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03/16/2008

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Brian R Davis

I'm just another over-the-hill lawyer trying to help people past the shoals of our own creation. Chris Dodd and Barney Frank need to be hearing from people like Gary Becker and Judge Posner. I was here, at then-Ground Zero (Texas), in the '80's-early '90's when every bank holding company and nearly all S&Ls went broke. I choose to analogize, roughly, last weekend's deployment of the Fed's resources to bail out Bear Stearns to certain maneuvers executed by Congress and the financial regulators in the earlier to mid-80's in an effort to stave off the failures that ultimately transpired and forced the enactment of FIRREA in '89. These were 1) Congress's enactment of the Garn-St Germain Act in 1982, which put the already-disintermediating S&Ls into the commercial real estate development business; 2) Congress's too-little-too-late strengthening of the FSLIC's powers to resolve distressed institutions; and 3) concurrently, the FHLBB's misguided "Southwest Plan," which bankrupted the old FSLIC by allowing defunct S&Ls to be "sold" to new owners who succeeded in "buying" the institutions' negative net worth ("supervisory goodwill") in trade for accepting the depository liabilities and bad loan portfolios. Most of the "new" S&Ls ended up going broke, too. We had a huge taxpayer bailout under FIRREA. It abolished "supervisory goodwill," as well. The taxpayer is still paying for that in the "Winstar" constitutional "takings" cases that presented meritorious claims for compensation.

At the end of the day, there are only so many ways Washington can rig a bailout that has a chance of attracting enough consensus to be implemented and succeed, albeit imperfectly. We heard very nearly the same arguments 20 years ago about bailing out high-flying financial promoters and shareholders versus bailing out "innocent" borrowers but primarily about protecting depositors. Just as there's never enough insurance to fix everything when a weather disaster strikes, there are never enough resources available in the common kitty to fix the problems of everybody with an appealing excuse in the case of a financial collapse. Washington overspends - we can all agree on that - but by the genius of the Framers the people to whom we've entrusted the full faith and credit of the Treasury eventually have to take its implied limitations seriously. I have to believe, for example, that Bill Douglas easily could have penned something diametrically different in the old D'Oench, Duhme case if he had honestly thought there was a way to do it and get four to go with him.

So it's still blocking and tackling. Nothing fundamental has changed. We're just seeing the "trick plays" stage of this game. Trick plays usually lead to mistakes, so you don't see many by the fourth quarter of a close contest. But you do find out who deserves to be out there, who should get the ball. This says to me that there's only so much the officials - especially with replays and challenges to deal with - can do to tilt the outcome. We'll end up with the contracts people signed being enforced by the courts with the same regularity D'Oench, Duhme inspires, and financial market enterprises that go broke in the meantime will have to go back to the market for reorganizational capital or accept liquidation. That's a cold shot but it's the American way.

Andrew K

"All "freedom" means is not being subject to certain kinds of coercion."

I am not convinced that there is a principled way to distinguish between "kinds of coercion" that can be applicable and still permit your version of freedom, and those "kinds of coercion" that, when applicable, preclude your version of freedom.

If the "choice" to do an act is completely "caused" (as opposed to "uncaused", which would correlate with your notion of "Christian freedom"), it would seem that fraud would become an incoherent concept. On this causal scheme, human action must be explained in probabilistic terms: to be fraudulent is simply to use means to increase the probability someone will act in a certain way, and acting honestly is... simply using means to increase the probability someone will act in a certain way as well.

This (it seems to me) Lockean notion of freedom cannot account for these distinctions in law.

Terry Bennett

Dr. Becker correctly identifies an annoying habit of modern Americans (and Judge Posner hypothesizes, all humans), failure to take responsibility. Both are probably right, in that certain peculiarities in our current culture encourage or at least do not adequately punish this human shortcoming.

While intellect and such may well not be within a person’s control, what IS within the control of the average person is the decision whether or not to factor the mores of one’s culture into one’s personal calculus. Cultural rules are designed to be easy to grasp, as they need to apply to a broad group of widely varying abilities. Anyone short of those who, in Justice Holmes’ words, exhibit a “distinct defect” is capable of signing on to the social compact into which he or she is born, either consciously or by a sort of default social osmosis. The failure to do this is blameworthy. As Jack Nicholson said at the end of A Few Good Men, you sleep under the protection I provide and then question the manner in which I provide it – or something like that. The Freemen out in Montana didn’t want to pay taxes a few years back, but I noticed in the news footage that they didn’t mind walking on a road which was no doubt paved with tax money. You can go vanish into the forests of the Pacific northwest and be a survivalist, or you can partake of the advanatges of living in a culture, and be an upstanding and supportive member thereof.

The three concepts of moral hazard, good faith, and the tragedy of the commons all stem from a common root – the maximizing of personal return by omitting social responsibility – or what one might call “decency” - from the decision tree. If an insurance company contracts with you for a no-deductible insurance policy, they assume (perhaps foolishly, given human nature) that you will not abuse the policy and malinger merely to enjoy the “free” (no marginal cost) ride to the doctor’s office. This may not be a defect of the will, but at the very least it is a defect of the conscience.

Judge Posner once issued an opinion describing the contract doctrine of good faith as a hedge against the necessary imbalances that occur during the course of a contract, due to the impracticality of having performance and payment proceed in perfect lockstep. If you hire a contractor to remodel your kitchen, you can’t very well stand there and pay him every 5 minutes as the work proceeds. If you give him a lump sum, you won’t see him again for 2 months, or maybe never. If he does the work first, you might stick him with a bad check, or find some little supposed defect in the job and hold up his payment.

We find the failure of good faith blameworthy under the law. I’m sure the nimble arguers who frequent this page can state that in economic terms, but it isn’t really necessary to get so complicated about it. It’s as simple as lying (which I suppose an economist would determine is blameworthy as the result of some equation). When you contract with the remodeler, he knows you want your kitchen remodeled, and you know he wants the money. Similarly, when you contract with the insurance company for the health policy, you know darn well they expect you to use it when you actually need it. Sure, abusing it may be “rational”, if you enjoy visiting the doctor and don’t give a crap about the rest of the world; I assert that abusing it is still blameworthy, which apparently sticks in the craw of the purist economists.

Murder can be rational. (If it were not, only the insane would commit it.) I am still against it. As Dr. Becker’s post hints, there is something bigger than economics, and a cold world awaits he who would choose to live in the theoretical realm of perfect economic rationality.

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