UNETHICAL AND ABUSIVE FINANCIAL DEALINGS IN THE U.S.
INTRODUCTION
In this essay, one unethical and abusive financial dealings' story will be given. The unethical dealings and their effects on national and global economy will be discussed. The unethical financial dealing story is “Subprime Mortgage Crisis in the U.S. And the following global financial crisis”.
Adam Smith's teachings indicated us how important to have ethical principles among agents in an economy. Ethical principles are essential for fair transactions and for a efficient working economy. They are like traffic lights, if people follows red and green lights and no accident happens, and no one cares about lights until someone crosses at red lights and causes a traffic accident. After accident, people comprehend why ligths and relevant rules has an importance in community life. The two example to be given in this essay are two big crashes in the U.S. Economy. As a result of unethical dealings in the economy, a lot of people have suffered, even the third parties who have not involved in unethical dealings because of the global financial crisis and the energy sector crisis.
Subprime Mortgage Crisis in the U.S. and the Following Global Financial Crisis
Having a shelter is very crucial for people, moving a little further to the modern times, people need houses more than basic shelters: house as a shelter and a social status indicator. It can be argued that whether social status indicators can be classified as need. To some scientist, participating and getting accepted socially are among human needs and because of that, social status indicators such as luxury house, luxury cars, etc. This is argument has been essential for the real estate markets in the U.S.. People want to have a house as shelter and than, if possible, a luxury house as status indicator.
The U.S. Government in President Clinton's term has deregulated the real estate markets. The Federal Nation Mortgage Association (Fannie Mae), founded in 1938, has warned the banks and the other financial institutions to help more people get new houses in mortgage system. Before that time Fannie Mae had an application called “Red Lining” which meant that tbe banks were refusing the purchase of the house in the risky neighborhoods regardless of loan demanding person's job and income. In Clinton's term, the deregulations in the real estate markets canceled this rule which has meant to people that they could buy houses anywhere in the country by using mortgage loans. At the same time, Fannie Mae ordered the banks to lower their standards for mortgage loans demanders.
All these deregulations caused an increase in the demand for the houses, and people have started thinking that they buy better houses for themselves, even though they did not have any savings. Almost all the banks have started nation wide mortgage advertising, and even new immigrants or low salary workers have begun dreaming of buying a house. Considering that mortgage system brings an equality between people to buy a house, however, it is not really egalitarian system. Because when it causes a financial crisis as a result of bad management of the mortgage market as we have seen recently, it might cause more inequality among people due to information assymetry.
The deregulations in mortgages have caused an increase in demand for houses and the prices of the houses have started rising. With higher house prices, people have needed higher amount of mortgage loans with long term installment payments. In this case, the banks had to find a way to survive, because they were selling houses immediately, however, they were receiving money partially in a long term more than ten years. They have had liquidity problems. At this point, derivative mortgage markets came into existence under control of Fannie Mae. Fannie Mae has always been the largest buyer in this market, we can familirize Fannie Mae with the FED. Fannie Mae is like the FED in the secondary mortgage papers' market for the banks. When they need liquidity, they sell mortgage loan papers to Fannie Mae and they receive cash. However, in this case, Fannie Mae was buying all the risks of all the mortgage loans.
The higher demand for house has meant higher prices for the houses and the worse, the higher risks for the banks, after selling their mortgage papers to Fannie Mae, higher risks for Fannie Mae. Deregulations' influence on the real estate, the mortgage loans and the secondary mortgage papers' markets continued for long years and each year put more burden on all the agents involved in at least of the mentioned markets starting from home buyers to Fannie Mae.
Eventually, through the end of 2007, some people have started complaining of not being able to repay their installments and they were asking for refinancing opportunities. Many people have tried refinancing and one day some people could not pay their installments to the banks and the mortgage system has started collapsing. It was a real estate buble and there was too much burden on everybody in the system and it could stand forever and collapsed.
We might think that the collapse is no one's fault, it is a natural process, however, as everybody knows, there were some economists in the U.S. publishing about the buble in the real estate and other relevant markets. No one listened to them, because a system was working giving everybody, regardless of their income, an opportunity to buy their dream houses. The government, the banks, Fannie Mae, home sellers, home buyers and everybody else involved in mortgage markets were happy. However, a nightmare was coming and some people were feeling it and maybe some people were knowing. Consequently, the mortgage and the related markets have come to an end.
Furthermore, this crisis has not been just a nationwide mortgage and relevant markets' crisis. The largest ten banks of the U.S. have struggled and the financial markets have collapsed in the U.S.. Many senior bankers have been fired, many other financial institution workers have been fired, many people lost their houses because of not being able to pay the installments and the crisis was spreading to all other sectors in the U.S.. Even at the universities, the number of students have decreased. The U.S. Government have tried to bail out some financial institutions, however, the burden was so big. The big banks have announced their bankruptcy.
One of the worst sides of the globalism is that all the crisis can spread to all around the globe quickly. The subprime mortgage crisis, after invading the U.S., it has spread to the European countries and to all other countries. Maybe, only the least developed economies have got no harm thanks to their less developed states. The global financial crisis has started in 2008 and many European countries are still suffering and the volume of international went down. In many countries, automotive production plants and other production places are closed. Even the developed European countries are having very low growth rates and even sometimes negative growth.
This global financial crisis is larger than any other global crises we have experienced in the past. The governments have implemented many different economic strategies and spent large amount of resources. Tha capitalist system and the globalization have been questioned and many economists started believing that the governments should be controlling the markets. The Keynesian school states their government interference models to control the economies and after a long time, many people believes in economies under control of governments. Free market society has given us a big crisis.
The Result
Building trust and maintaining it is very essential to develop an economy, and this task is truly hard. To be able to build an economic environment, all decision makers should exhibit that they follow certain ethical rules and they declare what next steps are. Providing true information to people creates trust. The same condition holds for individuals also. In an efficient economic system, trustable individuals have a very essential place.
Building trust in economy is really though task, however, destroying trust is quite easy. Unethical dealings among individuals or institutions such as creating information assymetry, blocking paths to individual development and other similar behaviors can easily destroy trust and when trust is lost, all economic system and everybody in it suffers. Finally, we can say that a successful and efficient economy depends on trust stemming from ethical principles.
The last global financial crisis was a result of losing trust between banks, Fannie Mae and people in the mortgage and the real estate markets. Many people could get very high amount of mortgage loans, and they have spent the money that they did not own. The house owners, after observing high demand for real estates, have asked very high prices for their real estates. As a result of all these happenings, the risks of the mortgage loans have increased. The deregulations have brought us a very unstable environment and no person could foresee the future. All the agents in the market have tried to survive one day more. However all those day saving efforts have not been enough, and finally subprime mortgage markets, mortgage insurance markets, mortgage markets and real estate markets have collapsed. In a very short time, this crisis have spread to all country and to all world.
References
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Standards, Loan Modifications and Securitization. Columbia University, retrieved from
http://www.columbia.edu/~lhw2110/Subprime_survey_Samson.pdf.
Cabral, Luis M. B. (2005). The Economics of Trust and Reputation: A Primer. New York University and CEPR, retrieved from
http://pages.stern.nyu.edu/~lcabral/reputation/Reputation_June05.pdf.
Chiappori, Pierre-Andre, Jullien, Bruno, Salanie, Bernard, and Salanie, Francois. (2001). Asymmetric Information in Insurance: General Testable Implications. Columbia University, retrieved from
http://www.columbia.edu/~pc2167/FinalVersion.pdf.
