The Ethics behind the Financial Crisis of 2007 – 2008

Ethics is the condition of balance of people, organizations and societies. That is why, as Antonio Argandoña states in his paper, to study and understand the business reality of this crisis three dimensions of ethics must be taken into account. These are the ones that will help us analyze the behaviors that move people in this field. Therefore, these will be the perspectives that will be used to analyze why the financial and political mechanisms that resulted in a global crisis fail.

Personal dimension

The personal dimension of ethics is that which focuses on personal values ​​and individual conduct of people.

Greed and lust for wealth. With a positive evolution of the economy every year, from 1997 to 2007, citizens, moved by the optimism of the years of economic boom, began to get into debt seeking to obtain profitability from important investments in stocks, real estate or material investments of different types ; However, at the moment when the credit bubble explodes, first in the US and later in Europe, a large number of individuals find themselves in debt beyond their means, with investments from which they will not be able to obtain any kind of profitability.

The lie and the lack of professionalism. Many directors of companies, especially of banks, who knew, or should have known, the danger of the situation that was occurring, blinded by the good results and a short-term mentality, continued to inflate the bubble, putting such positive results of the company and even your personal interests to those of your clients. In this way, the right to perfect information of the latter is violated, which is a fundamental characteristic to achieve an ideal market.

Social dimension

The social dimension of ethics is the one that focuses on existing social structures and collective action, and the impact of each individual’s way of being in all of this.

Little union and social action. The little pressure or movement on the part of society due to the bad situation that is being lived (high unemployment, low salary, cuts in the budgets in basic social matters such as education, health, pensions, culture, etc.) allowed the situation that would end in an imminent crisis continued and worsened to a greater extent, since a social union could have been a great obstacle in its development. This is because today, in richer countries, people act in a more individualistic way compared to the past (where important advances were achieved through revolutions and social movements), leaving the responsibility of maintaining a good level of well-being.

Furthermore, due to this scant action in favor of the transformation or change of the current economic structures, the labor unions did not have enough support to act properly. And it is that workers only remember this type of resources when they are necessary.

Organizational dimension

The organizational dimension of ethics is the one that focuses on the levels at which individuals assume functions within a company.

Much of the key business activity that took place in closed offices between senior positions, such as managers, major shareholders, directors, etc. they involved an important high-risk activity and, however, they did not communicate clearly and in detail (imperfect information). Therefore, many people with medium-low knowledge about finance and the market invested money in assets with a high rate of return without having any information about the risks involved. And even branch managers sold these assets without having any idea what they were really about. Only the upper echelons of the largest companies, especially investment, banking and insurance, were aware of what was happening, but they did not care about anything other than the economic profit, something that works in the short term to satisfy shareholders, but not in the long term and that led to the doubtful continuity and even the bankruptcy of large companies (for example Lehman Brothers).

Credit rating agencies also acted incorrectly, giving more importance to the number of cases they closed, whose benefits also increased the higher the rating that the client obtained, instead of conducting exhaustive analyzes and investing in new analysis models with more variables that would allow a much more realistic valuation to be determined. This is why Moody’s maintained an Aaa rating for Iceland for up to five months before its banks failed.

The lack of greater management by the government also allowed many companies to grow too large, becoming the so-called “Too Big to Fail”. That is, companies so large that they would have a great impact on the country’s economy if they fail (for example, the merger of Citicorp and Travelers Group).

Conclusions

The current system relates organizations, social agents and people regardless of their behavior, be it ethical or not, affecting their environment. This means that few agents with unethical behaviors affect a large set of people with ethical behaviors. For this reason, agents with ethical behavior would not have escaped the crisis.

Acting differently from the agents that pursued economic benefit as their ultimate goal meant facing a strongly established system and way of thinking, which becomes complicated and laborious, without finding a short-term benefit beyond personal conscience.

The behavior of each agent makes them responsible for their decisions since these decisions affect their environment and other organizational, social and personal agents. From a moral point of view, agents must therefore be responsible for their decisions not only vis-à-vis themselves, the law or their shareholders, but also that they must be responsible vis-à-vis the environment that surrounds them. The case of the bankruptcy of the Lehman Brothers bank, for example, led to a reduction in credit even in countries where the bank was not active.

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