crash. The event caused a tremendous loss of trust, already at low levels after Wall Street’s role in the financial crisis, in the integrity of markets. Laure Madonna’s paper, “The Ethics of High Frequency Trading” analyzes the ethics of HFT from a duty based and utilitarian standpoint, concluding that ethical implications depend on each HFT strategy.

(4 & 5) Regulations, Regulations – Where Do We Stand?

Since the financial crisis, there has been no shortage of regulations coming out from various agencies in the US, UK, and Europe. The presumption is that because light regulation led to the crisis therefore, heavy regulation should prevent another one. Tyler Dumler reviews both the Volker Rule aimed at preventing proprietary trading at banks and the Wheatley Report on LIBOR. The author despairs about the exceptions in the former but holds some hope the latter will lead to better processes for LIBOR determination.

(6) Questioning Economic Theory – Rediscovering the Moral in the Work of Adam Smith

Finally, Travis Strawn reviews, A History of Homo Economicus: The Nature of Moral in Economic History by William Dixon and David Wilson. The book is one in a line of recent books that question the current state of economic theory after the great financial crisis of this century. This strain of thought, giving the moral a role in economics, is not likely to fizzle and end. It may be just the beginning.


Dr. Kara Tan Bhala


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