The Global Financial Crisis - Essay Example

Name) (Instructor’s Name) (Course) 9th September 2009 Case study of Ethics and sustainability: The global financial crisis Introduction On a general level, ethics theories and concepts are concerned with providing guidelines on how human beings ought to behave or live their lives. At the very least, organisations, institutions and individuals need to be in a position where they can evaluate their actions through different moral theories and decide whether this will contribute towards the betterment of other people. The global financial crisis has solicited a lot of attention from various analysts. In fact some of them claim that contrary to common perceptions, the root cause of the crisis can be found in the field of ethics and sustainability instead of various economic and financial theories. This paper will dwell on the latter assertions and it will reaffirm the claim that the global financial crisis represents a crisis of ethics and a threat to achieving sustainability. The issues The collapse of the post subprime mortgage market – which is closely tied to the bust in the housing market - led to the 2008 economic recession which then spread to other developed economies that interacted with the US economy. This global economic crisis has revealed a number of faults within the financial system but most importantly, it has also pointed to the actors and participants involved in handling or managing this financial system. (Mihm, 7) In order to place this ethical argument into perspective, it is essential to look at the fiscal context of the crisis. Securitization is one of the biggest determinants of the global economic crisis. The latter term refers to a financial instrument in which a financial institution; usually a bank, converts its loans into assets that can then be traded. The main reason behind the creation of this instrument was to minimize risks held by banks by transferring them to other parties who would then be responsible for them. When these financial instruments were first introduced into the market, they were required to be rated on the basis of their credibility. They were given good ratings by various agencies in order for the public to consider engaging in such business. The Duty ethics principle requires individuals to perform their duties despite the results of their actions. In this theory, only two major issues matter: one’s internal obligations and responsibilities emanating from the external environment. Agencies that were required to rate securitised loans failed in their duties because they did not meet their internal obligations of letting the public know about the real risk and danger associated with such instruments. Instead, these agencies let their self interests of doing more business get in the way of their responsibilities. It is now known that securitization is highly risky and that such an instrument should not be given high credibility ratings. (Smith & Gjerstan, 45) After seeing the profits that could emanate from transacting such loans, then other entities also wanted in on the action. For example, those banks that had no securitisation eventually joined in because they wanted the profits that came with such ventures. Those banks that already had securitised instruments began doing more borrowing so that they could increase the level of securitisation and hence the amount of loans that could be sold off as securities. This was done irrespective of whether the loan was good or bad because all the banks were aiming at was to sell off those loans. The complications could then be handled by the person who chose to purchase such a security. This problem began spiralling out of control when a number of institutions such as Lehman brothers began entering into the real estate market. The latter organisation chose to purchase mortgage loans, convert them into securities and then sell them to interested parties. This kind of behaviour was not just synonymous to the Lehman Brothers because it now became common among other institutions. For instance, several banks urged their customers to get loans such that those loans could be turned into securities and then traded. In the end, banks exhausted their lists of credible clients to loan to, they eventually started turning to very poor individuals in the sub prime market. It was a known fact that these groups of people could not be trusted to pay back their loans but banks still went ahead and offered them those loans. They did this with the hope that housing prices would keep going up and that if a client could not repay, then their houses would be repossessed. The matter was further compounded by the creation of certain types of securities that were even more complicated than earlier types. Examples included the Collateralised Debt Obligations which did not actually show how risky a certain loan was. (Norris, 16) Eventually, more and more banks started engaging in the business of trading risks and acquiring home loans yet because securities had not been properly developed, then regulations were minimally done. In the end, various investment banks lacked tangible deposits to secure their retail funds. Also, the public realised what was going on and they lost trust in the system. This left the financial institutions with numerous loans that other investors had rejected in the first place after ascertaining that the loans were too risky. Asset values (especially in the housing sector) had gone down and more investors wanted to get their money back. However, this was difficult because these institutions had too many securities and very little deposits. In the end, the banks ended up collapsing. Because other countries had also invested in the US market, then they were also affected by the crisis and it became global in nature. Kantian ethics is governed by the categorical imperative which states that all moral law should be applied to all people in society irrespective of the time. Also, Kant believed that one’s actions should be guided by the belief that there is a universal law on humanity. In other words, one should consider whether their actions conform to the maxim or rule applied universally. Upon analysing the issues surrounding the global financial crisis, it can be seen that the categorical imperative in Kantian ethics had been broken. The moral laws that had previously been used in other forms of trade were not applied universally and to all people by financial institutions. In other words, the actions of these institutions were altered when it came to securitized loans and they were not motivated by the universal law of humanity. Instead, they looked towards their own need for profit. Besides this, Kantian ethics also requires one to treat human beings as ends in themselves and not means to achieve things. Clearly, this rule was broken by banks and other financial institutions that saw consumers as a source of loans that could be converted into securities. They did not care whether the consumer has a low credit rating and whether that individual was capable of repaying his or her loan. Instead, they simply dwelt on the short term gains that could emanate from offering them such loans. It was not their concern whether such consumers would have their houses repossessed and rendered homeless. They therefore used their clients to increase profits and this was very selfish. (Altman, 45) A number of analysts have called for greater regulation as a solution to the global financial crisis. However, saying this can be likened to the claim that thefts occur because there are no police on all street corners. Financial markets cannot solely rely on regulation as a way of making them efficient and reliable again. Instead, more effort should be directed towards restoring a strong ethical base. This is because the problem that minimal regulation actually exposed was the selfishness and greed of financial institutions as well as other investors. In fact in defence of their actions, most financial institutions claimed that it was the system that should be blamed for their actions. However, these very institutions were responsible for the design, commissioning and implementation of such schemes. It is an acknowledged fact that all the systems put in place in most developed economies are done by specific characters/ persons and as a result of certain motivations. Consequently, merely focusing on institutional and legal aspects of the global financial crisis cannot curb the real reasons behind this crisis. (Soros, 16) In Kantian ethics, it is often asserted that for moral actions to be considered as such, then the entities carrying out those actions must be allowed to behave as though they are law making members. In other words, if the law is made for them and all they have to do is follow rules then this reduces them to people without a will. In fact, all moral philosophies are governed by the need to allow people to exercise their ability to make right decisions. When compliance takes precedence over responsible decision making, then it is likely that individuals will loose their moral conscience and they may be tempted to think that as long as they are not breaking the law, then there is nothing wrong with their actions. These misguided perceptions were actually responsible for the global financial crisis owing to the fact that people largely forgot about the fundamentals of the financial system which are ethics based. Instead, they focused on legal loopholes as well as a number of avenues that they could utilise to get quick returns. Failure to take one’s responsibility to act ethically has eventually led people to dwell on selfish interests thus leading to prevailing circumstances in the crisis. Kidder (par 4) cites an example of the Madoff case that has just been cleared by US state courts in bringing out his assertions. Here, the author affirms that integrity and character had a huge role to play in determining how Madoff handled its clients. This individual was responsible for defrauding the public off huge sums of money thus contributing to the economic downturn that eventually catapulted into the global economic crisis. The latter writer further adds that the current President of the US has a daunting task ahead of him owing to the fact that not only must he tackle the financial intricacies of the crisis, but he must also look at ways of restoring the moral fabric of his society. In this regard, he must ensure that fiscal leaders selected have high moral values that can then redistribute that sense of responsibility to their followers and thus restore confidence in the country’s economic systems. Ethical and moral dilemmas by their vey nature tend to be very complicated; consequently, it is difficult to find one right or wrong answer. This is the reason why the global financial crisis cannot be easily solved by resulting to one ethical principle. Instead, different perspectives on different issues surrounding the crisis need to be used. For instance, it has been asserted that recent US presidents tended to endorse particular theoretical standpoints. For example, Clinton adhered to the utilitarian principle that required one to choose actions that increase happiness for the highest amount of people; this implies focus on the ends of one’s policies and actions rather than on its means. President Bush on the other hand concentrated on the Kantian perspective which focuses on the use of ideology rather than an overemphasis on the results of his actions. Both these presidents had their own challenges and successes. It is therefore the duty of the current president to merge the positive elements of these ethical principles in order to tackle his most serious task which is the global financial crisis. (Kidder, par 9) Conclusion Overly speaking, there are several explanations that can be sought to understand the global financial crisis, however, at the root of all these explanations is a failure to exercise moral and ethical responsibilities. Financial institutions and other fiscal stakeholders had the option of fully analysing the monetary instruments and policies that led to the global financial crisis and then duly warn the public about these dangers but they failed in these duties. Alternatively, these stakeholders would not have offered such financial instruments in the first place. Nonetheless, such a prudent alternative would be highly unpopular but could have prevented this problem. Stakeholders also had the responsibility to fully analyse the risks prior to the financial crisis and ensure that the public would not suffer as a result of their misgivings. Once again, this did not occur and it placed the global economy at the mercy of self seekers. Works Cited Kidder, Rushworth. Obama’s Ethics Landscape. 2009. Retrieved 9th Sept 2009 http://www.globalethics.org/newsline/2009/01/19/obamas-landscape/ Norris, Floyd. “Another Crisis, another Guarantee.” The New York Times 24 Nov. 2008: 16 Soros, George. “The worst market crisis in sixty years.” The Financial Times 8th Mar 2009: 20 Mihm, Stephen. “Dr. Doom.” The New York Times 15 August 2008: 7 Altman, Roger. “The Great Crash of 2008.” Foreign Affairs Journal 12.3 (2009): 45 Smith, Vernon & Gjerstad Steven. ‘From Bubble to depression.’ Wall Street Journal 5th Feb 2009: A 15 Read More