Ethics During the Economic Meltdown
Introduction
During 2008, the United States financial markets, and all major international markets, were devastated by the aftermath of unethical lending practices by major lending institutions. This shall be remembered as the worst financial crisis since the Great Depression. Given these facts, one would question as to whether the United States have learned their lesson, has ever learned their lesson, or will learn their lesson in the near future. These bad loans caused a real estate bubble since aggressive lenders engaged in loans called “sub-prime mortgages.” These mortgages were extremely risky and most of them violated traditional underwriting standards for the industry. As a result, mortgage lenders put ethics aside in favor of greed.
The problem got out of reach after these financial institutions started packaging these bad loans and selling them to other investors on the secondary market. When the real estate market started correcting itself from these bad sub-prime loans, the collapse caused a domino effect that initiated major banks to sink. As a result, most stock values dropped in the financial market causing the biggest financial crisis since the great depression. Those who thought the financial market would generate great returns were left with nothing but the consequences of greedy individuals who ended up destroying the United States economy and the global market as a whole.
Americans have since lost much of their savings, seen the unemployment rate go up the roof, and left with uncertainty about their future. Ethics and ethical practices are needed in the financial industry and the governing institutions that regulate and control the different markets. This sudden collapse in the banking and capital markets is a proof of the failure of senior managers, traders and so forth to be guided by proper practices.
This paper is organized into three parts. The first part discusses the events leading up to the mortgage and stock market meltdown. The second part discusses how the government bailouts affected the taxpayers and gave incentive to a problem known as moral hazard. Finally, the third part discusses some possible remedies for a sustainable financial system.
What went wrong?
Most of the mistakes the world is paying for were made by four entities. The responsibility can be spread out to the originators of the bad mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage backed securities (Duska, 2010, p.22). The purpose of these financial institutions is to manage risk, insure liquidity, and offer services at a reasonable price. Instead, these major players were mainly driven by greed and unethical behaviors. Consequently, these actors were putting their own interests at the expense of others and failed to be responsible in fulfilling their purpose.