Wednesday, January 13, 2010

Economics and Ethics of Walking Away

Business has perfected limited liability and asset stripping that turns business into one sided options. A non-recourse mortgage is really nothing more than a limited liability company. Now if someone wants to argue in favor of absolute liability and doing away with the corporate structure and business as we know it that is one thing, but to argue business should have privileges and perks unavailable to individuals is grossly inequitable.

After a crisis short of people operating economically rationally, I don’t think encouraging people to continue acting irrationally is reasonable. Let people weigh all the benefits and costs of their actions and decide what is best. We are all better off from such actions, not just some lender that acted irresponsibly in the first place. Some will err and suffer for it as they should, but don't insist people have an ethical duty to act contrary to their interests. Economic thought and behavior needs to be encouraged, not negated, for that is the truly ethical path.

I have no objection to changing the rules, but anyone following them is behaving ethically. If you don't consider something ethical or socially desirable, you should focus on changing the rules, not superimposing an ethics contrary to them and then blaming people for not following them. I do not blame finance for unethical bonuses, but I would for their part in setting the rules that allow them. Economics and ethics in conflict indicate inappropriate rules. Under the rules we have adopted, this is not an ethical decision but an economic one and should be treated as such. It is, and should be, just business.

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