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  • Loren E. Lomasky (a1)
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1 A word about nomenclature: The events of 2008 remain too recent for a consensus on terminology to have emerged. My preference is “Crunch.” “Crash” overemphasizes the fall of asset prices as opposed to the sheer breaking down of markets and is too much an echo of 1929. “Recession” is too mild and “Depression” too tendentious. “Panic” might be acceptable but suggests something more temporary and subjective than what transpired after the fall of Lehman Brothers.

3 The Federal Reserve Board, “Community Reinvestment Act,”

4 See, for example, Leibowitz, Stan J., “Anatomy of a Train Wreck,” National Review 60 (October 20, 2008).

5 The obverse diagnosis lays the blame for the Crunch on the “greed” of speculators. When haven't the money men been in it for the money?

6 Nor was Alan Greenspan. Critics have pilloried his rueful admission to Congress in October 2008 that “[t]hose of us who have looked to the self-interest of lending institutions to protect shareholder's equity—myself especially—are in a state of shocked disbelief” ( Without wishing either to affirm or to deny Greenspan's considerable culpability for the Crunch and its aftermath, I find the candor of this declaration refreshing. It marks a greater personal integrity than that possessed by certain previously effusive admirers-turned-critics.

7 It can be argued that Plato also anticipates invisible-hand dynamics in the Republic's account of the “city of pigs.”

8 For all the brilliance and rigor of his political logic, Hobbes ultimately places himself outside the perimeter of what is recognizably liberal in virtue of allowing the necessity of avoiding prisoner's dilemmas to occupy nearly all the political space there is.

9 Similarly, Ronald Reagan's statement in his First Inaugural Address that “government is not the solution to our problem; government is the problem” is approximately 88 percent correct. That's a splendid result for a practicing politician, but it isn't adequate as the foundation for political philosophy.

10 Hobbes, Leviathan, chap. 14.

11 It is, however, too great a stretch to conclude that all real rights are absolute, inviolable come what may. If to flee from an assassin, you run across my private property—even property displaying a large No Trespassing sign—you have not acted improperly (although you may subsequently owe compensation for damages inflicted). Rights can be robust without being infinitely stringent. I address these issues in “Compensation and the Bounds of Rights,” in Compensatory Justice: Nomos XXXIII (New York: New York University Press, 1991), 1344.

12 John Locke in Second Treatise of Government explicitly grounds rights in Divine provenance; Thomas Jefferson in the Declaration of Independence is slightly more coy. Nozick, Robert in Anarchy, State, and Utopia (New York: Basic Books, 1974) is content to leave unspecified the status of the so-called Lockean rights he invokes.

13 Including its ancient history. The Hebrew scriptures' institution of a sabbatical year in which (some) debts are canceled is an early variation on the bankruptcy theme.

14 This capacity holds to a lesser extent in the case of tort damage.

15 Corporations similarly have a prudential interest in avoiding liability for debts incurred by their shareholders. I am grateful to David Ciepley for making me aware of this symmetry.

16 To forestall possible confusion, this is not to be taken as an endorsement of all or any of these constructs.

17 TRIPS is the Agreement on Trade-Related Aspects of Intellectual Property Rights, signed in April 1994.

18 Some are not. For better or worse—mostly worse—the need to make and remake Adam Smith's case for free trade across national borders is perennial.

19 See Chernow, Ron, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Grove Press, 1990). Friedman, Milton and Schwartz, Anna also recount this episode in their magisterial A Monetary History of the United States (Princeton, NJ: Princeton University Press, 1963).

20 I hereby follow the usual philosophical convention in which “everyone” means those parties the writer is choosing to take into account so as to advance a particular theoretical point. To set that useful convention aside for the moment, I acknowledge that when banks fail, short sellers, investors rich with cash who have been sitting on the sidelines, Marxist revolutionaries, and misanthropes may thereby be advantaged.

21 The story is informatively and entertainingly told in Ferguson, Niall, The Ascent of Money: A Financial History of the World (New York: Penguin, 2008).

23 Greenspan was appointed Fed chairman by Ronald Reagan in 1987 and was succeeded in 2006 by Bernanke.

24 See Samuelson, Robert J., The Great Inflation and Its Aftermath: The Past and Future of American Affluence (New York: Random House, 2008).

26 “How many financial analysts does it take to screw in a lightbulb?” Answer: “None. The market has already done it.”

27 See note 19.

28 “Great Moderation” refers to the two decades between the conquering of double-digit inflation in the mid-1980s and the demise of Lehman Brothers. According to the New York Times, the expression originates in a paper by Harvard economist James Stock and is given widespread currency in a 2004 speech of Ben Bernanke. See “Origins of ‘The Great Moderation’,”

29 The speech is available at “Anna” refers to Anna Schwartz, coauthor with Friedman of A Monetary History of the United States.

30 Lucas, Robert E. Jr., “Macroeconomic Priorities” (January 10, 2003), available at

31 Best of all, as numerous post-Lehman critics aver, would have been a campaign several years earlier to put a foot firmly down on the brake of monetary expansion, thereby popping the real estate bubble before it expanded to dangerous proportions. Simultaneously, authorities should have imposed legislative or regulatory barriers to lax lending practices. See, for example, Taylor, John B.'s critique of Fed policy, Getting Off Track (Stanford, CA: Hoover Institution Press, 2009). Alan Greenspan responds to Taylor and other critics in “The Crisis,” Brookings Institute paper, April 15, 2010, available at Taylor, takes another bite of the apple in “Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis,” Federal Reserve Bank of St. Louis Review 92 (May/June 2010): 165–76.

In the glare of hindsight, these reflections are incontestable. Was there ever a realistic chance that they might have been taken up? It is difficult enough for the Fed to step up interest rates when the Consumer Price Index is beginning to climb; powerful political interests are more attached to easy money than to low inflation. In a period of stable consumer prices, the howls that would confront the (unelected and so democratically suspect) monetary authorities would be unendurable. At least that would have been so prior to Lehman; we now possess new hard-won knowledge. As for tightening up mortgage lending, it had been for many years the settled policy of both political parties, whether in Congress or the White House, to encourage greater rates of home ownership. (Recall George W. Bush's abortive “ownership society.”) Holders of risky mortgages vote too.

32 Suggestions in this section that the causes of the Crunch were largely endogenous to the workings of the financial system were anticipated by the work of the mid-twentieth-century economist Hyman Minsky. See his “The Financial Instability Hypothesis,” Jerome Levy Economics Institute of Bard College, Working Paper 74 (May 1992), available at On Minsky's relevance to the Crunch, see Yellen, Janet, “A Minsky Meltdown: Lessons for Central Bankers,” FRBSF Economic Letter, Number 2009-15 (May 1, 2009),; and “Minsky's Moment,” The Economist (April 2, 2009), My understanding of Minsky is that he offers a model alleged to apply to all business cycles. The intended application of the analysis of the preceding section is more modest, expressly limited to the Crunch of 2008.

33 It is a proposition affirmed by Adam Smith in The Wealth of Nations, Book II, chap. 2, “Of Money Considered as a Particular Branch of the General Stock of the Society”:

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.

34 I do not distinguish here between legislation and regulation, although these would have to be separated in a more sophisticated normative account.

36 An aptly countercyclical way to do this might be to encourage financial institutions to issue during good times special debt securities that automatically convert to equity when specified emergency situations arise. See Rajan, Raghuram G., “The Credit Crisis and Cycle-Proof Regulation,” Federal Reserve Bank of St. Louis Review 91 (September 2009): 397402.

37 Glass-Steagall is the 1933 act that, among other things, separated ordinary commercial banks from investment banks. After an extended period of whittling away, it was repealed in 1999. Again to forestall misinterpretation, I am not claiming that the repeal was unjustified.

38 Even here, there was some residual uncertainty as to the extent of the protection. Prior to 2008, the maximum insured amount per account per bank was $100,000. When rumblings of bank reserve shortfalls were heard, it was then raised to $250,000.

39 A contrary view was offered on the one year anniversary in Nocera, Joe, “Lehman Had to Die So Global Finance Could Live,” New York Times, September 11, 2009,

40 A similar verdict is offered by Kenneth Rogoff, “The Confidence Game,”

41 I am a tenured professor of philosophy. In my discipline, the scope of hindsight is centuries if not millennia.

42 The Maginot Line was an excellent strategy for holding back the Kaiser's troops. It worked decidedly less well against the Wehrmacht.

43 As final revisions of this essay were being prepared, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 made its passage through Congress and to the pen of the president. I would be claiming more for myself than is justified if I professed to understand the text of this legislation (available at, let alone to pronounce on the likelihood that it will improve the financial environment. At any rate, a thoroughly globalized financial industry does not take all its cues from the United States.

44 This is meant metaphorically. There are many Americans who would endorse it literally. I'm not sure that I couldn't be talked into becoming one of them.

45 See Andrew Samwick, “AIG Bonuses: Some Perspective,”

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