Editorial
How should we view financial instruments? Saviors or socially useless? There are equities (shares) and bonds. These instruments have been around a long time and are well understood. Then there are derivatives. The major types of derivatives are options, futures, and forwards. These instruments are traded daily, in large volume, and they too are more or less well understood. We do not question their existence because these financial instruments serve a purpose. They may help people to save or raise money (equities and bonds) or to manage risk (derivatives). What of financial instruments that seem to serve no purpose but to enrich those who speculate in them? What about those instruments that go above the usual purpose of savings and investments and actually help build social services that benefit society?
The first two articles in this issue of Moral Cents discuss two different financial instruments. The first article by Anna Kimbrell, describes an innovative, emerging financial instrument called the Social Impact Bond. The other article by Maja Cvjetanovic, is about the Collateralized Debt Obligations or CDO, infamous for its role in the Global Financial Crisis of 2007. The Social Impact Bond is a new financial tool that aims to use private investment to catalyze preventative social service programs. These programs reduce the amount of taxpayer money allocated to remedial social service efforts. The bonds belong to a new area of finance called impact investing, which represents only a small percentage of all socially responsible investing. Impact investing encompasses program-related investments made by foundations, direct investments into social enterprises through debt or equity financing, and microfinance investments. Whereas economic sectors have traditionally been seen as fitting into one of three spheres– nonprofit, government, and business (or social, public, and private), impact investing is a part of the increasing activity in the “fourth sector” that uses business models to affect social good. The latest impact investing tool is the Social Impact Bond or SIB.
In contrast perhaps, is the CDO. Maja Cvjetanovic gives a detailed description of a CDO and chronicles its role in the 2007 Global Financial Crisis (GFC). She describes the legislative responses with the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 and follows with an exploration of the current CDO status in the US. Invariably, the instrument has resurged and critics doubt if they are any safer now than they were pre-GFC.
Following the GFC, the banking sector faced an extraordinary level of regulatory fines and court settlements. This form of financial liability is broadly called ‘conduct costs’. Calvin Benedict looks at the implications of conduct costs and suggests the costs may be used to assess and then compare the ethical performance of banks.
Kanksha Mahadevia Ghimere thinks there is a way to get not only banks, but all private corporations to act ethically and in a socially responsible way. After a brief discussion of vice and virtue according to Adam Smith, she proposes a system that legally obligates businesses to find the right balance between profits and the interests of society and the maximization of profits at the expense of society.
Amir Khoury writes about copyright law and how we can resolve contentious social issues by applying the concept of inverse moral rights. In his view, this idea is a true expression of liberalism. Without inverse moral rights liberalism will decline and so too will economic vitality.
The final article in Moral Cents takes us to Hong Kong. Once again we analyze the topic of inequality of income in the former British colony. A reason for increasing income inequality may be the structure of the property market. The system is oligopolistic and government controls the supply of land. Using a Rawlsian distributive justice analysis, Helena Wong suggests the Hong Kong government should change the structure of the property market if the change leads to improving the economic situation of the least advantaged members of society.
Editorial: Dr. Kara Tan Bhala
