1. Econ 350: October 20th Superfreakonomics
A note on ethics and economics
Community
Reinvestment Act
Financial Crises
Chapter 9

2. Moral Values McCloskey 2006 Peter Boettke on McCloskey’s book:
The Bourgeois Virtues: Ethics for an Age of Commerce
Since 1800 income (in real terms has gone from $3 to $137)
How to account for how well off we are?
Ethical argument: In praise of capitalism
Commerce requires reliability, reasonableness, integrity.
Peter Boettke on McCloskey’s book:
Like combining Adam Smith’s Wealth of Nations and Theory of Moral Sentiments into one book.

3. Foreclosure study conclusion
“… one of the more interesting findings of our research is the evidence that some aspect of “local” presence seems to matter in predicting the sustainability of a loan.
Once a lender is removed from the community…or from the origination decision (wholesale loan)…foreclosure increase significantly.”
Retail presence in the neighborhood is important
CRA at worst no different than non-CRA lenders

4. Foreclosure and asymmetric information
How does the CRA finding relate to information asymmetry issues we have been concerned with?
Low-income neighborhoods contain people who are good credit risks.
Local bankers are gathering information on who these people are
Therefore make better loans.
Puzzle
In a competitive system, banks should issue profitable loans without regulation
Is CRA necessary? “Community Redundancy Act”
CATO:

5. A broader look at financial crises
Why do asset prices fall?

6. Some Basic Facts: Introduced on 10/13
Stocks are not the most important sources of external financing for businesses
Only large, well-established corporations have easy access to securities markets to finance their activities
Financial intermediaries, particularly banks, are the most important source of external funds used to finance businesses.
The financial system is among the most heavily regulated sectors of the economy
Collateral is a prevalent feature of debt contracts for both households and businesses.
Debt contracts are extremely complicated legal documents that place substantial constraints on borrowers