Introduction
The global financial crisis of 2008 demonstrated that markets were not as stable as they were perceived to be prior to the crisis. It resulted in the bankruptcy of many companies and led to the deteriorating quality of life for many Americans and people worldwide. This essay aims to identify the major ethical problems that are readily apparent in this crisis. Following that, some policy recommendations will be outlined that aim to address these ethical issues.
Ethical Problems
Strive for Personal Gain Took Superiority over the Greater Good
The first ethical problem related to the 2008 financial crisis is the lack of effective monitoring and oversight techniques to detect unethical behavior by some companies. A review of the actions taken by trusted professionals revealed that they sought higher returns. For example, the 2007 subprime mortgage crisis was triggered by the rise in mortgage defaults among borrowers with poor creditworthiness.
The rise of subprime mortgages was evident through the years: from 8% in 2004 to 20% in 2006 (Simkovic, 2011). Although it was perceived as a tool to save money for those who invested in mortgage-backed securities, it resulted in catastrophic consequences. With the decline in housing prices, people stopped paying their mortgages, as they viewed them as excessive payments. As a result, many borrowers who scrupulously paid their mortgages lost a significant amount of money.
Rating Agencies Gave Extremely High Ratings to Mortgage-Backed Securities
For some people, the behavior of rating firms that gave high ratings to companies that ultimately collapsed was unethical. In this logic, firms needed to be more careful in assessing assets because they acknowledged the extremely high risks associated with their failures. However, these firms did not give a 100% guarantee that all their ratings were safe, so there was some marginal chance of failure.
Schoen (2017) addressed this ethical issue and concluded that the fees charged by these companies for their services were not high, so they were not obliged to significantly increase their team of experts. Otherwise, the higher fees would increase the price of investments and consequently lead to lower investment returns. This situation demonstrated how investors who trusted the rating agencies’ credibility lost all their money.
Economists Were Highly Confident in Their Theoretical Constructs
Finally, an interesting aspect of considering ethical issues is the discussion of the prevailing consensus among economists about the stability of markets. Paul Krugman (2009) noted, after the end of the economic crisis, that economists denied any prerequisites for the crisis and believed their neoliberal view of the economy was correct. Therefore, these economists have long campaigned for less government economic intervention (Krugman, 2009); however, it turned out that the most serious global crisis occurred, contrary to popular narratives.
Here comes the ethical problem: whether economists are responsible for their own selfishness and unwillingness to revise their views. For example, if they had been more strict about their theories, the prerequisites for the economic crisis would have been identified earlier. One can trace a clear link between economists’ optimistic projections and the deteriorating quality of life for many people worldwide.
Policy Solution
After considering the major ethical lessons of the 2008 global financial crisis, it is reasonable to suggest some policy recommendations. One excellent recommendation is to bring more Keynesian approaches into modern economics. The current hyperinflation, driven by volatile food prices, the globalization of markets, and the rise of uncontrolled economies such as China and the United States, is of great concern.
The 2008 financial crisis clearly demonstrated that if the economy of the world’s most developed country is left unregulated, it can lead to numerous recessions and instabilities. Additionally, an uncontrolled economy gives rise to numerous ethical dilemmas and problems. The significant participation of the state in the economy will help to promote equality and justice. For example, the Dodd–Frank Wall Street Reform and Consumer Protection Act was an effective move by the Obama administration. It promoted greater business accountability, thereby increasing the stability of the markets.
References
Krugman, P. (2009). How did economists get it so wrong?New York Times.
Schoen, E. J. (2017). The 2007–2009 financial crisis: An erosion of ethics: A case study. Journal of Business Ethics, 146(4), 805-830.
Simkovic, M. (2013). Competition and crisis in mortgage securitization. Indiana Law Journal, 88, 213-271.