The economic crisis of 2008 was caused by economic factors, but ethical issues almost certainly made it worse. Low interest rates and rapid growth caused a housing bubble, which eventually burst, but the US economy has experienced several such bubbles without the major dislocations of this one. Ethical failures on the part of most of the major banks and some consumers inflated housing prices to a much larger extent than previously, and the resultant crash turned out to be much more severe.
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The most flagrant ethical abuses were seen in the behaviour of the financial organisations that made loans without verifying creditworthiness. They sometimes misrepresented the terms of mortgages to buyers, and in some cases used appraisals that were inaccurate. They then did not follow appropriate procedures when registering loans and mortgages and, when the lack of documentation was discovered during foreclosures, some companies fabricated documents fraudulently. In many cases, the ethical failures can be traced to a lack of training of low-level workers who were told they were acting correctly. Such failures point to a lack of a code of ethics and a lack of an ethical orientation at the management level. A major unresolved issue of the crisis is that such behaviour has not been punished and ethical abuses continue.
While many financial institutions took advantage of borrowers and even actively misled them, many borrowers were only too willing to go along with unethical practices to obtain loans. Some borrowers misrepresented their assets and incomes while others lied about their intention to reside in an owner-occupied residence. Within an ethically appropriate framework, such behaviour would not result in rewards as the financial institutions would normally have verified borrower information, and refused loans to unqualified applicants. When the banks stopped making such verifications, unethical behaviour on the part of borrowers grew as a result.
Governments have been acting unethically, first in promoting home ownership among people who couldn't afford it, and then by refusing to hold accountable those who played the biggest part in precipitating the crisis. Government officials in 2011 maintain that the financial system is still tool fragile to allow prosecutions and fines of major financial institutions that caused the crisis, but this position itself is unethical. The major issue for governments is the extent to which superficially unethical behaviour in government can be justified in the name of avoiding a further crisis that would damage everyone even more.
There was an epic failure of the ratings agencies to properly rate debt. While inability to foresee a crisis of this magnitude was a factor, there were conflicts of interest that probably played a major part. As referees, the ratings agencies are not supposed to have a stake in the outcome of the game. Instead, they derived major revenue from the companies they were rating and whose bonds they were supposed to rate neutrally. A major issue highlighted by the crisis is the extent to which governments should regulate financial service companies. A related issue is how government regulation can be neutral when governments rely on ratings agencies to rate their own debt.
Ethical Behavior in the Financial Industry
It is clear that there were ethical lapses in the behaviour of some companies and some consumers prior to the financial crisis. It must be noted that financial institutions, had they behaved ethically, would have stopped unethical behaviour on the part of consumers, while the latter have no such power over the financial companies. Rather than regulating the behaviour of financial institutions, forcing them to develop and implement a code of ethics might be more effective. More than any other business, financial transactions have a large trust component that is difficult to maintain when unethical behaviour is common.
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- The Ethical Society of Austin; Understanding the Financial Crisis and Comments on the Ethical Issues Involved; Valerie R. Bencivenga; May 10, 2009
- Global Ethics: Ethical Issues Continue to Ripple from Financial Crisis
- The Big Picture; The Financial Crisis and the Collapse of Ethical Behavior; Gregory Curtis; December 4, 2008