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Government financial actions: ethical or unethical

Is it ethical for a government to act in ways that socialize financial risks or losses? Is it ethical to do so while privatizing gain/profits? Or to do so in ways that favor wealthier citizens while imposing risk on less wealthy taxpayers (or vice versa)? Or that create moral hazards? Why or why not? Are these social goals that are so important that they would lead you to change your answer?

1. What are the relevant facts?
2. What are the ethical issues?
3. Who are the primary stakeholders?
-what are the rights of the stakeholders? (i.e What is owned to the stakeholders)
-What are the duties of the stakeholders?
-who derives the benefits of an unrealistic analysis?
-who bears the heaviest burden of an unrealistic analysis?
- What is the most fair and equitable way to distribute the benefits and burdens across all stakeholders?
4- What are the possible alternatives?
-what alternative is the most fair to all stakeholders?
5. What are the ethics of the alternatives?
-what is the cost and benefit of the alternatives?
-which alternative provides the greatest benefit or the fewest costs for all concerned?
6. What are the practical constraints?
7. What action(s) should be taken?

Solution Preview

While privatizing gain profits means that when there are gains it is the private rich who take the profits, on the other hand when there are losses, these are passed on to the common man. Consider the case of financial institutions/banks bailouts. When these banks were profitable, the owners and the shareholders of these institutions reaped the profits but when these faced losses, and possible bankruptcy, the government bailed it out using taxpayer money. The losses were socialized.

It is unethical for the government to favor wealthier citizens while imposing risk/losses on less wealthier taxpayer. During the economic downturn mortgage lenders such as Fannie Mae and Freddie Mac were bailed out. These were private companies. When they made profits, their owners enjoyed the profits but when they collapsed the US government committed up to $200 billion to save these two from collapse. Wealthier citizens were favored because the share owners of Fannie Mae and Freddie Mac managed to get loans at very low rates and leveraged these to make large profits. But when these firms collapsed their losses were borne by the normal tax payers.

This situation creates moral hazards. The firms feel that they may take unreasonable risks because if they fail the government will bail them out and the costs of failure will not be taken by the firm taking the risk. In case of Fannie Mae and Freddie Mac, they took unreasonable risk because they believed that the government would bail them out. Specifically, they invested money in securities that had unreasonably high risk (Berube, A., Kim, A., Forman, B., & Burns, M. 2002, May).

The social goals are important but these are not so important that they would lead me to change the answer. The social goals were that the socialization of losses was required to prevent the financial system from "collapsing". Another social goal was that socialization of losses was required to prevent an increase in unemployment. This argument was put forward in the case of automobile companies that were bailed out. The argument was that if these companies went into liquidation there will be an increase in unemployment. In my opinion these social goals were exaggerated to justify the socialization of losses. The collapse of a couple of financial institutions ...

Solution Summary

The answer to this problem explains the morality of government intervention in the economy. The references related to the answer are also included.