Banking bailouts among other forms of protectionist practices have a long history in the US despite the many ethical issues associated with such interventions. The basis of helping banks when under financial crisis is mainly justified through the argument that failure to rescue them would lead to greater calamity. For instance, bailing out organizations in the banking sector would prevent the economy from undergoing unwarranted depression. These arguments have drawn sharp criticisms from the opponents of such approaches. The objections to bailing out the banking sector are pegged on various ethical theories. However, the banking bailout could be justified through utilitarianism and the social contract theory as explained in this paper.
From a utilitarian perspective, bailing out the banking industry serves the common good of the majority of the people by preventing the widespread economic problems associated with depression. According to utilitarian ethics, “a policy is deemed good if the result is the greatest good for the greatest number” (McGee 4). In other words, economists would argue that any policy that results in a positive-sum game or creates more winners than losers is good. For instance, bailing out banks would prevent many investors who have put in their money through shares and deposits into such entities. Additionally, if the banking sector is not bailed out thus ultimately leads to an economic depression, millions (the majority) of people will be affected negatively. This argument explains why such bailouts are necessary and ethical.
However, critics of this position would point to many inherent flaws in this perspective. The first counter-argument is that the negative attributes associated with such a protectionist approach to a financial crisis are the multiplier effects on various groups in society. The money that the government uses to bail out these corporations comes from people’s pockets or from another industry that is performing well financially. As such, if the government uses a billion to rescue the banking sector, it has to obtain this money from somewhere else in the economy. Therefore, the contentious issue that arises is what happens to the industries where these monies have been acquired. Such sectors would probably suffer negatively and have a multiplier effect on those affected. Similarly, even if the government uses deficit funding and pumps in the needed money from the central bank, it means that the consumers’ purchasing power reduces significantly.
Nevertheless, despite the challenges highlighted in the preceding paragraph, banking bailouts are ethically sound. First, such economic rescue plans create a negative-sum game, as implied above; however, such results would have the least negative effects than any other option. For instance, while a bailout might contribute to a significant GDP drop by say 200 billion dollars, doing nothing about the situation would ultimately cause a drop of GDP by over 600 billion dollars. In this case, from a utilitarian perspective, using 200 billion dollars to save 600 billion dollars is the best intervention measure. The greatest good, according to utilitarianism, would be realized by saving the economy from sinking into a depression. In the long-term, banking bailouts prevent unprecedented job losses and poor living standards. Ultimately, the crime rates remain low because people remain in employment, and the society in its entirety benefits hugely from such practices, even though on the surface they seem to favor a small group of individuals who are directly impacted by the bailouts.
Similarly, banking bailouts could be justified as ethical practices based on the social contract theory. While this theory mainly touches on the relationship between authorities and individuals or societies, it could be applied in the relationship between the government and banks. According to Baradaran, “Banks gain specified protections from the government in exchange for operating within the limits of the law, much like the average citizen must do in order for the state to function properly” (1286). As such, the relationship between the government and banks, within the premise of the social contract theory, revolves around three major tenets – access to credit, consumer protection, and sound business practices. The underlying concept of this theory is that each party has to sacrifice something in exchange for what it needs.
Therefore, on the one hand, the state has to play certain roles that facilitate trade and commerce. On the other hand, banks have to operate within certain set rules and policies to ensure that their clients’ money and interests are protected. However, such a healthy relationship could be broken during a financial crisis occasioned by different reasons. Consequently, if banks are experiencing some financial challenges threatening their very existence, the government is morally obligated to intervene for various reasons. First, a functional state requires a functional banking sector. In his economic masterpiece, The Wealth of Nations, Smith states that it is not “by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country” (304). Therefore, the government has a moral obligation, to ensure that the banking sector is protected and rescued during such periods.
The preceding argument also holds because by bailing banks out of financial distress, the government is playing its active role in social contract theory with society. The government is morally obligated, under the social contract, to protect its citizens in various ways. Therefore, banks should not be treated as private entities but as political machines because the public has stakes in them. For instance, members of the public are allowed to deposit their monies and buy shares from these institutions with the promise that the government offers safeguards through policies and regulations. Consequently, when banks are undergoing financial crises, governments should intervene to protect public interests and prevent people from losing their investments. As such, based on the arguments made here, it suffices to argue that, under the social contract theory, the government is morally obligated to bail out banks where necessary.
The question of banking bailouts by governments is a controversial one with both proponents and critics highlighting different reasons to support their stands. However, as shown in this paper, from a utilitarian perspective, such bailouts are ethical because failure to intervene would lead to widespread negative consequences affecting the majority of people in society. Similarly, based on the social contract theory, the government should protect banks for many reasons including the indirect implication that by doing so, it would be keeping its part of the bargain in this theory to society. Banking bailouts protect the public from the negative effects of financial crises that could render banks insolvent including joblessness and making unwarranted losses among other aspects, hence the need for governments to intervene.
Works Cited
Baradaran, Mehrsa. “Banking and the Social Contract.” Notre Dame Law Review, vol. 89, no. 3, 2014, pp. 1283-1342.
McGee, Robert. “An Ethical Analysis of Corporate Bailouts.” Florida International University Chapman Graduate School of Business Working Paper, 2008. Web.
Smith, Adam. The Wealth of Nations. Shine Classics, 2014.