Chautauqua Notes | Ethical Challenges of Finally Fixing the Financial Crisis: Fair Deals vs. New Deals

rcwhalen's picture


Ethical Challenges of Finally Fixing the Financial Crisis: Fair Deals vs. New Deals


Below is an outline for my August 7, 2012 presentation at the Chautauqua Institution, Chautauqua, New York, earlier this week.  Special thanks to Walker Todd of AIER for the invite and for creating this interesting program.  


When someone asks about the ethical challenges of fixing the financial crisis, that question opens up multiple avenues of discussion.  Everything about the breakdown in national trust since 2008 reflects a crisis of ethics.  Ethics is the key question behind the entire event that we have now decided to call the financial crisis.  Personal, institutional and national ethics all come into play in this search for supposed solutions.  But in asking and then discussing this question, we may not necessarily reach the conclusion that at first seems so obvious to many Americans today – namely that the solution to the financial crisis is more laws and regulation. 




To start our conversation, let’s first define a couple of terms.  First, fair dealing as a unique American concept.  Second, the so-called “New Deal” of the 1930s.   Economist Paul Krugman says that Americans need another New Deal, but it is my view that a fair deal consistent with traditional American values regarding politics and economics is a better idea.  We’ll start with the New Deal and work backwards. 


Harry Truman coined the political terms “fair deal” as an extension of FDR’s New Deal model.  The basic idea of the New Deal was that government would guarantee economic opportunity and social stability. This model of political economy was distinctly European in derivation and is entirely at odds with the American traditions of limited government and individual responsibility.  We still honor those traditional American values in a rhetorical sense, but in practical terms the operative model of American economic policy over the past century has become more and more socialist and European. 


In the face of economic swings, labor unrest and geopolitical tensions following WWII, a large majority of Americans supported government intervention in all aspects of the economy.  The shared experience with deflation and unemployment starting in the early 1900s and through WWI worked to make government intervention more and more popular.  This was especially the case in urban areas where captive populations of immigrant workers became easy prey for progressive politicians promising a bigger piece of the economic pie.  


Today, the chief ethic of America is not free enterprise or individual achievement, but dependency and transfer payments between the half of the households which pay taxes each year and the half which do not.  The fact that the much maligned one percent pays a disproportionate percentage of the taxes each year goes largely unnoticed by politicians who seek to promote greater fairness in our society via government mandated redistribution of wealth.  Yet each time that we raise taxes or increase government intervention in the shrinking private sector in the US, the net, net effect on individuals and the public at large seems to be negative.    


The concept of a fair deal in America prior to the 20th Century was quite different than the politically opportunistic definitions coined by FDR and Truman.   Truman saw the state as the mechanism for delivering economic and social stability, while the concept of “fair dealing” in the American sense implied a voluntary exchange between free individuals.  The model behind the New Deal of FDR is authoritarian at its roots, while the fair dealing model of pre-20th Century America reflected a voluntary and democratic model of political economy.  Citizens did the right thing because of a strong system of ethics, not because the coercive power of the state to punish nonconformity. 


The founders of the United States were classics scholars and aware of the experiences of Rome and Greece when it comes to national governance.  The views of anti-Federalists such as John Adams and Thomas Jefferson, for example, were very much consistent with the Greek view of democracy and economic life.  Going back to the Greeks and Aristotle, notes Richard Day in “Globalization and Political Ethics,” the idea of an ethical society in a political and social sense was seen as paramount, while the pursuit of material or financial gain was secondary or even prohibited. 


In the Nichomachean Ethics, Aristotle spoke of three types of economic exchange:  1) the natural, cooperative exchange of services in the form of good deeds among the members of society, 2) the natural form of exchange of things needed to satisfy household needs, and 3) the unnatural form of exchange of material goods, not to satisfy natural needs, but rather to take advantage of other people.  Aristotle believed that money could be used as a medium for natural transactions, but that unnatural transactions motivated solely by the accumulation of money were evil and a threat to society.  


In traditional American terms, “fair dealing” simply stated meant that both parties in the transaction received roughly equal value or utility.  Consistent with the Aristotelian model of a just society, the two parties in a transaction had a duty to one another not to cheat and, indeed, to point out when the other party was making a mistake.  The first two legs of the economic world defined by Aristotle were seen as acceptable, but financial speculation solely to earn a profit was anathema.  


In much of America prior to the turn of the last century, the pursuit of financial gain was viewed as being socially unacceptable.  If a daughter in 1900 came home and announced that she was betrothed to an investment banker, the reaction likely would have been disapproval.  Since WWI, the idea of “investing” and financial speculation has gained progressively more and more acceptance with the public, in part because of the efforts by government to finance periodic wars and related domestic spending programs such as housing.  The role of the federal government in subsidizing housing is the key cause of the financial crisis that began in 2008.  


In place of the voluntary association between individuals that characterized the Greek polis and the US republic in the 19th Century, today Americans have created an authoritarian model of governance.  The end result of the Civil War and American involvement in two world wars has been to make us a nation of laws rather than ethics.  People are required to do the right thing in order to avoid punishment rather than choosing to do the right thing because of being a member of a virtuous and “fair” society.  The roots of this social, ethic shift are ultimately financial, but finance driven by the imperative of war.  


As the 20th Century began, a growing portion of the US population was concerned about the increasing concentration of wealth in society.  The Robber Barons of the 19th Century were succeeded by the Money Trusts of the 20th century, vast predatory corporations with no duty to the idea of a virtuous society and, indeed, every incentive to do the wrong thing in pursuit of financial gain.  Likewise, as the idea of speculation for its own sake grew in popularity, individuals increasingly rejected the traditional formulation of “fair dealing” in the American sense as well as the traditional, Aristotelian view of political economy that said financial speculation is inherently evil.   Today we tolerate credit default swaps and other financial derivatives which have no connection to the real world of trade and commerce. 


During the 1920s, as speculation in commodities, real estate and financial instruments reached a zenith and fraud likewise flourished, the federal government in Washington enacted a series of laws to restrict bad behavior.  Both individuals and corporations were limited in their actions, in part because the public, courts and political class came to realize that the consensus regarding a civil society had broken down.   Government regulation essentially became a substitute for virtue, both in terms of individual and corporate action in the economy.  Most important, the pursuit of financial gain by individuals and companies was ratified as an acceptable form or behavior and one that could be regulated to avoid the bad results that so concerned Aristotle.  




So when we turn to crafting solutions to the crisis, the first questions seems to be whether more laws and regulations, and government subsidies, are the answer.  If a society does not demand that people behave in an ethical and fair way in dealings with one another, what use are more laws?  If current financial and economic pressures are so intense as to demand cheating as a means of survival, then how can regulation possibly help us to achieve a positive outcome?  And if public policy encourages financial speculation, is there any way to make such activity “safe and sound?”


The results of regulation since the 1930s have been poor at best.  You could argue that the period of 1950 through 2008 was one of relative stability.  But as the size of government debt and intervention has grown to support that stability, so too has the specter of systemic risk.  There is not a single instance in the post-WWII era where regulators were able to avoid a risk to the financial system.  Fraud is only possible in a free society, after all, thus our democratic system works to enable financial bad acts.  And regulators are just as susceptible to political pressures as are legislators and judges. 


My former colleagues at the Fed, for example, worry that it is not possible for the largest banks to be resolved via an FDIC receivership.  This causes so-called regulators to tolerate bad behavior by the largest banks that would cause the officers of smaller institutions to be indicted and imprisoned.  The regulators are the facilitators of the acts of fraud committed by the big banks, presenting a stark illustration of the ethical roots of our collective financial woes.  


Beyond the narrow question of regulation comes the economic premise of the New Deal.  The cost of the New Deal and its iterations has been to burden the people of the US with debt that cannot be repaid and thus the prospect of future inflation.  Zero interest rates today imply double digit or worse inflation in the future.  No amount of regulation can make the current fiscal posture of the US government stable, either in terms of financial markets or future consumer and wholesale prices.  Is it ethical for Congress and the Fed to steal money from savers via financial repression and inflation, deliberately designed to fund fiscal profligacy?  


Federal Reserve Chairman Ben Bernanke said on Monday that gauging happiness can be as important for measuring economic progress as determining whether inflation is low or unemployment high. Economics isn't just about money and material benefits, Bernanke said. It is also about understanding and promoting "the enhancement of well-being."  


This Orwellian nonsense from Chairman Bernanke illustrates the core, ethical dilemma of our time, namely that experts and regulators who are supposed to be working to achieve good outcomes for the public are instead apologists for bad policy.   While we ponder imposing more regulation on private business, maybe instead we need to regulate the regulators and their sponsors in Congress.  Perhaps imposing more ethical constraints on our elected officials is the first order of business.  


The financial crisis presents us with an opportunity to reassess the ethical rules of our society.  If you examine possible solutions to the crisis from the perspective of ethics, it is difficult not to conclude that the fiscal profligacy of the US government and related behavior in the private sector is the cause of the problem.  Rather than imposing more constraints on individuals and private business via regulation, it might be more effective to place limitations on the ability of government to intervene in markets such as housing.  


Thank you.




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neutrinoman's picture

Nice article. Adams was a Federalist, not an anti-Federalist. That's the only error I see.

Both the Federalists and anti-Federalists believed in ethics, not laws, as the main thing. The Federalists saw the individual states as too weak to survive in a loose confederation. They also saw that the new federal government could enforce higher standards on states than states could on themselves. This worked until the last 40 years or so.

In a progressing, capitalist society, Aristotle's views about the evil of accumulating wealth are obsolete and wrong-headed. Wealth accumulation = capital formation => source of economic growth. This was true even in ancient times. But until the last three centuries or so, major thinkers were bewitched by static views of society as being a "timeless order." Capital formation expands wealth = productive capacity, satisfying future needs and wants that we don't even know about yet.

The confusion, however, continues in a new form, confusing income (goods and services) and wealth (the ability to produce goods and services) with money and, even worse, with credit. This is the root of the "financialization" often denounced on ZH.

"Leges sine moribus vanae" (Laws without ethics are vain) - motto Ben Franklin chose for the University of Pennsylvania, of which he was a founder

working class dog's picture

Thomas Jefferson and Ben Franklin were whore mongers, and our founding fathers are offspring from the Dutch East India Company and all the scoundrels, undesirables, crimminals, religous outcasts, all were forced to come to america to screw over the Indians, so dont say our forefathers were any better than the present herd of fleas.



Muppet Pimp's picture

The real debate going forward needs to be about how the private sector, i.e. 'We the People' can all move forward in an environment where there is going to be less work due to our overwhelming efficiency.  It would seem that somehow working this out among the people would be far preferential than the route of governent redistribution.  We are getting to the point of hitting the wall for maintaining 6% unemployment.  Computers do so much for us anymore that honest hardworking folks are 'pretending to work; at times just to get that paycheck.  What is the new paradigm?  Is it appropriate that we all pretend to work and spend 40 hours at jobs we could be out of in 20?

Silicon Valley is showing some leadership in this area with work programs providing no scheduled hours and unlimited paid vacations.  But in the end, shareholders will not stand for this sort of 'nonsense'.  So lets say in a year or two when the drought is over and even food is again abundant, how do we create the new paradigm?  It is not about giving things to people who are not deserving, but how do we move to a less rigorous environment when the current system says the capital owners get to reap all the rewards for these new found efficiencies?  Their sales are hitting the wall due to the efficiencies netting increasing unemployment.  The ability of society as a whole, without government intervention or redistribution to deal with this is the real challenge we face.  It is a good problem to have really, but .gov solution of taxing and redistributing is not the right answer.  With their plan we will pay them three dollars for every dollar they give out to the least deserving of us all.  Shorter work weeks seem inevitable.  Why create the schism to where honest folks have no choice but to show up and fake their 40 when they could be productive and happier jamming it out in 20 and surfing more?  This is the challenge and it requires a new paradigm, a new way of thinking imo.   

wombats's picture

Good luck with selling that idea to the dumbed down masses hooked on their reality TV shows and gov't cheese.

Miles Kendig's picture

As long as the music is playing you've got to get up and dance

-- Chuck Prince

OK .. so the parties at the Metropolitan Club are in competition with the Mayflower for the title of most awful around.  How does one change the DJ's, music selections and dance steps Chris when the whole debutante ball construct is premised upon spectacle rather than result?

flacorps's picture

Fair dealing is not uniquely American. "The LORD abhors dishonest scales, but accurate weights are his delight." - Proverbs 11:1

donsluck's picture

If there is a Lord, do you really think she would be interested in scales and weights? Isn't she the Lord of all creation? Do you think animals give a shit about scales and weights? This is a purely human concern.

steve from virginia's picture




The fact that the much maligned one percent pays a disproportionate percentage of the taxes each year


The much maligned one percent are simply robbers who should be taken out and shorted.


What a stooge.

Jack Sheet's picture

A fine discourse for a university philosophy colloquium.

Shankopotomus's picture

An essay condemming Government intervention in our lives and business coming from a banker whose bank and banking business couldn't exist without the Government. That's cool.

Widowmaker's picture

That this author presumes the rich (top 1%) pay any taxes at all illustrates how fucking broke the perception of reality is.

11b40's picture

That top 1% argument never goes to the core of WHY their percentage of taxes is higher, even though it is the 900 pound gorilla in the room.  It's because they have so much more of the income and the wealth.  And who benefits most from what society provides?  Unquestionably, it is those with the most to lose.

GreatUncle's picture

"That top 1% argument never goes to the core of WHY their percentage of taxes is higher"

Consider a limited amount of money, then if somebody takes out too much then somebody else gets less. As the number with not enough grows then those with more become expected to pay more. At that point it is self feeding so those with the most want more, leaving even less at the bottom to go round.

A human society, hungry starts devouring itself from the legs up until only the head remain.

Now to my ideal model, add some Keynsian mechanics so that governments can now borrow what they don't take from those with the most to give to the bottom and as you deflate this debt away watch the values rise. Thought they were clever on this, pay the debt, you can't you will never have enough money to do so.

So cap the top, cap the bottom, constrain the economic model within limits other than that it is bust with no way to repair except borrow ever larger amounts or watch the footless human society start chomping ever nearer to the head as you tackle the structural deficit.

The structural deficit = those with nothing!

Toolshed's picture

For real. I stopped reading at that ludicrous sentence. +1

monad's picture

Very nice. Just needs an effective delivery vehicle. Can you coat this in sweet stuff, give it big knockers & make it into a pinata?



GCT's picture

It always based on Greed and the Greeks learned that 2000 years ago.  They did away with democracy and went to an elected Republic.

Funny how we are going from an elected republic to a social democratic society.  They always have and will always fail.

falak pema's picture

This essay misses the whole point of how power transforms ethics time and time again. To go back to those pristine times, the corrupt power structure now in place, like the Caesars of old, must voluntarily abandon power and accept deep institutional reforms. Something that has NEVER been experienced in history! 

A revolution yes, barbarians at the gates yes! But never a voluntary acceptance, social hara kiri of an oligarchical class to restore the principles of general good; to admit collective and social defeat overtly. 

This transformation will NEVER come from within the system. It has to be wrenched from them by a power play from antagonistic forces either spawned within the nation state or imposed from outside as the empire crumbles and hollows out.

That's historical precedence. We're beyond fair deals within a nation state structure. They have built their nest in transnational hegemony and nation state apparatus is now meaningless as power player in their view of things; as imposed by the current NWO and its mulifaceted institutions like WTO etc. No nation state can change that except through internal profound conflict both political/insitutional and maybe even more violent. 

It is futile to think that they, the global oligarchs,  will implode under the impetus of current national events or under ethical pressure from non government elites. They won't. It will take deep and protracted social unrest and repeated institutional type reforms being required by the people, under dire duress of election pressure, to achieve meaningful change. Something that the US public has forgotten as nobody takes the voting right as a serious tool to achieve change. Its this democratic vacuum which is the biggest blessing that the Oligarchs feel is their political life line. Nobody challenges their power via the vote, by imposing a new political vision and pressure groups representing the people. Even the unions are dead in the USA. If you don't believe in people's power you are toast for the oligarchy order. You dig your own collective graves as democracy and republic are all we know to fight  a return to feudalism.

They will go to more concentration of arbitrary, concealed 'behind the curtain' type power; that only a social revolution from within or intra oligarchy type imperial warfare from without, as a result of thieves falling out,  can bring down. 

GreatUncle's picture

This unrest, revolution, etc.

It has to be global now as it is all the known world which was the Roman Empire at the time and the so called dark ages that followed. Do a Romanov also, you cannot leave anybody at the top because that is no more than continuation of the same. Add on to the fact are any of the Ceaser's of Rome relatives left alive? Nah didn't think so.

That's the problem everything has to go to change anything! Also I don't think even if you managed to do this it would only revert to the same as the underlying mechanism and society would be the same pile of crap.

So likely then human society is set to struggle till the end of time and the end is defined by ourselves and that means we become extinct as a species. We were not good enough to make the grade on what the universe would want to survive an we are just an evolutionary step.


Jack Sheet's picture

Agree. "ethical challenges" makes the flawed assumption that ethics are even present to be challenged.

justsayin2u's picture

The most stringent and harshest regulations need to be applied to protect "we, the people" from those who lack a moral and ethical compas, sociopaths, psychopaths, you know - criminals . . . and to those who can do the most damage to us all like politicians, conngressmen and women, large corporations, the Fed, the president, atc. 

drdj4425's picture

I agree with much of what Mr. Whalen has to say.  More regulation will not help especially when the regulations are written by those who are to be regulated.  It seems to me that the problem is that reward is no longer tied to risk in the financail sector.  When large accounting firms and investment banks stopped operatng as partnerships and the personal wealth of the partners was no longer at risk, we ended up with Enron, Lehman, Merrill Lynch, Bear Sterns, and many others.  I can't help but believe that if Fuld, Oneil, Cox, Mozillo, and countless others had their entire personal fortunes at risk we would not have ended up where we are today.

11b40's picture

But corporations are people, too, dontcha' know?

Piranhanoia's picture

When an ex fed talks about ethics,  one is forced to laugh.  It causes great psychological pain to laugh at the idiocy of such a tool and the statements justifying a criminal lifestyle.  Some of us watch our nation, state, community and neighbors suffer to make this feral pig happy and fatter.

   Drop dead pigman.  Free us from feeble attempt to change the definition of words and concepts just to suit your morbid fear of fairness and humanity coming after you in that dark night.

kayl's picture

Fair dealing under the Law Merchant-Uniform Commercial Code is a laugh. But I ask you? Why are you taking it so personally? It is just a game, a game of law between those who know it and those who don't.

If you had a choice to release yourself from debt or keep paying things out with your dollars that ultimately leads to your ruination, which path would you take? See Title 31 USC Gold Clause Rule. Any legal medium of exchange in the US may be used to discharge public debt obligations. Study the UCC at cornell law edu for the system that transfers value and liability in bankrupt USA. Practice the discharge of debt and go in peace.

Suffering and delusion have always existed.

Exit the matrix, assume your duties and responsibilities, discharge your debt, and stay alive in this chaos.




i-dog's picture


"Fraud is only possible in a free society, after all"

WTF!!!!!!!!!!!!!!!!!!!!!!! A great article spoiled by a stupid subliminal message, er, non-sequitor, er, typo?

ajax's picture



@ i-dog  You got it into comments before I could... what a load of bullocks. Could the writer have meant

              that fraud is acknowledged as such only in a free society? Oh well...

partimer1's picture

Great stuff, great insight.   current system favors a few, and fools most.  To keep current system or rescue the system is to keep the status quo.  But its probably too late for any meaningful change. Maybe this is the way it should be. all those "fairness" stuff is fairytale. 

partimer1's picture

By the way, all this 'free market" BS is just BS.  Market is never free.  Keep dreaming.  

michigan independant's picture

Unseen is what will finish us off. We can also add that the compliance costs amount to more than $8,000 per American employee, but we’ll have to stop the comparisons there or else this editorial would rival Atlas Shrugged in length.

q99x2's picture

You're late. The FEDs already have the tanks being moved into position. Good luck and may God bless.

LawsofPhysics's picture

"Fixing" the system requires the restoration of contracts and real consequences for bad behavior.  Hence, this would require the current and past  "leadership" and power brokers to indict themselves.  Aint going to happen, hedge accordingly.

Gully Foyle's picture


Fixing the system involves fixing the genpop.

Tear it all down and there will just be a new set of assholes who discover a new way to game the system.

There is a saying that goes something like, radicals attack the system in turn becoming a system attacked by radicals.

In other words it's a no win situation.

Aren't we in effect saying

"The idea behind Year Zero is that all culture and traditions within a society must be completely destroyed or discarded and a new revolutionary culture must replace it, starting from scratch. All history of a nation or people before Year Zero is deemed largely irrelevant, as it will (as an ideal) be purged and replaced from the ground up."

Pol Pot used the idea

"Immediately after the fall of Phnom Penh, the Khmer Rouge began to implement their concept of Year Zero and ordered the complete evacuation of Phnom Penh and all other recently captured major towns and cities."

Will we be less zealous?

Ever read your fellow posters?


LawsofPhysics's picture

Did you actually have a point or are you in academics?  The punchline is all that is important, hedge accordingly, that is all you can really do anyway.  Now go get something done.  regardless of the paper-pushing bullshit(which is really what this all is), real goods and services (FYI-financial "services" is code for stealing you wealth) still need to be delivered, even as Atlas continues to shrug.

Gully Foyle's picture

The institution just ain't what it used to be.

Like any of those faux rich fucks give a shit about this.

I smoked and drank with Ken Kesey there and stumbled on Paul Newman one day.

I listened to Vonnegut bitch about his son in law Jerry Rivers, and watched Joan Biaz's futile attempt to piss off the audience by illuminating their backwardness.