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Experimental Philosophy

One thing I never liked about philosophy is that, for lack of a better phrase, it allowed you to make shit up.  Come up with an idea, make some good arguments, there that's that.  There is a minority movement seek reform.  They are calling themselves experimental philosophers, and this excellent overview chronicles their efforts.

Though the article doesn't mention it, here is one problem I saw with Rawls' original position argument.  John Rawls argued that, from behind a veil of ignorance, people would want to create a strong system procedural justice.  Since no person would know what his lot in life would be, he'd want to guarantee equal opportuny.

Really?  How did he come up with that "person"?  He just made it up, of course.  Or he intuited it based on his understanding of humanity.

We are a product of our culture.  What if I were born into a gambling culture?  Would I really want to guarantee procedural justice?  Or would I vote to roll the dice.  Maybe I'd get lucky, after all.

Or what if I were from a culture that believed that God preordained everything that happened.  I might not even care about what system would be set up.  It would not matter, after all; I would be in God's hands.

So, with Rawls, you have to pretend there is some mythical man whose decision would not be influenced by his culture.  Yet.... Does that concept make sense?  Vonegard may have written a book entitled "A Man Without a Country," but anyone reading his book would recognize American values. 

WIth experimental philosophy, someone could actually test Rawls' theory.  Behind a veil of igorance, would people really create what Rawls' say they'd create?  Of course, we are still stuck with the problem of cultural bias.  At least we'd know what Americans actually think.  (Even then, we'd have a form of the naturalistic fallacy.  Just because people would vote for procedural justice, does that make it right?)

It really is no surprise that philosophers are resisting the experimential philosophers.  It's so much easier just making shit up.

Politicians to Lie About Bailout

Unable to explain why the bailout will work, Republicans and Democrats have decided to lie about the bailout:

WASHINGTON (AP) -- The Bush administration is searching for a new way to sell its financial rescue plan after acknowledging some blunders and missteps in presenting it the first time around. One big key: Insist it's not a Wall Street "bailout."

Now it's not about financial institutions. The focus has switched to everyday Americans. And it's not an expenditure of taxpayer money, it's an "investment."

This was clearly evident in Bush's grim warnings on Tuesday of "economic hardship for millions" if the plan can't be revived. He declared, "For the financial security of every American, Congress must act."

This emphasis was echoed on the presidential campaign trail.

"Let's not call it a bailout. Let's call it a rescue," said Republican John McCain.

Democratic rival Barack Obama said, "This is no longer just a Wall Street crisis -- it's an American crisis, and it's the American economy that needs this rescue plan."

House Speaker Nancy Pelosi's take: Its not a bailout but "a buy in, so that we can turn our economy around."

Imagine your child runs up a huge credit card bill.  If you pay his bill, have you bailed him out, or invested in yourself?  I imagine you could say that you're investing in him, since having unpaid credit card balances on his credit report will prevent him from getting credit.  But, really, how is that going to lead to a payout for you? 

Maybe he won't come home looking for another bailout?  But what assurances do you have?  If anything, most parents would say that bailing your child out is the worst thing you could do; since your child will always come back for more.

The Paluson-Pelosi-Bush Plan is a bailout, not an investment.  The bailout might still be needed.  Let's  be honest, though, and stop calling it an investment.

Minorities and Subprime Loans

As might be expected, minorities are being blamed for the market crash.  If banks hadn't loaned money to blacks, we'd all be fine.  This is a myth.  At least in 1999, minorities only received 18% of all subprime loans.  Which means you can thank whites for this mess.  (Though the racists won't.)

There is, however, a race angle. 

Republicans wanted to reform Fannie and Freddie.  The Congressional Black Caucus, as well as other Democrats, resisted this effort.  They claimed that without subprime lending, fewer blacks would get home loans.  That was true:

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

So while we cannot blame black homeowners for this crisis, Democrats used racially-motivated reasons to support Fannie Mae and Freddie Mac.  They argued that without subprime lending, blacks would not own homes.  It's a good thing, they said, for blacks to own homes.  (And who can argue, in principle, with that?)  Yet, in protecting blacks, Democrats enabled low-credit white borrowers (the super-majority of subprime borrowers) as well.

The market meltdown demonstrates why the road to Hell is often paved with good intentions. 

Flashback: American Enterprise Institute on Fannie-Freddie in 1999

Last week I linked to a 2005 AEI article about Fannie Mae and Freddie Mac.  Well, they were six years ahead of me.  In 1999, Peter Wallison from the AEI made this prediction:

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

The full article from the New York Times is fascinating:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

Again, read the full article.  And send it to your friends who keep claiming that "free markets" caused the market meltdown.  (Free markets were partially responsible, but Wall Street fat cats could never have crashed the market without the unholy help from Fannie and Freddie.)

Unrelated meta-commentary: Isn't the Internet great?  Politicians and the powerful have not found a way to control it.  So honest citizens can easily find historical information.  That Times article is almost ten years old.  Yet it's now just a click away.

Before the Internet, there were databases available to the rich.  If you had $50 to run a Lexis-Nexis search, you could educate yourself.  Now, even the common folk can find information. 

Nietzsche was Right

Who would have guessed

Herd mentality rules during a financial crisis because people are wired to follow the crowd when times are uncertain, experts say.

Brain and behavior studies clearly show that when information is scarce and threats seem imminent, people often stop listening to their own logic and look to see what others are doing.

"People are afraid, and the reason they are afraid is there tremendous uncertainty right now in the markets," Gregory Berns, a neuroeconomist at Emory University in Atlanta who studies the biology of economic behavior, said in a telephone interview.

The world would be a better place is more people would read Nietzsche.

Wire Fraud and Executive Pay

Part of any bailout will almost certainly include limits on executive compensation.  The thinking (which is sound) goes as follows: If CEOs are coming to Washington for a hand out, they shouldn't expect a hand full of gold coins.  Many economists have suggested that CEO pay limitations are a bad ideal.  Alex Tabarrok, an economist who blogs at the must-read Marginal Revolution, writes:

If you think the situation is very dire and also that Wall Street is ruled by greed then it's a disaster as the captain may prefer to go down with his ship, rather than give up the golden parachute (life-jacket?).  Thus, those who think the situation is very dire must be gambling on CEO altruism!

Unfortunately, Mr. Tabarrok missed an important issue - federal criminal law.  A self-interested CEO would be imprudent to sink his ship for sake of his golden life jacket.  Here's why.

Overzealous prosecutors will be looking to make their careers out of this crisis.  As with Enron, there will be widespread prosecutions.  There is a law that would perfectly cover the greedy CEO.  In fact, it's the same law that was used to prosecute Ken Lay and Jeff Skilling.

Under the federal mail and wire fraud statutes, "the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services."  18 U.S.C. 1346 (here).  A CEO has fiduciary obligations to his employer.  In other words, a CEO must put the corporation's interest in front of his own. 

A CEO who refused a buy-out deal in an effect to protect his pay could - and would - be prosecuted under the mail or wire fraud statutes.  We thus do not need to rely on CEO altruism at all.  Old fashioned self-interest will motivate CEOs to take any good deals that are offered.