JOURNAL OF ECONOMIC ISSUES Vol. XLV No. 2 June 2011 DOI 10.2753/JEI0021-3624450213
Banking Ethics and the Goldman Rule
John P. Watkins
Abstract: Insulating people from the effects of the crisis has left intact the habits of thought and the basic institutional structure. The continued reign of pecuniary values leaves intact the Goldman Rule: pursue profitable opportunities regardless the effects on others. Within a culture dominated by pecuniary values, profitable opportunities present a coercive force. Laissez-faire policies allow profitable pursuits without restraint. Subprime mortgages offered an opportunity to tap a new source of profits, namely, the increase in housing prices. ...view middle of the document...
Banks pursued making subprime loans to tap a new source of income without regard to the effect such loans might have on debtors. Banks provided subprime loans
John P. Watkins is a professor of Economics at Westminster College in Salt Lake City, UT. This paper was presented at the annual meeting of the Association for Evolutionary Economics, January 7-9, 2011 in Denver, Colorado.
©2011, Journal of Economic Issues / Association for Evolutionary Economics
John P. Watkins
assuming a continual rise in home prices. The collapse in prices precipitated the collapse in banking profits, prompting a call for bailing out the banks. Government bailouts effectively rewarded financial institutions for “bad” behavior. Hence, meaningful institutional change required to reign in the financial sector remain wanting. The Banking of Ethics Banking is a peculiarly capitalist activity. The purpose is profit; the means is through the purchase and sale of debts: government securities, commercial paper, consumer loans, and so on. Banks purchase debts (assets from the bank’s point of view) with cash or spendable IOUs. Spendable IOUs represent a promise redeemable for cash or some other acceptable asset. To fulfill these IOUs, banks must obtain cash or the spendable IOUs of other banks either by liquidating assets or acquiring liabilities through deposits or borrowing. Profits stem from the income earned from interest and fees less the interest paid and operating expenses. During medieval times, the Scholastics considered banking unethical. They viewed charging interest a sin against God punishable by eternal damnation.1 The Scholastics could not reconcile charging interest with the idea that economic activity should serve a moral end. Charging interest appeared to take advantage of the needs of others, behavior contrary to the medieval notion of a functional society. In brief, interest placed the money lender above the social interest (Tawney 1926). Following Aristotle, the Scholastics considered money barren. They viewed money as a means to procure the goods and services necessary to live a virtuous life. They viewed the pursuit of money as an end in itself contrary to nature. For within nature, everything has a beginning and an end; the pursuit of money begins with money and ends with money in a neverending process.2 The Goldman Rule Laissez-faire policies foster a belief that individuals and organizations may pursue pecuniary values without restraint. For individuals lacking ethical considerations there is no tradeoff. There is only a single minded pursuit of profit. In Milton Friedman’s view, the only ethical issue is how an individual allocates his property.3 Ayn Rand, Alan Greenspan’s intellectual mentor, precisely summarized the ideology underlying the Goldman Rule. I work for nothing but my own profit — which I make by selling a product they need to men who are willing and able to buy it. I do not produce it for their benefit at the...