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Global Financial Crisis and Its Ethical Causes Essay


Introduction

Nowadays, after the actual mechanics behind the making of the 2008/2009 financial crisis have been revealed, it became a shared assumption among many social scientists that this crisis should be discussed within the conceptual framework of ethics.

The reason for this is simple – the analysis of what had brought about this particular financial crisis and what accounted for the subtleties of its extrication points out to an undeniable fact that it was namely bankers’ endowment with the irrational sense of greed, sublimated in their preoccupation with reaching short-term economic objectives, and politicians’ strive to ensure their popularity with the voters at any cost, which created objective preconditions for the financial collapse on 2008/2009 to take place.

As it was noted by Cascio and Cappelli (2009): “No single villain lurks behind this crisis, but as the story bas unfolded, a common theme has played out across the failed companies—efforts to ‘push the envelope” (p. 47). Apparently, there are good reasons to think that the financial crisis of 2008/2009 was of essentially ‘artificial’ nature because it came to be as the result of people’s blind preoccupation with making ‘easy money’, without considering what will account for the ultimate consequence of such their activity. In this paper, we will aim to explore the validity of an earlier articulated suggestion at length.

Analytical part

The fact that there were a number of ethical aspects to the making of the 2008/2009 financial crisis is now being recognized by more and more social scientists closely affiliated with the ‘left-wing’ agenda, as it provides them with a chance to criticize the workings of the free-market economy as ‘thing in itself’. According to them, it was named the fact that, throughout the course of the nineties, the functioning of America’s financial markets has been deregulated, which should be thought of as the actual cause of this crisis.

In its turn, this type of theorization, on their part, causes these scientists to promote an idea that the 2008/2009 financial crisis came as the result of governments in most Western countries pursuing the policy of trade-liberalization, based upon the assumption that financial markets are being essentially self-regulated and that the less government meddling with economic affairs – the better. As Benatar, Gill, and Bakker had put it: “Some far-sighted political economists long argued that the financial collapse would ensue from too-rapid economic liberalization, excessive leveraging, and the use of poorly understood financial derivatives” (p. 647).

According to this line of thought, the financial crisis of 2008/2008 was bound to happen, as the result of the institutionalization of neo-liberalism as a socio-economic matrix for Western societies’ functioning. Once, the governmental officials are being removed from the process of designing socio-economic and fiscal policies, it becomes only the matter of time before greedy ‘capitalist sharks’, preoccupied with making profits as their foremost agenda, destroy the economy. As it was pointed out by Benson and Kirsch (2010): “The current financial crisis may yet be a tipping point for a critical rethinking of the profit motive, neo-liberalism, and market deregulation” (p. 475).

Nevertheless, the careful examination of the subject matter reveals an undeniable fact that the foremost precondition for 2008/2009 financial was not as much of the irrational greed, on the part of American bankers, as it was most prominent American politicians’ close affiliation with the concept of unmistakably Socialist political populism (Couch et al. 2011). In this respect, we can only agree with Hubbard (2009): “Never attribute to malice or stupidity that which can be explained by moderately rational individuals following incentives in a complex system of interactions” (p. 55).

Throughout the 20th century’s nineties and 21st century’s first decade, most American top-ranking politicians never ceased proclaiming their allegiance to the ideals of ‘multiculturalism’, based upon the idea that, regardless of what happened to be the specifics of their ethnocultural affiliation, all American citizens are absolutely equal (Torres 1998). Therefore, according to these politicians, it did not make much of a sense that the living standards, on the part of the majority of White Americans, on one hand, and on the part of representatives of racial minorities, on the other, differ rather dramatically.

It was namely this specific consideration, which prompted George Bush to sign a so-called ‘American Dream Downpaynment Act’ in 2003, which established provisions for even citizens without a positive credit history (and very often without jobs) to qualify for bank-loans so that they would be able to become ‘house owners’ in an instant: “There is a reason why many American families can’t buy their first home – they can’t afford the downpayment and other upfront closing costs required to qualify for a mortgage… That will change as President Bush today signed The American Dream Downpayment Act into law” (U.S. HUD 2003).

In other words, banks have been prompted to provide downpayment credits to people, who despite their enthusiasm in ‘celebrating diversity’, could hardly be considered society’s productive members. In exchange, banks were allowed to charge high-interest rates.

While trying not to lose the opportunity to become house-owners, the majority of less than upstanding Americans rushed into applying for easy downpayment loans. In its turn, the inflow of money into the real-estate market caused prices for houses to be continuously increasing. As the consequence, more and more people were becoming involved in the process – after all, prior to 2008, people could easily make $20.000 – $30.000 by buying just about any house and selling it a year later.

Still, it was the banks that benefited the most from strongly positive dynamics in the real-estate market. Throughout the decade’s first half, they could well afford to provide downpayment credits even to those citizens who were absolutely incapable of sticking to the terms of the contract. If the client could no longer pay interest on the mortgage, the bank would simply take his or her house away and make a profit again – after all, throughout this time, prices for real-estate properties were galloping.

In its turn, this increased the popularity of so-called ‘derivatives’ – financial contracts between two parties, backed by third parties’ financial obligations, which could be bought and sold on the open market. These ‘derivatives’ spawned the new generation of ‘derivatives’, backed not by the actual credits per se, but by originally issued derivatives. This created a paradoxical situation – while the individual risks, in regards to banks and private citizens making money in the real estate market, were being continuously lowered, the overall risk for the whole financial system to lose its stability kept on growing ever-more heightened.

The reason for this was simple – the vitality of the real-estate sector of the American economy has been maintained by the exponential influence of more and more financial obligations, backed by third parties’ financial obligations, backed by fourth parties’ financial obligations, and so on and so forth. In other words, at that time, the money in the real-estate market was made out of the thin air.

Such a situation, however, could not last forever. Eventually, the financial bubble, filled with air, which was blown by popularity-seeking politicians and by easy riches-seeking commercial institutions and private citizens, was going to burst. This happened in 2007 when it was revealed that despite the fact that Lehman Brothers Holdings Inc. annual financial transactions accounted for billions of dollars, the value of actual physical assets in the company’s possession amounted largely to the value of furniture in its rented offices (Caballero, Farhi & Gourinchas 2008).

Therefore, there can be very few doubts about the validity of the suggestion that the financial crisis of 2008/2009 should be discussed from an ethical rather than from a purely economic perspective because it appears to have been predetermined by the deterioration of people’s sense of ethical responsiveness.

Apparently, in the years preceding this crisis, most American mainstream politicians have grown irresponsible to the point of becoming utterly ignorant of what represents a dialectical relationship between causes and consequences. While in the Presidential office, both: Bill Clinton and George Bush were largely concerned about gaining cheap popularity with intellectually marginalized voters, the number of which in this country increases exponential progressing to the flow of timer – all thanks to initialization of ‘celebration of diversity’ policy.

In all probability, it never occurred to these both individuals that, allegorically speaking, regardless of how intensely we may refer to donkeys as steeds, for example, they would never cease being donkeys in reality. Therefore, it is namely American politicians’ willingness to ‘improve America’, without possessing a scientific insight on how it can be accomplished, in the first place, which should be thought of as one among foremost reasons behind the financial crisis of 2008/2009. As it was pointed out by Yandle (2010): “The 2008 financial collapse originated with a political effort to expand mortgage lending to consumers who could not meet normal standards of creditworthiness” (p. 346).

After all, it is being considered utterly unethical, on the part of individuals without diplomas in medicine/health care, to be providing medical treatment to sick patients, because such treatment is most likely to result in the worsening of patients’ condition. The same can be said about socially-prominent but not overly bright individuals’ strive to facilitate ‘equality’ and ‘fairness’ in society, without being aware of what will account for the whole scope of possible consequences. As a famous saying goes – the road to hell is made out of good intentions.

Therefore, even though as we have shown earlier, there are clearly defined ethical undertones to the discussion of what caused the financial crisis of 2008/2009, these undertones are not being concerned with the objective nature of free-market economy’s functioning as ‘thing in itself’, but largely with how Socialist initiatives undermine the social beneficence of such functioning. After all, it was not American bankers’ ‘inheritable evilness’, which in years prior to 2008/2009 financial collapse had prompted them to consider making money out of the thin air, by the mean of blowing the ‘bubble of the real-estate market’, but governmentally sponsored social initiatives, aimed at ‘eradicating poverty’.

It is namely these initiatives, which created objective preconditions for American banks to become preoccupied with reaching short-term financial objectives, which in turn transformed the very essence of banking from being the foundation upon which society’s economic well-being rests, into the speculative pursuit of ‘easy money’ – something absolutely counter-productive, in social, economic and political senses of this word.

Therefore, it is quite impossible to disagree with Kinsella and Kinsella (2009), who suggests that it was specifically American politicians’ lack of understanding of what contributes to the proper functioning of the free-market economy that presupposed the coming of 2008/2009 financial crisis: “(Governmental) failure allowed a culture of greed to subvert and undermine financial institutions and to fan the flames of a quite lethal set of perverse incentives, for management, to maximize short-term shareholder value of such institutions” (p.286). Once, bankers realized themselves in a position to make unsustainable but quick profits, they naturally seized the opportunity.

Yet, as it was illustrated earlier, the emergence of such an ‘opportunity’ came as the result of government officials’ ‘effective’ socio-political governing. Hence, the paradoxical subtleties of 2008/2009 crisis – even though Clinton and Bush’s rhetoric, concerned with making provisions for underprivileged American citizens to be able to enjoy ‘affordable housing’, stood in striking opposition to the very notion of ‘corporate greed’, as something that facilitates poverty and inequality, it nevertheless created yet an additional set of prerequisites for more and more Americans to explore life-enhancing opportunities exclusively in relation to their endowment with the sense of greed.

Conclusion

As it was mentioned in the Introduction, there are good reasons to discuss the 2008/2009 financial crisis within the methodological framework of ethics. The reason for this is quite apparent – the economists well ahead of time have predicted the coming of this crisis. And yet, nothing was done to prevent it, which in turn signified the lack of ethical awareness on the part of a great many socially prominent Americans at the time.

Therefore, we can only subscribe to the idea of previously quoted Kinsella and Kinsella: “The failures of economics, of regulation and standards of corporate governance are essentially secondary causes of the (2008/2009) crisis. The root cause lay in a failure of ethics – not ‘business ethics’ – but Ethics” (p. 286). Apparently, it was these people’s endowment with less than admirable psychological qualities of perceptional ignorance, social irresponsibleness, and greed, which predetermined the coming of this crisis. We believe that such our conclusion resonates with the paper’s initial hypothesis perfectly well.

References:

Benatar, S, Gill, S & Bakker, I 2011, ‘Global health and the global economic crisis’, American Journal of Public Health, vol. 101, no. 4, pp. 646-653.

Benson, P & Kirsch, S 2010, ‘Capitalism and the politics of resignation’, Current Anthropology, vol. 51, no. 4, pp. 459-486.

Caballero, R, Farhi, E & Gourinchas, P 2008, ‘Financial crash, commodity prices, and global imbalances’, Brookings Papers on Economic Activity, vol. 5, pp. 1-55.

Cascio, W & Cappelli, P 2009, ‘Lessons from the financial services crisis’, HRMagazine, vol. 54, no.1, pp. 46-50.

Couch, J et al. 2011, ‘Government behind the wheel more a matter of politics than of economics’, Independent Review, vol. 15, no. 4, pp. 577-591.

Hubbard, D 2009, The failure of risk management: why it’s broken and how to fix it, John Wiley & Sons, Hoboken, NJ.

Kinsella, R & Kinsella, M 2009, ‘Ethical causes and implications of the global financial crisis in Ireland: Political contagion and political transformation’, An Irish Quarterly, vol. 98, no. 391, pp. 285-308.

Torres, C 1998, ‘Democracy, education, and multiculturalism: Dilemmas of citizenship in a global world’, Comparative Education Review, vol. 42, no. 4, pp. 421-447.

U.S. Department of Housing and Urban Development (HUD) 2003, Bush signs American Dream Downpayment Plan. Web.

Yandle, B 2010, ‘Lost trust: The real cause of the financial meltdown’, Independent Review, vol. 14, no. 3, pp. 341-361.

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IvyPanda. 2021. "Global Financial Crisis and Its Ethical Causes." January 25, 2021. https://ivypanda.com/essays/global-financial-crisis-and-its-ethical-causes/.

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IvyPanda. (2021) 'Global Financial Crisis and Its Ethical Causes'. 25 January.

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