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Some of the things that happen to a person
are truly not that person’s fault. Children who are abused, for
example, bear not even a share of the blame for the harm that
befalls them. Nor do they deserve any praise for eating a
nutritious diet, say, at least not when they are very young. As
we grow into preteens, adolescents, and young adults, however,
we humans gradually begin to appreciate the existence of other
minds, to understand that actions have consequences, and to
develop the power to control our own behaviour and make our own
decisions. In step with this cognitive and psychological
development, we gradually deserve more and more of the praise
and blame for the things we do and for the things that happen to
us.
Yet even a healthy, mature adult is not entirely responsible for
every aspect of his or her life. As a general rule, events often
have complex causes, and so praise or blame must be parcelled
out accordingly. A simple illustration of this is the bicycle
accident, of which I have had three since moving to Montreal as
a young man.
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When Bicycles and Cars Meet |
The first bicycle accident I had
occurred during my very first year in the big city. I was riding
along Sherbrooke Street in NDG when a car just ahead of me
suddenly made a right turn onto a side street without signalling
and, presumably, without checking his rear-view or side mirrors.
I was unable to stop in time, and my left elbow shattered his
back-seat passenger-side window. To this day, I still have a
small scar on my upper arm, but I escaped relatively unscathed,
as did my bicycle.
Sounds like a clear case of simple blame, doesn’t it? Checking
mirrors and blind spots for cyclists before making a turn is
City Driving 101, not to mention signalling one’s intention to
turn. Clearly, the driver was to blame. But did I mention that
my brakes were shot? Even with fully functioning brakes, I would
not have had time to stop, but I doubt my arm would have gone
through his window.
My second and third bicycle accidents occurred a few years later
while I was working as a bicycle courier one summer during my
university studies. In the first of the two, I was zipping along
Ontario Street in the Latin Quarter when a car door opened up
before me. A second later, I was flying through the air, and I
landed some fifteen feet away in the middle of the road.
Incredibly, but thanks in no small part to the fact that I was
wearing a helmet, I was not badly hurt at all.
Opening your car door after parallel parking without checking
for cyclists is extremely negligent and dangerous, and any
driver who does this is blameworthy. But did I mention that I
was riding along with one hand on my handlebars and the other
hand steadying a second bike that rolled along beside me? Also
dangerous and stupid, although again, I still would have hit
that door had I been riding normally. (Ironically, I was
bringing the second bicycle to the bike shop to have its brake
pads replaced.)
Just a few weeks later, I was riding west toward downtown along
René-Lévesque Boulevard after having delivered a package to the
Molson Brewery. I was on the bike path when a taxi driver
exiting the parking lot of the CBC Radio-Canada Building failed
to look to his right and plowed into me, sending me, once again,
into the middle of the road. Thankfully, since he had looked to
his left, there was no traffic coming.
This taxi driver certainly deserves practically all of the blame
for this accident, though I could have slowed down as a
precautionary measure when I saw him, even though he wasn’t
moving and I clearly had the right of way. Also, I’d forgotten
my helmet that morning, and had I been badly hurt with a head
injury, I could have shared some of the blame for that, but
thankfully once again, I escaped serious harm.
All of which to illustrate that it
is not always a simple matter to determine blame, and that
often, blame is shared. You may be wondering, though, what
exactly is illiberal about the belief that assigning
blame is simple. Though admittedly, determining responsibility
for bicycle accidents may not have any obvious implications for
liberty, the same cannot be said when it comes to determining
the causes of such things as financial crises. And if the causal
chain explaining a simple bicycle accident is often not even
that simple, it would be very surprising if the global financial
crisis did not have a complex and convoluted explanation.
Some people—including some members of the various Occupy
movements and their sympathizers—blame the global financial
crisis and its ongoing fallout on greedy bankers. For the sake
of enormous profits, these Wall Street wizards took inadvisable
risks with our money, the story goes. When the whole house of
cards came tumbling down, they used their influence to extort
bailouts from governments, which is to say, from taxpayers.
While this story is true enough as far as it goes, it is far
from a complete account of the causes of the financial crisis.
For one thing, greed is a constant of human nature, and blaming
a constant for an unusual event is clearly insufficient.
Exceptional occurrences require exceptional explanations. The
danger to liberty in not endeavouring to understand the whole
story and instead assigning blame solely or even primarily to
greedy bankers is that it all too naturally leads to calls for
greater regulation of the financial system. But in point of
fact, many other causes contributed to the crisis. In his
article “A
Perfect Storm of Ignorance,” Jeffrey Friedman discusses the
“welter of regulations that have grown up across different parts
of the economy in such immense profusion that nobody can
possibly predict how they will interact with each other.”
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A Perfect Storm of Causes |
Just to get a sense of the scope
of the issues involved, here is a list of the causal links
Friedman identifies in his article:
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the Federal Reserve
stoked inflation, stimulating the housing boom;
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Fannie Mae and
Freddie Mac encouraged low-equity mortgages;
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the Community
Reinvestment Act mandated “subprime” loans to poor credit
risks;
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the Recourse Rule
amended the Basel Accords in the United States and lowered
the capital cushion requirement for asset-backed securities
to a mere 2 percent;
-
federally mandated
mark-to-market accounting translated market fears into
actual numbers on banks’ balance sheets, leading to the
bankruptcy, on paper, of Lehman Brothers and to commercial
banks’ lending freeze;
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Basel II spread the
Recourse Rule outside the US;
-
‘no-recourse’ laws
in many US states relieved mortgaged homeowners of liability
if they just walked away from their homes;
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the US tax code
discourages partnerships in banking, instead favouring
publicly held corporations that are in turn encouraged by
certain aspects of tax and securities law to pursue
short-term profits;
-
the tax code makes
equity capital unnecessarily expensive;
-
a 1975 amendment to
the SEC’s Net Capital Rule turned the three rating companies
(S&P, Moody’s, and Fitch) into a legally protected
oligopoly, robbing them of the market discipline that had
kept them honest up until then.
Friedman elaborates on
the effects of each of these, and on how they interacted (along
with short-sighted behaviour on the part of bankers and home
buyers alike) to cause the crisis. He then goes even further:
the Basel Accords and prior bank capital regulations were
enacted to deal with the moral hazard of federal deposit
insurance, which would otherwise lead bankers to make
excessively risky investments. Deposit insurance, in turn, was
put in place in America in 1933 to deal with the problem of bank
runs, which were common in the US in the 19th century
and had spread like wildfire at the start of the Great
Depression.
But bank runs were themselves caused by prior regulations that
impeded branch banking. Canada, which had no such impediments,
experienced exactly zero bank runs during the Great Depression
(and didn’t get deposit insurance until 1967). Writes Friedman,
“Thus, deposit insurance, hence capital minima, hence the Basel
rules, might all have been a mistake founded on the New Deal
legislators’ and regulators’ ignorance of the fact that panics
like the ones that had just gripped America were the unintended
effects of previous regulations.”
Friedman could have gone further still. As Chris Leithner
describes in detail in his book The Evil Princes of Martin
Place (which
I reviewed earlier this year), fractional reserve banking
and legal tender laws are what allow central banks like the Fed
to print money out of thin air, which is what gets the whole
boom-and-bust cycle going in the first place. Stop protecting
the fraud of fractional reserve banking, or at least eliminate
legal tender laws and force banks to compete with each other in
a free banking system, and you stop inflation dead in its
tracks. No inflation, no boom-and-bust cycles—of which the
global financial crisis is just an extreme example.
Do irresponsible bankers deserve some of the blame for the mess
we’re in? Sure they do. But even bicycle accidents are usually
not that simple, and the financial crisis is a whole lot messier
than a bike accident. Irresponsible home buyers deserve some of
the blame too, of course, but without the morass of regulations
that have accumulated over the years, irresponsible bankers and
home buyers would be the ones to suffer the consequences of
their own actions. As a result, such overly risky behaviour
would be discouraged instead of being aided and abetted as it is
today.
Part of growing up is taking on more and more personal
responsibility for our lives in step with our cognitive and
psychological development. But it sure doesn’t help when the
system of rules and regulations that should encourage and
support such adult behaviour instead incentivizes recklessness. |
