While severe childhood neglect and abuse do not legally excuse criminal conduct, such a background should be a factor to be considered by courts when determining a sentence. Severe childhood abuse and neglect frequently have a significant, life-long effect, and it is not merely a question of “reducing…alternative legal opportunities.” Maximizing the deterrent value of criminal laws is a critical goal of our criminal justice system, but not the only goal. Some types of crime are difficult to solve, but we would not necessarily increase the penalty to the point of maximizing deterrence because the resulting sentences would be too high for most of our moral sensibilities. If natural life sentences were the most cost-effective means of deterring juvenile shoplifters, for example, we still would not adopt such a sentencing scheme. And contrary to Judge Posner’s experience, in my 16 years as an attorney, most judges I have seen “allow the excuse of a bad upbringing to mitigate punishment.” The federal sentencing guidelines prohibit such considerations, but most crimes are prosecuted at the state level. Thankfully, many state-court judges are willing to consider evidence of severe neglect or abuse as a mitigating factor during a sentencing hearing.

I would add that there is also an inherent injustice in a government bailout of those who took out risky mortgages - specifically, using tax dollars taken from those who did not take out such loans.

it's irrational for the politicians /not/ to bail out the subprime borrowers, since helping the poor, especially rescuing them from predatory businessmen, is such an important principle for a significant bloc of voters. ditto for balancing the utility of deterring crime with compassion for the disadvantaged. this is the price of living in an enlightened liberal democracy that even libertarians have to pay. there is no "injustice" to taxpayers who understand the pulse of society and yet choose to stay in this country.

I wonder, though, how to reconcile the implication of bailing out (or not) large financial institutions vs. individual lenders? In both cases, I agree with the moral argument that individuals and organizations should be held to account for the results of their decisions. I also see the sense in the Fed organizing protection for Goldman Sachs and others threatened by the impact of their investments in sub-prime mortgage securities. Goldman's (and others') failure would create genuine pain for millions -- even cautious borrowers like myself!

So what to do? Bail out the large financial organizations but leave individuals to face their doom? I don't like the sound of that, but it seems where we're headed.

Comments?

Posner: In the traditional sense of that concept, a sense most highly developed (so far as I know) in Christian theology, uncoerced decisions, such as a decision to commit or refrain from committing a crime, are deemed to be uncaused.

The successful organized religions are a bit more subtle. Their claim is essentially that people will get what they "deserve" in the afterlife unless they join that particular religion. They also generally claim that pretty much everyone "deserves" to be tortured for all eternity after they die so the only way to avoid such a fate is to join up with the religion in question.

Anyway, there is a siginificant chance that free will is an illusion. That we don't know whether a coin will come up heads or tails doesn't mean the coin has free will. That we don't know what decision a person will make also doesn't mean the person has free will. On the other hand, two billiard balls can affect each others behavior even if neither billiard ball has free will. Similarly, two people can affect each others behavior even if neither person actually has free will (e.g. having a conversation).

Anyway, a system laws that is uniformly enforced will influence individual behavior. That is not to say that an individual "deserves" to be punished - only that by punishing certain individuals a society can collectively influence the behavior of its individual members.

In this instance, a bail-out should be avoided and an additional system of monitoring and punishments should be devised to prevent the management of financial institutions from engaging in similar behavior in the future. Of course, given that life most likely has no fundamental purpose, there isn't really a "should". I am merely expressing desires that I happen to have (not that I actually had a choice in those desires).

> most people with a bad upbringing [...]
> do not become criminals. [Therefore] the
> threat of punishment can deter even a person
> who has had a bad upbringing.

I don't follow you there: most people, whether they had bad of good upbriging, are honnest: how does that prove that deterance work? More precisely, how do you prove that people with a bad upbriging identify with other similarly educated people to the point it would justify a different judicial treatment? If anything, not being honnest in USA implies being either irrational, or having strong risk-assessement issues.
I've always taught the excuse was from a Rawlsian argument -- but I might be wrong on this one.

I think it is much easier for an average person to understand the risk of committing burglary than of taking out an adjustable rate mortgage. Society does a good job of explaining to everyone, regardless of upbringing, that criminal conduct is wrong. Those who commit crimes knowingly flout the rules of society and bring punishment upon themselves. Of course, a person's background may be relevant to punishment, but it is not relevant to guilt.

On the other hand, the average person is unsophisticated in the ways of financial markets. If financial advisors urge him to buy tech stocks, because they are "hot," he follows that advice. Similarly, if bankers, mortage brokers, and loan officers urge him to take a no-money-down, interest-only mortgage, and if all his friends have received similar advice, he is likely to jump on the bandwagon. While some people, likely highly-educated ones, are more attuned to the risks of certain financial instruments, my guess is that the vast majority of people "go with the flow."

I think that financial professionals should have a fiduciary duty to explain the true risks of instruments like interest-only loans. If the system failed to properly warn individuals about the risks, it bears at least partial responsibility for bad outcomes. The current financial mess could have been avoided if lenders had behaved like responsible citizens.

There should be some sort of "bailout," however "unjust" this sounds, to prevent the system from collapsing into a depression. This might result in helping persons whom one might consider morally blameworthy. Still, it should be done for the greater good. However, no one should get rich off of this mess, and new rules should be implemented to prevent a recurrence. So long as a profit motive exists, innovation will occur, and some innovation is not in the common good.

A worrisome aspect of including past history of abuse as a mitigating factor in sentencing is the surprising numbers of people alleging specific abuse are later found by psychiatrists to have had 'false memory.' How much 'false memory' of past abuse is acually concocted by defense counsel?

As for the determinist's ability to throw off any personal responsibility for misbehavior to the acts of God, Satan, when and where the moon or sun is rising or setting, the spilled guts of Caesar's cat or which shoulder the Greek's eagle flew over, determinism is, by its very nature, the fallback of a pessimistic psychology. The pessimistic determinist will always exhibit a 'knee-jerk' negativity and place special value upon 'victimhood' and 'helplessness.' This link between determinism and pessimism is drawing increased attention by psychologists, especially those studying the link of psychic pessimism with chronic depression, the foil of human happiness.

As for state intervention to rescue private decision-makers from the economic consequences of their decision: the bail-out is, at best, pragmatic; at worst, it's the exuse-making of a determinist.

The public assumes that institutions like banks have an apriori, antecedent moral condition that governs their actions. That is why institutions become institutions. People trust that there will be an equitable, mutually beneficial exchange between the institution and themselves. When that trust is broken, people have a tendency, and this is the danger, of no longer having confidence in the institution. Isn't it the role of government then to instill that confidence? Isn't that why our savings is insured by the FDIC? I think Hayek would even say that government has some role in engendering that confidence.

Don’t believe one optimistic word from any public figure about the economy or humanity in general. They are all part of the problem. Its like a game of Monopoly. In America, the richest 1% now hold 1/2 OF ALL UNITED STATES WEALTH. Unlike ‘lesser’ estimates, this includes all stocks, bonds, cash, and material assets held by America’s richest 1%. Even that filthy pig Oprah acknowledged that it was at about 50% in 2006. Naturally, she put her own ‘humanitarian’ spin on it. Calling attention to her own ‘good will’. WHAT A DISGUSTING HYPOCRITE SLOB. THE RICHEST 1% HAVE LITERALLY MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. Don’t fall for any of their ‘humanitarian’ CRAP. ITS A SHAM. THESE PEOPLE ARE CAUSING THE SAME PROBLEMS THEY PRETEND TO CARE ABOUT. Ask any professor of economics. Money does not grow on trees. The government can’t just print up more on a whim. At any given time, there is a relative limit to the wealth within ANY economy of ANY size. So when too much wealth accumulates at the top, the middle class slip further into debt and the lower class further into poverty. A similar rule applies worldwide. The world’s richest 1% now own over 40% of ALL WORLD WEALTH. This is EVEN AFTER you account for all of this ‘good will’ ‘humanitarian’ BS from celebrities and executives. ITS A SHAM. As they get richer and richer, less wealth is left circulating beneath them. This is the single greatest underlying cause for the current US recession. The middle class can no longer afford to sustain their share of the economy. Their wealth has been gradually transfered to the richest 1%. One way or another, we suffer because of their incredible greed. We are talking about TRILLIONS of dollars which have been transfered FROM US TO THEM. All over a period of about 27 years. Thats Reaganomics for you. The wealth does not ‘trickle down’ as we were told it would. It just accumulates at the top. Shrinking the middle class and expanding the lower class. Causing a domino effect of socio-economic problems. But the rich will never stop. They just keep getting richer. Leaving even less of the pie for the other 99% of us to share. At the same time, they throw back a few tax deductible crumbs and call themselves ‘humanitarians’. Cashing in on the PR and getting even richer the following year. IT CAN’T WORK THIS WAY. Their bogus efforts to make the world a better place can not possibly succeed. Any 'humanitarian' progress made in one area will be lost in another. EVERY SINGLE TIME. IT ABSOLUTELY CAN NOT WORK THIS WAY. This is going to end just like a game of Monopoly. The current US recession will drag on for years and lead into the worst US depression of all time. The richest 1% will live like royalty while the rest of us fight over jobs, food, and gasoline. So don’t fall for any of this PR CRAP from Hollywood, Pro Sports, and Wall Street PIGS. ITS A SHAM. Remember: They are filthy rich EVEN AFTER their tax deductible contributions. Greedy pigs. Now, we are headed for the worst economic and cultural crisis of all time. Crime, poverty, and suicide will skyrocket. SEND A “THANK YOU” NOTE TO YOUR FAVORITE MILLIONAIRE. ITS THEIR FAULT. I’m not discounting other factors like China, sub-prime, or gas prices. But all of those factors combined still pale in comparison to that HUGE transfer of wealth to the rich. Anyway, those other factors are all related and further aggrivated because of GREED. If it weren’t for the OBSCENE distribution of wealth within our country, there never would have been such a market for sub-prime to begin with. Which by the way, was another trick whipped up by greedy bankers and executives. IT MAKES THEM RICHER. The credit industry has been ENDORSED by people like Oprah Winfrey, Ellen DeGenerous, Dr Phil, and many other celebrities. IT MAKES THEM RICHER. Now, there are commercial ties between nearly every industry and every public figure. IT MAKES THEM RICHER. So don’t fall for their ‘good will’ BS. ITS A LIE. If you fall for it, then you’re a fool. If you see any real difference between the moral character of a celebrity, politician, attorney, or executive, then you’re a fool. No offense fellow citizens. But we have been mislead by nearly every public figure. WAKE UP PEOPLE. THEIR GOAL IS TO WIN THE GAME. The 1% club will always say or do whatever it takes to get as rich as possible. Without the slightest regard for anything or anyone but themselves. Reaganomics. Their idea. Loans from China. Their idea. NAFTA. Their idea. Outsourcing. Their idea. Sub-prime. Their idea. High energy prices. Their idea. Obscene health care charges. Their idea. The commercial lobbyist. Their idea. The multi-million dollar lawsuit. Their idea. The multi-million dollar endorsement deal. Their idea. $200 cell phone bills. Their idea. $200 basketball shoes. Their idea. $30 late fees. Their idea. $30 NSF fees. Their idea. $20 DVDs. Their idea. Subliminal advertising. Their idea. Brainwash plots on TV. Their idea. Vioxx, and Celebrex. Their idea. The MASSIVE campaign to turn every American into a brainwashed, credit card, pharmaceutical, love-sick, celebrity junkie. Their idea. All of the above shrink the middle class, concentrate the world’s wealth and resources, create a dominoe effect of socio-economic problems, and wreak havok on society. All of which have been CREATED AND ENDORSED by celebrities, athletes, executives, entrepreneurs, attorneys, and politicians. IT MAKES THEM RICHER. So don’t fall for any of their ‘good will’ ‘humanitarian’ BS. ITS A SHAM. NOTHING BUT TAX DEDUCTIBLE PR CRAP. In many cases, the 'charitable' contribution is almost entirely offset. Not to mention the opportunity to plug their name, image, product, and 'good will' all at once. IT MAKES THEM RICHER. These filthy pigs even have the nerve to throw a fit and spin up a misleading defense with regard to 'federal tax revenue'. ITS A SHAM. THEY SCREWED UP THE EQUATION TO BEGIN WITH. If the middle and lower classes had a greater share of the pie, they could easily cover a greater share of the federal tax revenue. They are held down in many ways because of greed. Wages remain stagnant for millions because the executives, celebrities, athletes, attorneys, and entrepreneurs, are paid millions. They over-sell, over-charge, under-pay, outsource, cut jobs, and benefits to increase their bottom line. As their profits rise, so do the stock values. Which are owned primarily by the richest 5%. As more United States wealth rises to the top, the middle and lower classes inevitably suffer. This reduces the potential tax reveue drawn from those brackets. At the same time, it wreaks havok on middle and lower class communities and increases the need for financial aid. Not to mention the spike in crime because of it. There is a dominoe effect to consider. IT CAN'T WORK THIS WAY. But our leaders refuse to acknowledge this. Instead they come up with one trick after another to milk the system and screw the majority. These decisions are heavily influensed by the 1% club. Every year, billions of federal tax dollars are diverted behind the scenes back to the rich and their respective industries. Loans from China have been necessary to compensate in part, for the red ink and multi-trillion dollar transfer of wealth to the rich. At the same time, the feds have been pushing more financial burden onto the states who push them lower onto the cities. Again, the hardship is felt more by the majority and less by the 1% club. The rich prefer to live in exclusive areas or upper class communities. They get the best of everything. Reliable city services, new schools, freshly paved roads, upscale parks, ect. The middle and lower class communities get little or nothing without a local tax increase. Which, they usually can't afford. So the red ink flows followed by service cuts and lay-offs. All because of the OBSCENE distribution of bottom line wealth in this country. So when people forgive the rich for their incredible greed and then praise them for paying a greater share of the FEDERAL income taxes, its like nails on a chalk board. I can not accept any theory that our economy would suffer in any way with a more reasonable distribution of wealth. Afterall, it was more reasonable 30 years ago. Before Reaganomics came along. Before GREED became such an epidemic. Before we had an army of over-paid executives, bankers, celebrities, athletes, attorneys, investors, entrepreneurs, developers, and sold-out politicians to kiss their asses. As a nation, we were in much better shape. Strong middle class, free and clear assets, lower crime rate, more widespread prosperity, stable job market, lower deficit, ect. Our economy as a whole was much more stable and prosperous for the majority. WITHOUT LOANS FROM CHINA. Now, we have a more obscene distribution of bottom line wealth than ever before. We have a sold-out government, crumbling infrastructure, energy crisis, home forclosure epidemic, 13 figure national deficit, and 12 figure annual shortfall. The cost of living is higher than ever before. Most people can't even afford basic health care. ALL BECAUSE OF GREED. I really don't blame the 2nd -5th percentiles in general. No economy could ever function without some reasonable scale of personal wealth and income. But it can't be allowed to run wild like a mad dog. ALBERT EINSTEIN TRIED TO MAKE PEOPLE UNDERSTAND. UNBRIDLED CAPITALISM ABSOLUTELY CAN NOT WORK. TOP HEAVY ECONOMIES ALWAYS COLLAPSE. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. The American dream will be shattered. and thats just the beginning. Greed will eventually tank every major economy in the world. Causing millions to suffer and die. Oprah, Angelina, Brad, Bono, and Bill are not part of the solution. They are part of the problem. THERE IS NO SUCH THING AS A MULTI-MILLIONAIRE HUMANITARIAN. EXTREME WEALTH MAKES WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. WITHOUT WORLD PROSPERITY, THERE WILL NEVER BE WORLD PEACE OR ANYTHING EVEN CLOSE. GREED KILLS. IT WILL BE OUR DOWNFALL. Of course, the rich will throw a fit and call me a madman.. Of course, they will jump to small minded conclusions about 'jealousy', 'envy', or 'socialism'. Of course, their ignorant fans will do the same. You have to expect that. But I speak the truth. If you don’t believe me, then copy this entry and run it by any professor of economics or socio-economics. Then tell a friend. Call the local radio station. Re-post this entry or put it in your own words. Be one of the first to predict the worst economic and cultural crisis of all time and explain its cause. WE ARE IN BIG TROUBLE.

I think some important concepts are missing from this discussion: reputation and the accumulated resources of society. Reputation is important becuase its potential loss is a key consideration when making a decision. You lose reputation if you are revealed to have made a fraudulent or unwise decision. Because reputation has different values depending on your station in life, completely rational individuals can compute very different expected negative consequences from making bad or illegal decisions independent of the legal repercussions.

Because the level of societal resources has gone up drastically over time, rational individuals may willingly impose much larger costs on society through moral hazard because society has a greater ability to bail them out and it is therefore more likely to happen. So there may well be a rational move toward not taking responsibilty for ones actions.

I am a young lawyer living in San Diego. Shortly after I graduated law school in 2004, the real estate frenzy reached its apex. During this time, virtually everyone I knew said the same thing: (1) the first thing a young worker must do is buy a house; (2) price is not an issue because any good lender can get you the necessary loans; (3) home prices have always increased in San Diego, so you can always use your increased equity to refinance before your rates adjust.

This was certainly the "conventional wisdom" of the time, and I felt like the only person in San Diego who had not yet jumped on the property bandwagon. So my wife and I began investigating what homes might be affordable on my $75,000 first year associate salary. We were shocked to find that: (1) even the most modest 2 bedroom bungalow cost at least $550,000 and; (2) there were plenty of lenders who were willing to lend us that money - with no down payment.

I remember sitting down with one lender as he explained how he could get me a $600,000 loan. He told me that it would an interest only adjustable rate mortgage, and that for the first three years sixty percent of my salary (approx. $3700/mo) would go towards paying interest. Then the adjustable rates would increase and at some point in the future, I would eventually start paying down the principal. But according to the lender, I could easily refinance before the adjustable rates took effect - assuming housing prices continued to increase and I gained equity in my home.

I thought about this offer and the terms of the loan for quite awhile. Despite the fact that all of my friends and colleagues were telling me that I was missing out by not "getting in" to a home, I could not understand how the price of a $600,000 two bedroom house could increase any greater in the coming three years. Who was going to buy this house for $650,000 after me? It made no sense to me, and I felt confident that the housing prices would eventually return to normal levels. Rather than following the herd, I made an independently reasoned choice and I decided to rent, and wait.

So it was with great joy that I watched the real estate bubble begin to burst last year. My joy quickly turned to horror, however, when I first heard that people and companies who entered into bad deals will be "bailed out" of accepting the consequences of those deals.

What message does this send to those who chose not to make the bad deal in the first place?

Andrew and Bernard: Basically it comes down to "screwed is screwed" and there will be no "bailouts" worthy of the name as the cupboard is bare in DC too. There may be patches and some sort of scheme to keep the guy in his house and paying and paying and paying. One being batted around is that of lowering principal...... ahh but it has the hook of paying it back, out of, haha, guess what! house appreciation.

Stats show that those friends of yours having purchased in the last three years, 30% are underwater. Others? Say they bought 5 years ago then most have lost their equity and there will be no "bail out" for them.

There seem many here reflecting on the morality of any "bailout" and what message it may send to others in the future. But we're well past such niceties as morality and as at sea the only reason for all bailling as fast as they can is that of the threat of sinking....... ie. patching up the Bear Stearns mess was done in panic of any other approach sinking the whole sector.

And..... there is a bigger issue yet. Soon, and again in panic mode Congress is rebating $600 or so in belated hopes of spurring our moribund economy. Ha! after presiding over the greatest shift of wealth from lower incomes to the wealthy accompanied by juicy tax bennies to accompany such transfer have they finally gotten some clue that an economy can NOT fly on one wing?

We've had 25 years in which per capita productivity has doubled while median wages have not risen at all. Recently we've had oil price driven inflation and health care costs eating away at all wages levels but at median and below it's taking ALL of the discretionary income so demand for consumer goods, including housing, is tanking.

It's laughable that Congress that has let min wages atrophy for twenty years now thinks that kicking down $600 is going to "fix" or even begin to spur this mess. But to be fair, until they raise taxes to pay for the warmongery and ongoing DEFICITS they've little money with which to effect a Keynesian spurring.

So...... we're soon off to another "morality" debate: that of "redistributing income and wealth", though the upward redistribution of the last quarter century went along nicely with no discussion of morality. But, if we are to have a working economy money has to be put in the hands of those of median and lower incomes or there will be no one to buy the goods and services that create the wages for those above median incomes.

How this gets accomplished is of less importance than getting it done and that is the tough task of the next administration and Congress.

Bernard - I'm a (somewhat older) lawyer in NYC who, similarly, refrained from buying into what seemed to be an overpriced market. Like you, everyone I work with has been saying for years that I should buy as much apartment as I can possibly leverage, immediately. I, too, looked at the unrealistic cash flow that would be required to pay the mortgage for an apartment large enough for my family of 4, and rented. Prices haven't dropped much in NYC yet, so I haven't enjoyed your Schadenfreud, but I am baffled at the presumed victimhood of people who, essentially, gambled their houses and lost. And I, too, am infuriated at being asked to pay for irresponsibility that I myself refrained from.

That said, there are some good reasons for "assisting" some of the principals in this debacle (both individual and institutional), none of which arise from any desire to alleviate their personal suffering. Preventing empty houses from dragging down the property values of the innocent seems a worthwhile goal, as does preventing lenders from descending into a more general credit crisis that would prevent you and me (and other appropriately cautious bystanders) from getting affordable mortgages when prices come down enough to finally seem reasonable.

Judge Posner:

I want to make sure I understand what you are saying, so a clarification in your response would be appreciated.

I understand you to be saying the following: forces outside the control of the individual lead the individual to make a particular choice. Let's think of these forces as controlled by a computer. When the costs associated with a particular course are lowered, the computer (which the individual has no control over) re-analyzes the costs and benefits of that course and commands the individual to act accordingly. Thus, we punish the wrong doer to deter the computer that is commanding the individual from engaging in similar conduct in the future.

In other words, someone has to bear the costs of each bad outcome, and you're suggesting we make the person with the "bad computer" that engaged in the loss-generating activity bear the losses, rather than other people, who were born with a better computer.

That seems rather odd. I guess Becker can thank the luck of the Irish for his Nobel prize.

Judge Posner's analysis of freedom brings to mind Janice Joplin--"freedom's just another word for nothin' left to lose." There may be other ways of interpreting her song, but it is thoroughly consistent with the Posner view that in our society choices are caused by upbrining, education, values, responsibilities, and alternatives, and are not random. If choices are caused, then surely the policy decisions of government are a factor rationally considered in many purchasing decisions. I find it difficult to believe that the way in which current policy responses to the collapse of the housing bubble are playing out will lead to many home purchases that are irresponsible, or more precisely, done with the assumption that the loan financing the purchase will be materially changed by the government to the advantage of the borrower. First, most people who have not been subprime borrowers are happy that they do not have a subprime borrowing problem. Second, the long period of housing price increase is over and most Americans will remember this housing depression indelibly. There is a small group of relatively prosperous speculators in second vacation homes and urban condos who may walk from their obligations, but it is difficult to believe that lenders who have been burned by this event will not be chary about lending to them in the future. Government intervention that gives the market a chance to catch its collective breath about institutional and instrument creditworthiness may avoid the kind of longterm meltdown that occurred in the Great Depression. Whether that should take the form of government subsidized purchasing or money supply management, I'll leave to Becker whose comment recognizes the importance of the macro event. Finally, Judge Posner's comments about responsibility is tantalizing. Clearly, Americans have become adept at using the banner of victimization in a way that might leave a third world citizen shaking his/her head--consider the 14 year old girl in rural Uganda who has delayed the commencement of sexual relations and avoided HIV/AIDS. How would she think about ARM's after a presentation by a smarmey mortgage broker? More interesting, does Posner believe that citizens in free economies are better prepared to make economic decisions than citizens in socialist economies? In other words, doesn't successfully taking advantage of free choice generally help a person make future choices?

I have to say, I love reading this blog. Even the comments. It's instructive.

Still, it's hard not to read the course of events as pushing against the ideas Becker and Posner offer here.

I think back to posts in June of 2007, subsequent posts, and then to the events as we've seen them unfold. Given this larger stage, to continue to focus on the causes and consequences of individual mortgage holder decisions seems, frankly, remiss.

OK. Individual mortgage holders made bad decisions. Also: highly educated, professional, wealthy decision makers. En Masse.

What I want to know is: where is the "aggregate wisdom" we are promised? Is it really just over the hill, ever off in the horizon? Am I really to believe now that if only the bail-out did not happen and these decision makers had to face the consequences of their decisions, that then we would see the true benefits of the free market system? And what about the real human suffering along the way? Am I really to believe this will be well worth the eventual realization of the perfect mediation of society by markets?

It seems to me, to press here, ever so lightly, against the interesting questions of economic decision-making without offering more is insufficient.

It seems to me that we will need more than this. We'll need more as a foundation for theories of public policy and we'll need more as a foundation for legal theory. I don't know enough to offer these possibilities, it's just a hunch.

Here's hoping this financial crisis, which now does not at all seem like a crisis based on individual mortgage holders, but something else entirely, will turn out for the best.

Also, in case it hasn't been shared before... "Free to Choose" is available streaming online, here: http://www.ideachannel.tv/

If only Milton Friedman were as perfectly right as he is intelligent and charming.

This matter seems to rest on the old "free will versus determination" debate which I view as nonsense. A person is defined by the interaction between their genes and their past and present environments. Policy should be set to give efficient incentives (which become part of the person through their environment).

I think that any bail-out would be bad for the economy's long-term health as it would encourage future reckless investments based on the idea that if many people lose big then they will be bailed out.

The notion of free will is necessary and useful because it legitimizes in our minds the scorn and punishment we feel toward those who do 'bad' things. This threat of scorn/punishment then acts as a deterrent to such 'bad' behavior, reducing its prevalence. The notion of free will is a mental construct evolved out of the blue to serve the selfish genes of each individual, but its deterrent effect has unsavory aspects like vindictiveness towards others over wrongs they commited to us and a general lack of compassion toward the misfortunes of others, as well as hypocrisy when we are the ones who commited 'bad' actions. Noone who commits a crime and then truly feels sorry ever thinks he should be punished for it. That is a paraphrase from Justice Holmes.

Really, you too fellows are amazing. What type of drugs are you on? I suspect that you are not. But I ask to be charitable. If you are taking drugs then there is some hope for you. You could stop. Then, presumably, you might take some individual responsibility, look at the facts and start talking sense.

The lenders in this debacle, who you seem to ignore in favour of bashing the poor, knew those they were lending (other people's money) to (dumb ignorant poor people) couldn't possibly repay the loan. Why did they lend the money? For commissions. What did they do with the debt obligations? They bundled up these worthless pieces of crap and flicked them around the planet. CDOs brought by others using other peoples money. Why did people at all these other institutions buy them? For commissions. It wasn't their money used to buy them. And when you do wrong in a very large crowd like this, there is no real risk. No one is likely to be fired or made to pay back their commissions for this fiasco. And nitwits like Becker and Posner will blame it all on the people at the bottom, who didn't exercise "Individual Reponsibility". And why are these people at the bottom? Because they are poor, often too ignorant to understand contracts they sign, frequently people with mental and physical health problems. They are the 'deserving poor'. That is in the Becker-Posner ideology they deserve to be poor. And whether they do, they are.

"Moral hazard is thus not a defect of the will, but a rational response to one's opportunity set."

So following that logic judge, if I saw a girl I wanted to have sex with, then raping her, killing her, setting fire to the body and getting away with it would not be a defect of the will, but a rational response to one's opportunity set.

I certainly hope that I do not fall into your opportunity set!

Government, or whoever our leaders are, can make us "do" good, but can't make us "be" good. There is a difference.

Anti-faux, about the only difference I might have with your post is that of too much emphasis on the poor in the sense of not being able to read contracts. Truth is that the mess reaches up to include lots of very large loans taken out by well-to-do folk of good educations and well able to read contracts, though many do not, as they've been led to believe it's all "OK".

As you and others point out, the game was set up by those who should know better, with the effect w of printing money to fuel massive inflation in one sector (seemingly? unbeknownst to Gspn? or Bernanke? who must have thought that homes doubling in a year or so represented ........ added value??? or some such???)

W/O sticking up for speculators, how "should" home buyers of the last couple of decades have played the cards that were being dealt? Was it an economic sin or unwise to have bought about as much house as one could afford, when what they could afford was often barely adequate? and should they pass, it would be higher yet a year later?

I agree that both Becker and Posner show strong signs of having been up in their ivory towers long enough to become tone deaf to what is going on in the real world and the ship is sinking much too fast to go on putzing around with "fault" and "morality"; as in our last big economic storms we'll be lucky to make shore and only if all put down their prayer beads and begin bailing.

If there was a faux-Nobel prize for sophistry (other than the faux-Nobel for economics), then Becker would get his second with this blog and Posner would get his first.

1) "Or because their psychology, which they are not responsible for, has produced in them an abnormal demand for money?"

What if "their psychology" has produced an abnormal demand for human blood? Would they be responsible?

2) "(There is an odd exception: some Christians believe that a person can be "possessed" by the devil, in which event he is not responsible for his actions until the devil is exorcised.)"

This is not accurate. If a person allows the devil to possess their body it means that the behavior and actions of this person were not very Christian. So, ultimately, the person is responsible for allowing the devil "to enter", hence, the person is responsible for the crime...
accessory in the best case...

Good discussion. I always get a laugh when I see the commercial on television that begins with: "Are you in debt? It's not your fault..." I can't even describe what follows with much clairity. I am always laughing too much at the punch line.

At any given time, there is a relative limit to the wealth within ANY economy of ANY size.

Truxter- the problem with this argument and the wealth redistribution that you seem to be arguing for is that it assumes that wealth is fixed, and focuses on 'distributing' it (by force.) That mentality might have made sense in primitive triabl societies, where wealth was not actually created. It's not surprising that people have that instinct. But all the goods in existance in 2008 are worth far more than those available in, say 1970. The laptop I type this on alone would fetch a few millions if sold half a century ago. But I don't know of any accounting system which takes into consideration this creation of wealth. I do know that I would rather live in a society which promotes this type of innovation rather than one which stifles it. And 'redistribution' wherever it has occurred, has has done serious harm to the economic wellbeing of people on all levels of society.

Please keep a close eye on how governments based on this notion of redistribution are doing. Even the poor in Zimbabwe are suffering now because of Mugabe's land reforms. And Mugabe and Chavez have both centralized power and moved closer to dictatorship. Their path there was the promised redistribution of wealth.

At the risk of invoking Godwin's law, the Nazis and Communists followed the same path.

Einstein, despite is knowledge of physics, knew bumkum about economics. He was a socialist, and it is the socialist societies wihch have predicted free market collapse, then collapsed themselves. The tremendous tax rates of Hoover and FDR kept the US in depression. The countries to emerge from depression first, to the benefit of their whole population, were those which did not tax business income.

Ryan: Perhaps the following is flawed by being ideology not supported by the realities of the last quarter century.

"Truxter- the problem with this argument and the wealth redistribution that you seem to be arguing for is that it assumes that wealth is fixed, and focuses on 'distributing' it (by force.)"

A bit earlier than a the last 25 years, JFK put forth the idea that a "a rising tide lifts all the boats" however no such thing has occurred in recent years. Instead while productivity per capita doubled or tripled the min wage was allowed to erode to half it's purchasing power, instead of even keeping up, much less doubling along with the tide.

At median income level there has been virtually no increase in purchasing power during the same era. Perhaps, there is a theory, somewhere, (in the dusty archives of the CATO institute?) making the case that the half of all workers at or below median wages have done zipnada towards our doubling of productivity and thus "deserve" no lifting with the other boats and instead are handed snorkels in order to deal with the rising tide?

Now perhaps we can do a little math. 25 years ago wages, of course, did slope from low to high. So, say that in the course of doubling productivity, ALL wages doubled, still those above median would enjoy far larger improvements in their standard of living than would be the case for those below median income or at the min wage. So, assuming, as may be the case that the upper half had MUCH more to do with the doubling or more of per capita productivity, on a basis of doubling all wages they'd still have been rewarded far more than those of lower wages.

Thus! the very "redistribution" you claim to abhor has already taken place, and if you don't mind, is and will continue to be a cause of recession as over half the nation has very little discretionary income with which to spur demand for the production over-capacity of the US and in fact the world.

Perhaps you've noted the, token, efforts to "spur" the economy via kicking out a pittance which is skewed towards putting some spending money in the hands of those who've little to none? Well, it's far too little and far too late to do much of anything, but what are "we" to do when more federal spending is driving us yet deeper into debt? Also, while AOL "polls" are hardly scientific it is of interest that of five choices over 60% indicated they'd use the "windfall" to "pay bills"

As for your examples of efforts made in third world nations, I'd remind you that there are differing economic medicines for differing circumstances. Today, the US is suffering from a lack of demand for goods of nearly infinite supply as any shortage of labor or even capital simply draws those factors of production from a truly infinite supply of labor and there is GOBS of investment capital looking desperately for any viable project; one need not look beyond a 5% prime rate to have a good idea of the lack of demand for investment capital.

In conclusion while it may frustrate those who think the upwwards redistribution of the last 25 years was a sacred example of capitalism in its finest hour may want to revisit the history of the 20's and 30's noting wealth consolidated at the top, the subsequent crash, and that the strong economy of the 50's and 60's came out of a downward "redistribution" in part due to FDR's "New Deal" but even more so by WWII which gave the lower echelons not only full employment but all the overtime they could stand, while keeping the lid on war profiteering and wartime debt with a top income tax rate over 90%.

Perhaps an analogy would be that of building a racing engine that as it revs higher the oil pump spins faster and pumps so much oil up to top that the rocker covers are full and rockers are drowning in unneeded oil while down at the bottom the main bearings are starved for oil and the whole machine self-destructs.

America will not recover it's prosperity unless those at the bottom are "oiled". Politically the "right" will be out of power until the "bottom" becomes wealthy again as was the case when the union guys threw in with Nixon, or that they come up with something other than their bankrupt ideas and tendencies even to fling those out the window in favor of massive spending and passing on D E B T to those to young to know what is being done to them.

Ryan: Perhaps the following is flawed by being ideology not supported by the realities of the last quarter century.

"Truxter- the problem with this argument and the wealth redistribution that you seem to be arguing for is that it assumes that wealth is fixed, and focuses on 'distributing' it (by force.)"

A bit earlier than a the last 25 years, JFK put forth the idea that a "a rising tide lifts all the boats" however no such thing has occurred in recent years. Instead while productivity per capita doubled or tripled the min wage was allowed to erode to half it's purchasing power, instead of even keeping up, much less doubling along with the tide.

At median income level there has been virtually no increase in purchasing power during the same era. Perhaps, there is a theory, somewhere, (in the dusty archives of the CATO institute?) making the case that the half of all workers at or below median wages have done zipnada towards our doubling of productivity and thus "deserve" no lifting with the other boats and instead are handed snorkels in order to deal with the rising tide?

Now perhaps we can do a little math. 25 years ago wages, of course, did slope from low to high. So, say that in the course of doubling productivity, ALL wages doubled, still those above median would enjoy far larger improvements in their standard of living than would be the case for those below median income or at the min wage. So, assuming, as may be the case that the upper half had MUCH more to do with the doubling or more of per capita productivity, on a basis of doubling all wages they'd still have been rewarded far more than those of lower wages.

Thus! the very "redistribution" you claim to abhor has already taken place, and if you don't mind, is and will continue to be a cause of recession as over half the nation has very little discretionary income with which to spur demand for the production over-capacity of the US and in fact the world.

Perhaps you've noted the, token, efforts to "spur" the economy via kicking out a pittance which is skewed towards putting some spending money in the hands of those who've little to none? Well, it's far too little and far too late to do much of anything, but what are "we" to do when more federal spending is driving us yet deeper into debt? Also, while AOL "polls" are hardly scientific it is of interest that of five choices over 60% indicated they'd use the "windfall" to "pay bills"

As for your examples of efforts made in third world nations, I'd remind you that there are differing economic medicines for differing circumstances. Today, the US is suffering from a lack of demand for goods of nearly infinite supply as any shortage of labor or even capital simply draws those factors of production from a truly infinite supply of labor and there is GOBS of investment capital looking desperately for any viable project; one need not look beyond a 5% prime rate to have a good idea of the lack of demand for investment capital.

In conclusion while it may frustrate those who think the upwwards redistribution of the last 25 years was a sacred example of capitalism in its finest hour may want to revisit the history of the 20's and 30's noting wealth consolidated at the top, the subsequent crash, and that the strong economy of the 50's and 60's came out of a downward "redistribution" in part due to FDR's "New Deal" but even more so by WWII which gave the lower echelons not only full employment but all the overtime they could stand, while keeping the lid on war profiteering and wartime debt with a top income tax rate over 90%.

Perhaps an analogy would be that of building a racing engine that as it revs higher the oil pump spins faster and pumps so much oil up to top that the rocker covers are full and rockers are drowning in unneeded oil while down at the bottom the main bearings are starved for oil and the whole machine self-destructs.

America will not recover it's prosperity unless those at the bottom are "oiled". Politically the "right" will be out of power until the "bottom" becomes wealthy again as was the case when the union guys threw in with Nixon, or that they come up with something other than their bankrupt ideas and tendencies even to fling those out the window in favor of massive spending and passing on D E B T to those to young to know what is being done to them.

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.

"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.

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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