# The moral dilemma of banking debt made public



## horusd (17 Feb 2011)

I’ll admit to being no expert in the matter of debt, but I have a serious problem with the fundamental notion of private debt being socialised and made public, as is now the case with banking debt. 
 I also have a problem with being told by some “pragmatist” experts or vocal opinion-holders that this is somehow magically _our_ debt or that there aren’t any alternatives but to divvey up and pay it. And not only must we pay it, but we must commit future generations to paying it without as much as a by your leave. 
We live in a so-called republic, _Res publica_, translates as the public good. It is a moral principle, and it is not difficult for anyone to understand. It’s obvious to the least expert amongst us that morally actions done by one person cannot & should not be laid at the door of another; this is contrary to the very notion of the public good, yet we are asked to sign up to it by the majority of parties in this election, and by commitments made on our behalf and on behalf of future generations by the present government.  This, in my view, is simply immoral and agreeing to it, we undermine more important principles that underpin republican democracy, and will damage its very foundations. 
If one principle is inconvenient, then all principles can be set aside. It may not be “convenient” or “practical” to repudiate the debt, but is it not obviously the right thing to do?


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## jpd (17 Feb 2011)

Due to many reasons, there are now huge losses/debts in the system. It would be useful to have an enquiry into how and why these occured but that is a different question to the one who have posed.

You are asking who should bear these losses/debts - because they are real and will have to be borne by someone now and/or in the future. Unfortunately, the government, in its wisdom and on our behalf, took on this burden in Sept 2008. If we now wish repudiate it or part of it, then we, as a soverign nation, can do this but we must be prepared to live with the consequences , mostly uncertain, of our decision. 

As for future generations, we can hardly ask them what they think, any more than Michael Collins et al asked me my view on the Irish Republic in 1918. Each generation has to act on its own but should bear in mind that future genrations will hold it to task for the errors it committed - as Fianna Fail will soon learn.

But we should be very wary of anyone who proposes that we can  renege on our word and that the rest of the world will say - "Ok, that's grand - now back to tbusiness as usual" This isn't the way the world works in my experience.


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## Chris (17 Feb 2011)

I very much agree with you. I have a 1 year old baby who will be paying taxes to service debt that was taken on around the time she was born. The actions that led to this debt will have created an even bigger incentive to banks to take on risk, which will mean that she is paying for the "luxury" of increased bank risks.
The mistakes of a few should never ever become the burden of everyone. That is not a good foundation for a sound economy, or a free society.
You might find this article interesting; it deals with the moral hazards prior to the crisis and those after the crisis hit:
http://mercatus.org/publication/gambling-other-peoples-money


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## DrMoriarty (17 Feb 2011)

jpd said:


> Due to many reasons, there are now huge losses/debts in the system. It would be useful to have an enquiry into how and why these occured but that is a different question...


The losses/debts "occurred" through a combination of incompetent government and the corruption and venality endemic in the very system we are now being asked to believe will rescue us, if we will only put our shoulder — and our children's shoulders — to the wheel for the next generation or so.

Meanwhile, the architects of this situation are laughing all the way to the golf course. It seems to be "business as usual" for them. Unfortunately, this _is_ the way the world works, in my experience.


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## Chris (17 Feb 2011)

DrMoriarty said:


> The losses/debts "occurred" through a combination of incompetent government and the corruption and venality endemic in the very system we are now being asked to believe will rescue us, if we will only put our shoulder — and our children's shoulders — to the wheel for the next generation or so.
> 
> Meanwhile, the architects of this situation are laughing all the way to the golf course. It seems to be "business as usual" for them. Unfortunately, this _is_ the way the world works, in my experience.



I agree with your conclusion but not entirely with your premisses. The crisis was mainly a result of too much and too cheap credit made available by the ECB. Government failure came in when they threw fuel on the fire through increasing subsidies on mortgages, increasing tax breaks for buyers, affordable and joint ownership housing schemes. 
Bankers certainly must be laughing when they should in fact be sacked from their bankrupt organisations and rendered unemployable.


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## horusd (17 Feb 2011)

> As for future generations, we can hardly ask them what they think, any more than Michael Collins et al asked me my view on the Irish Republic in 1918.


 
But there is a difference here jpd.  Collins was committed to republicanism. A form of gov.t that could be rejected democratically by later generations without penalty. 

Debt on the other hand must be borne by both present future generations.  In a sense, all will  have been indentured without consent. Their work and ours will be taxed to pay for this, the services available to them & us, the level of education, health care etc will all reflect this indenturment, and why should this be the case?  Were my neighbour to try to force me to pay his gambling debts, because otherwise the bookies would go out of business, this would be rejected out of hand by any court.  Yet this is precisely what we are faced with. I have no association other than proximity to my neighbour.  The argument is that a functioning banking system is in the public good as a higher and necessary goal making the socialisation of debt unavoidable.  Yet, this presupposes no alternatives to providing banking except thro a bailout, and this argument doesn't convince me either morally or practically.

No matter what way I look at this, either rationally or ethically, I see no basis for its justification that convinces.


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## horusd (10 Apr 2011)

Josef Stiglitz's article in the IT 9/4/11 raises this issue again:


IMF & EU are asking ordinary Irish Workers to bear the burden of mistakes made by international financial markets.
...these mistakes are at least partially attributable to deregulation an liberalisation policies advocated by the IMF and ECB.
Under capitalism those who provide capital are supposed to oversee what is done with their funds; this accountabilty is what makes capitalism work.
...those who seemed to believe in markets, started to rewrite the rules in the midst of the crisis. They argued for the socialisation of losses while the gains were privatised. *Such a system of ersataz capitalism is doomed to failure.*
...*It is a massive, unjustified and unjustifiable redistribution of resources*.
...*10% of Ireland's GDP would have to go forever to just service the debt*. This is a noose around the countries neck that will strangle it.
...the IMF, ECB and Government must come to terms with imposing losses on the international lenders whose loose lending policies played a central role in the current crisis.
We cannot and we should not take this debt on. The whole European project is based on fairness and consent, current policies are anti-democratic and it can't work. We need to bite the bullet and face this issue down. Iceland has rejected the debt deal in the referendum, we need to have a referendum and do exactly the same.


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## horusd (10 Apr 2011)

Just for gas I used a propositional logic formula (sad, I know) to test the following: (For those unfamiliar with propositional logic, the basic idea is that if the premises are true, the conclusion *neccessarily* follows. In short, from true premises and valid inference, the conclusion *cannot* be false.

*Premise one.* Capitalism is based on the idea of free choice & personal responsibility.
*Premise two.* Debt freely incurred by capitalists is a personal responsibility.
Therefore, if you are a capitalist and freely incurred a debt then you are responsible.

Logically this is both valid and neccessarily true*. The point being, that all other arguments are trumped by this one, if you accept that the premises are true. I'm no financial wizard, but you don't need to be if you understand basic logical principles. Once you accept two fairly basic premises then all arguments to the contrary are *neccessarily false*. 

So, there is a logical argument against the debt which means that socialising it is inconsistent with Capitalism. To accept the premises and still socilaise the debt would be a contradiction. There is the associated but valid moral argument based on free choice and personal reponsibility and there is the economic argument why this debt should not be socialised. The only remaining reason it has been is political; As John Drennan noted in the Sindo, European leaders at war with their people to save private banks.

* For those fellow geeks, the logical formula is p ->(q^r), s^p, (p^s)-> r. Where p = Capitalism, q= free choice, s =debt incurred, r = personal responsibilty. The only case this is false is where no debt is incurred, which actually re-enforces the point I'm making.


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## DrMoriarty (11 Apr 2011)

I suspect that your analogy with being forced to pay your neighbour's gambling debts to keep the bookies from going out of business might have more general persuasive appeal.


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## Chris (11 Apr 2011)

horusd, I think your logic is absolutely bang on. I did a course on logic earlier this year and your syllogism is one that was mentioned by the professor.
However, I think that where your syllogism is flawed, is in assuming that the economic world we live in is actually capitalism. Even prior to the crisis there were implicit and explicit state guarantees of private debt. The argument that is often brought to table is that the present crisis shows that capitalism doesn't work and that we need more socialism. When the exact opposite is the case. The present crisis shows that crony capitalism/interventionism/socialism does not work and that we we need freer market capitalism


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## scallywag (11 Apr 2011)

horusd, I have to agree with your well-made points.

What I think this boils down to is the following question: just how independent exactly are banks?

It seems to me that while they are making profits, they are fully independent. Yes there is some degree of regulation on their activities, but obviously not quite enough given what has happened in the last few years. But they seem to be free (and independent enough) to award their directors whatever bonuses they like, and to spend their profits in whatever way they wish.

On the other hand, when things go wrong they suddenly seem to become "systemic", with the government (and hence taxpayers) being held responsible for their losses. 

My (somewhat simplistic) analysis is that the banks are in fact intrinsically tied to a country's finances. This is because people (and countries) seem to just live off borrowed money. The ability to borrow money at reasonable rates depends on lenders' confidence in your ability to pay back. And these lenders do not appear to distinguish between independent banks and their native countries. So when things go wrong for an "independent" bank, unless the motherland pays the bill, she loses the ability to borrow herself.

However, what annoys me is that if these banks are in fact systemic, then why are they not treated as an extension of government? Why does government not exercise control over what they do and what they pay themselves?


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## AlbacoreA (11 Apr 2011)

Chris said:


> I agree with your conclusion but not entirely with your premisses. The crisis was mainly a result of too much and too cheap credit made available by the ECB. Government failure came in when they threw fuel on the fire through increasing subsidies on mortgages, increasing tax breaks for buyers, affordable and joint ownership housing schemes.
> Bankers certainly must be laughing when they should in fact be sacked from their bankrupt organisations and rendered unemployable.



Also when the Govt failed to heed warnings that it was happening.


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## horusd (11 Apr 2011)

Chris, tell your professor to keep his grubby mits off my syllogisms! You say flawed because it's not a captialist world. Well, it doesn't have to be. As Stigliz pointed out there is an onus on lenders such that they must take responsibility for their funds which they freely lent. So, we can replace capitalist with lender and still get the same result. Respecting the explicit/implicit guarantees, I don't think this would hold given that these were private contracts freely entered into by consenting parties. As Von Hayek (Liberal right-wing philosopher) clearly argues, the entire concept of contracts underpins Western notions of freedom. You cannot argue both _for _freedom and _against_ it without a contradiction arising. But maybe you meant something else?

But lets assume that there was an implicit/explicit state guarantee on banking debts. This effectively would join the state as an indentured debtor without it's consent, to a contract it never entered. It would equate private banking debt with sovereign debt. 

Lets look at the logical implications:

Premise one:There exist two types of debt, a= Private debt, b = Public debt. 
Premise two: All valid debt is incurred by valid contract. (c)
Premise three: If a debt is private then it is not public unless it is incurred by valid contract.(a and c)
Premise four: Only willing entities can enter valid contracts.(d)
Therefore, if a debt incurred it is either a or b or a and c, or none of these.

Premise two & four makes the legal notion of contract clear. There can exist no contract that binds the state. To add a premise stating that a state is entered into a contract without consent would result in an inconsistent set and be a logical and legal nonsense*.


*The state did enter a guarantee of a type, but with caveats which would have allowed them to reject covering bondholders. and a "gun to the head" your money or you life "choice that they were forced to make was not a free choice.


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## horusd (12 Apr 2011)

Dr M, the advantage of formal logic is that it allows for preciseness and clarity. It avoids the waters being muddied by non-relevant issues. We clearly see contradictions, and identify where problems exist. Analogies (neighbours and gambling debts) are useful, but only up to a point, because the vagueness of language, confusion  and spin can enter into the debate. From true statements and a valid inference we can only derive other true statements. Logic is not perfect, the premises may be wrong/flawed but it tends to make errors less likely.


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## Chris (12 Apr 2011)

horusd said:


> So, we can replace capitalist with lender and still get the same result.


Yes indeed, and now the premises are correct, but there is still a caveat which I will get to below. I find being pedantic in syllogism helps a lot.



horusd said:


> Respecting the explicit/implicit guarantees, I don't think this would hold given that these were private contracts freely entered into by consenting parties. As Von Hayek (Liberal right-wing philosopher) clearly argues, the entire concept of contracts underpins Western notions of freedom. You cannot argue both _for _freedom and _against_ it without a contradiction arising. But maybe you meant something else?


Yeah, I think I may not have made my point clear, and would certainly agree with Hayek on contracts. What I was trying to say was that deposits (aside from bond investors) with banks are formed on contracts that explicitly include the state guarantee (the caveat I mention above). Essentially you have a situation as follows:
Premise 1: Customer deposits cash with a bank through a freely entered contract
Premise 2: A state deposit guarantee protecting against the bank's insolvency forms part of the contract
Conclusion: The state is liable in the event of the bank's insolvency.

To tie this in with the title of the thread, the moral dilemma existed before the crisis and due to the increased/unlimited guarantee the moral hazard has only been exacerbated. 



horusd said:


> But lets assume that there was an implicit/explicit state guarantee on banking debts. This effectively would join the state as an indentured debtor without it's consent, to a contract it never entered. It would equate private banking debt with sovereign debt.


As already mentioned, in the case of depositors the state guarantee explicitly existed as part of the contract. But you are absolutely right that there was no contractual agreement that the state would cover losses for bond holders. In my opinion there is no legal or moral obligation for doing so, quite the opposite actually.


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## DrMoriarty (12 Apr 2011)

horusd said:


> Dr M, the advantage of formal logic is that it allows for preciseness and clarity. It avoids the waters being muddied by non-relevant issues. We clearly see contradictions, and identify where problems exist.


Quite so, but we're discussing human behaviour, which is not governed by logical rules (Jim). 

Vagueness of language, confusion and spin are the stuff of politics and of government. I agree entirely with your judgement regarding the moral issue at stake, and your assessment of the damage to an already defective democracy. I just think that action will come (if it comes at all) from an appeal to emotion rather than via a process of deductive inference from valid premises.


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## horusd (12 Apr 2011)

Ok Chris, we might be at cross -purposes here. I am talking about bondholders who lent money to banks, not depositors. But as a matter of interest, you mention an implicit guarantee; what are you referring to? Is it that state's thro some kind of convention or a written or unwritten understanding, offer guarantees to depositers _per se_? Or does it arise from duty to regulate banks?


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## horusd (12 Apr 2011)

Dr M, sadly you are right. Spin, smoke and mirrors and we're all blind...sad but true. But then again, would we really all want to be dry assed Vulcans! Our emotions add a bit of pepper to life!


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## Chris (13 Apr 2011)

horusd said:


> Ok Chris, we might be at cross -purposes here. I am talking about bondholders who lent money to banks, not depositors. But as a matter of interest, you mention an implicit guarantee; what are you referring to? Is it that state's thro some kind of convention or a written or unwritten understanding, offer guarantees to depositers _per se_? Or does it arise from duty to regulate banks?



In regards to bondholders there are numerous forms implicit guarantee:
1) the central bank being a lender of last resort
2) the too big to fail mantra that is not a spawn of the current crisis
3) political fallout from bondholders losing money that could have a severe effect on the viability of the EMU, would not be tolerated at EU level
4) countries were allowed to blatantly break the growth and stability pact by running up debts at extremely low interest rates
5) possibly most importantly the international precedence that has been set over decades of bailing out and nationalising companies or industries and their investors

A perfect example is Anglo Irish bonds. If I'm not mistaken Anglo issued 1 year bonds with a coupon of about 2.5% prior to the crisis; I can't find specifics on longer term bonds but we can use this as a yard stick. In 2006 a very large blue chip German chemical company issued 5 year bonds with a 4% coupon. Bond investors are not stupid, they can tell that a bank with 80% real estate exposure is riskier than a large German industrial company with a very diverse product range and very export driven. Yet the bond yield points out how much of an effect implicit guarantees have; guarantees that most other non-financial companies do not have.


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## horusd (18 Apr 2011)

Ok Chris, some interesting points there. I get where u are coming from. However, for the moment lets return to logic, and the idea of neccessity. If we say that God is perfectly good, then he explicitly cannot ever be evil, and implicitly will seek to prevent evil. Thus he is neccessarily good, but his duty to prevent evil is only implict; a sufficient but not a neccessary consequence of his goodness.

A Central Bank as lender of last resort is *not obliged* to bail-out banks,( altho they might, and people may assume they will) so this might be a* sufficient* condition, but not a *neccessary* condition for an implicit guarantee; think of Lehman's. The too big to fail issue is also a logical misnomer. It assumes that a state or other entities are capable of rescuing all failing banks; this might be true, but is not neccessarily true. Nor is it neccessarily right. Again it is arguably a sufficent cause, but not a neccessary one. Likewise, neither the stability & growth pact, or precedence entail any neccessity. Why is all this important? A few reasons:

1. Neccessity has been used i*nvalidly* as a reason. We have no alternative is simply not true, and in my opinion, justification for scare-mongering and bullying.

2. Your Anglo bondholder & German blue chip example point to an assumption made by investors. Investors are entitled to make any assumption they wish, and they do so all the time. But they are not entitled to claim there assumptions are correct or true, or assume  a guarantee exists where none was given.

3. Western Democracies are ruled by a legal principle that all are equal before the law. So, if bondholders can assume such guarantees, then all can assume such guarantees, or none can assume them. There is not middle ground here.

4. If  I infer that something is so, is that my responsibility or is it someone else's ? If I infer from past experience that every apple you take out of the box is red, and you go da da and remove a yellow one. Should I deny the yellowness of the apple, or accept _a posterori_  that a yellow apple was a possibility? Or should I, without a leg to stand on, claim the_ a priori_ neccessity of a red apple? This is the nonesense we are being sold.


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## Chris (18 Apr 2011)

horusd, I agree with your logic and conclusions, but I think it is safe to say that politicians do not abide by logic. If they did then the majority of their policies would be scrapped before they make it into practice.
Where I think things are little more ambiguous is on this point:


horusd said:


> 3. Western Democracies are ruled by a legal principle that all are equal before the law. So, if bondholders can assume such guarantees, then all can assume such guarantees, or none can assume them. There is not middle ground here.



While everyone is equal before the law, there certainly are different laws dependent on whether you are a private citizen or a corporation (take bankruptcy laws as an example). As far as I know bond holders and depositors have equal standing in bankruptcy proceedings. But depositors enjoyed an explicit guarantee while bond holders did not.
I think this is something that is not explicit enough in western legislatures and would be fully in favour of a constitutional law that forced legislators to ensure that every law was applied equally to every person or organisation.


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## horusd (18 Apr 2011)

> horusd, I agree with your logic and conclusions,* but I think it is safe to say that politicians do not abide by logic.*


 
 Both you & Dr M point out this fact. The operation of the political world is generally or sometimes illogical. The implication of this is that logic can tell us nothing of real import; it might be of mere academic interest, but cannot be of actual use in the world, because this is not how the world operates. I will agree, but argue this is immoral.

 As a thought experiment, lets assume that all politicians do not reason logically*. Lets also assume the neccessary truth that humans need reasons (to think or act). Therefore, all human actions require reasons (or principles) but not all principles are logical. This is a valid argument. So, if no logical principles neccessarily underpin political actions, what does underpin them? Now consider that modern society is supposedly based on Enlightenment principles governed by reason, and reason is rooted in logic. The paradox becomes evident, and the moral dilemma too. We can offer no justification for such actions. 

The great Enlightenment philosopher Immanuel Kant suggested that the supreme principle of morality was simple. Act only in such a way that you could wish your action were a universal law in a rational world. Does it matter that this is flouted in the bailout of bondholders? Well yes it does, because it highlights a vacousness at the moral heart of politics, and logic shows this clearly. It is not a mere exercise in academia which has no value, but clearly points to the lack of principles operating. As Stigliz has pointed out, this is an unjustified and unjustifiable redistribution of resources from the Irish taxpayer.


* We'll assume all rather than some to avoid the neccessity for somewhat  more complex predicate logic.


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## Chris (19 Apr 2011)

I couldn't agree more with you and it rarely happens, but I also agree with Stiglitz. 
Regarding your point "that logic can tell us nothing of real import", I would certainly say that we live in a world where the benefit of logic has been largely ignored or discounted. In just a few posts you have been able to show how fallacious one government policy actually is from a logical point of view; just imagine what would happen if you analysed all the policies of the last 10 years. My prediction would be that far from bankers' greed being the cause of the crisis it would be a multitude of government actions that caused the crisis.

To give an example of political response to logic, during the last election I had a candidate at the door and conversation veered towards regulation. When I pointed out mistakes in his premises for concluding that deregulation was to blame (I challenged him to name one significant deregulatory policy) and corrected his statement logically, he actually resorted to saying that it makes no sense to use logic in government policy. I think my laughter indicated that he was not getting my vote.


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## AlbacoreA (19 Apr 2011)

Political logical, or objectives, may not align with non political logic, objectives. Especially if the politician has no altruistic motivation. 

Didn't Iceland change some laws relating to politician acting in the best interest of the country or something. I can't find any info at the mo.


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## Chris (19 Apr 2011)

AlbacoreA said:


> Political logical, or objectives, may not align with non political logic, objectives. Especially if the politician has no altruistic motivation.


I think the logic would be no different, but objectives certainly would. It doesn't matter what your political view or objective is, the same rules of logic apply. In my case I offered the candidate following syllogism as a representation of his opinion:
P1: financial industry was deregulated
P2: financial industry collapsed
Conclusion: deregulation caused the financial system to collapse

What I challenged the candidate to, was to prove that we had significantly less regulation rules/laws in the lead up to the crisis than 10 years ago. What I did was show him that premise one was false and that therefore the conclusion was not valid.



AlbacoreA said:


> Didn't Iceland change some laws relating to politician acting in the best interest of the country or something. I can't find any info at the mo.


Haven't heard of this, but would be interesting to know. Don't think that it would make any difference though. US politicians take an oath to uphold the constitution (which was written in the public's best interest), but many ignore it and downright claim it is not relevant any more.


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## horusd (19 Apr 2011)

Chris you might be right, but not necessarily in logical terms, recall from true premises, and valid inference, only true conclusions may follow. But the truth value of P2 is challengable. Many things can cause financial collapse apart from deregulation. So the fact that P2 follows P1 doesn't entail that P2 was caused P1!  

This is called the logical fallacy of _post hoc ergro propter hoc_. B followed A, therefore A caused B.  The causal link you make cannot be ascertained without question. Having said all that, your probably right anyway!!


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## Chris (20 Apr 2011)

horusd said:


> Chris you might be right, but not necessarily in logical terms, recall from true premises, and valid inference, only true conclusions may follow. But the truth value of P2 is challengable. Many things can cause financial collapse apart from deregulation. So the fact that P2 follows P1 doesn't entail that P2 was caused P1!


Yes, it certainly is a simplification, but one used extensively by politicians, the media and the general public.You would have to dig down into each premise until you get to an a priori statement in order to totally overcome uncertainty over causation. Correlation should never be deemed sufficient to argue causation, this is what my school chemistry teacher used to preach, and I think it has validity in some many other areas.



horusd said:


> This is called the logical fallacy of _post hoc ergro propter hoc_. B followed A, therefore A caused B.  The causal link you make cannot be ascertained without question. Having said all that, your probably right anyway!!



Very important point, inference must be valid. But you can get a correct conclusion from wrong premises using valid inference:
P1: Monkey's have no comprehension of economics
P2: Bertie Ahern is a monkey
Conclusion: Berti Ahern has no comprehension of economics

Inference is valid, conclusion is valid, but one of the premises is not valid.


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## Ethan 1 (6 May 2011)

As stephen Kinsella said when he tweeted this Article " Kaboom "

[broken link removed]


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## horusd (6 May 2011)

Chris I did mean to reply to this! From wrong premises anything can follow. But once the premise is undermined, the whole thing falls  regardless. Interesting article Ethan.


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