Question 1 (Appendix A):
Government interventions in the financial markets have been and will always be an issue of ethical dilemma (Stiglitz, et.al, 1993). Therefore, it may be worthy to understand beforehand, what an ethical dilemma is. In YourDictionary, ethical dilemma is defined as “situation in which there is a choice to be made between two options, neither of which resolves the situation in an ethically acceptable fashion. In such cases, societal and personal ethical guidelines can provide no satisfactory outcome for the chooser. Ethical dilemmas assume that the chooser will abide by societal norms, such as codes of law or religious teachings, in order to make the choice ethically impossible. (LoveToKnow, Corp., 2014)”. However, when the government, which is perceived as the regulatory body or lawmaker, is put in the shoe of the “chooser”, what is considered as ethical or unethical may be debatable given that there are different stakeholders with various interest that will be affected in any government intervention.
In a free market economy, it is argued that less government intervention is better as it promotes market efficiency. The government’s role then is supposed to be as an overseer of the economy and part of this responsibility is about setting rules to ensure that right market infrastructure is in place for economic growth. However, when there is a malfunctioning in the system that would result into a financial market crash or prolonged recession, it is only but right (i.e., ethical) for the government to intervene to prevent further deterioration of the economy that would eventually affect the society, and nation as a whole (Econmentor, 2014). Socializing financial risks or losses is one good example of this measure that a government has to take.
On the other hand, what might be perceived as privatizing gains or profit is a result of free and competitive economy which may partially be attributed to government’s deregulation or absence of/minimal intervention. Given this situation, when is government intervention considered right or ethical? When there are inequities in the system or when the system does not cater anymore to common good, government should intervene to favor sectors in the economy that would make the system balanced. It does not always work properly and governments have often times been criticized for selective intervention in the financial market system which resulted to its boom and bust, and perhaps even to widening of the gap between the rich and the poor. Therefore, the challenge for the government will always be in the design of its intervention that would promote common good and society’s overall welfare---something that cannot be left alone in the hands of business sector, even in an assumed perfect market system.
Question 2 (Appendix A):
The crisis of Savings and Loan (S&L) institution in the late 1980s is pointed out as a failure of government regulation more than the market system itself (Stiglitz, et.al, 1993). Although the government’s creation of higher interest savings certificate and promotion of market mutual funds could be beneficial to public depositors, it left S&L banks no choice but to compete or else accept defeat in the prevailing financial market system (Russell, et.al., n.d.).
Given above situation, as an owner of one of the S&L banks, I would most likely choose to compete for survival even if this means taking on more risk for my business. It is the right thing to do than just giving up. It is a decision that will not only save the business, but also considers all the employees involved whose livelihood is at stake and the community’s welfare, which relies on the stability of the business.
The challenge, but at the same time the ethical thing to do in this situation, is in choosing portfolio of investment instruments, and ensuring that due diligence were made in creating investment options that are truly viable for depositors. I will go through the process to ensure that what I would offer in my own S&L are sound investments, and explain potential risks to depositors rather than simply guaranteeing fixed interest that creates false expectations.
Question 3 (Appendix A):
Based on the premise that provided my partner and I keep our jobs, we can afford the house we want at the prevailing low interest, I would take the bank’s offer.
For me, this is not about an ethical issue but an investment decision. Buying a house or a property is an investment. In this case, there is an opportunity presented i.e., we could afford the mortgage for the house we want (or let it slip away). At the same time, I am cognizant of the risks entailed to it, but for as long as our salaries (mine and my partner’s) can cover it, I am willing to take the risk, than wait until we can save for 20% down payment. The savings may not even be enough by the time we accumulate it because home prices are going up. Thus, this is a matter of weighing the opportunities and risk for me, and understanding the consequences of the risks involved.
On the side of the bank, I believe it is ethical for them to offer mortgage only if they deem that the client can afford it. If not, the bank should decline or reject the client, no matter how tempting it is to gain profit or benefit from the transaction. It is also right for the bank to inform clients of the risks involved in offering loans. This way, the choice to take on the risks is understood and acknowledged by the client and he/she could better prepare for it.
Question 4 (Appendix A):
As a bank loan officer, I will not offer the client mortgage, even the subprime package, if I already know that they would have difficulty paying for it in the long run. The client should be able to appreciate the sound advice and walk away from the risk knowing fully-well that they are not yet ready to handle it. On my side, despite my/our own financial difficulties, I believe that my partner would understand and respect me more for doing the right thing.
However, if this situation were in the era prior to the 2008 financial crisis, it would probably be difficult to refuse a client given that there were no banking restrictions that would discourage the practice. In fact, it is being promoted and given incentives. In this case, I would be saddled with a moral dilemma because eventually, I might lose my job for not offering subprime mortgage to risky clients. This could put me in an even more difficult financial situation. I have no option then but to implement the existing banking practices on offering subprime mortgages, even at the disadvantage of the client. It is the moral thing to do? Maybe not, but is can be justified because it is also not illegal and it will help me maintain my job in order to survive.
Question 5 (Appendix A):
The decision of the government to take over Fannie Mae and Freddie Mac is mainly driven by the goal to stabilize the economy, which was brought down by the housing crisis in 2008. Behind this crisis is the poorly managed business model on mortgage-backed securities guaranteed by these two institutions. Owning billions of assets, it is the moral obligation of the government that these institutions are restructured, and to put back the market system into sound operations in order to restore confidence in the housing market. If these reforms were not taken, there is a risk that the underlying assets managed by them would continue to rut, and bring down the economy further (The Economist, 2014).
On the other hand, choosing not to touch the subsidies and tax break, serve to maintain the benefits middle to low-income families of aiding them to buy a house. It may not be advantageous to majority of low income families, but it is not unethical for the government to ignore them. Perhaps, it may even be treated as an incentive for low income families to strive more in order to be able to buy a house knowing that there is this benefit awaiting for them.
APPENDIX A: Case Study 1 Questions
- Is it ethical for a government to act in ways that “socialize” financial risks or losses? Is it ethical to do so while privatizing gains/profits? Or to do so in ways that favor wealthier citizens while imposing risks on less wealthy taxpayers (or vice-versa)? Or that create moral hazards? Why or why not? Are there social goals that are so important that they would lead you to change your answer?
- Put yourself in the shoes of a person running a small, local S&L in the late 1980s. If you refuse to take on risk, something that you have always tried to do, depositors will move their funds to riskier investments which offer higher interest rates. Eventually your S&L could be bankrupt. Your depositors will be protected by federal insurance but you, your employees, family and community will suffer. Alternatively, you could do what many of your peers are doing—make riskier investments. If you make good choices, your S&L may survive, and you could become very rich in the process. If you do not, it will go bankrupt sooner. What is the ethical thing for you to do? Why?
- Now pretend that it is 2005 and you just graduated from college, got married, and landed an entry-level job in one of the booming economies of Southern California, Nevada, or Florida. You like your apartment but keep reading about low interest rate home loans that are available to people who have not saved up the old-fashioned 20% down-payment. You also vividly remember messages from your childhood telling you that renting is a waste of money because it does not build you equity. You also feel that you won’t have really become an independent, mature person until you own your own home (or at least your own mortgage). Home prices are skyrocketing, and if you wait until you’ve saved a standard down payment, houses will be much more expensive. You find a house that both you and your partner love. Your banker shows you a way to buy the house at payments you can afford, as long as both of you keep your jobs. You know it’s risky to commit that high percentage of your income to housing, but you also know that interest rates may never be again this low. Would it be ethical to take the bank’s offer? Will ethical considerations determine what you do? Should they? Why or why not?
- The federal Debt Reduction Commission recently recommended that both mortgage-related subsidies and tax breaks from the federal agencies that help middle-and lower-income families buy homes be scaled back or eliminated. The Obama administration has proposed taking the latter step, eliminating Fannie Mae and Freddie Mac but doing nothing about the incentives and tax breaks that benefit wealthier taxpayers. Is their proposal ethical? Why or why not?
Reference
Econmentor (2014). Role of government in a market economy. Retrieved from
http://www.econmentor.com/microeconomics-hs/role-of-the-government/role-of-government-in-a-market-economy/text/1059.html#Role of government in a market economy. Date Accessed: 29 Nov 2014.
Russell, K., et. al. (n.d.). Ethical Dilemmas in the Financial Industry, Case Study 1
Stiglitz, J.E., Jaramillo-Vallejo, J., and Chal Parl, Y. (1993) The role of the state in financial
markets. World Bank Research Observer, Annual Conference on Development Economics Supplement (1993: 19-61. Retrieved from http://financecottage.com/wp-content/uploads/2013/03/Role-of-Government-in-Financial-Market.pdf. Date Accessed: 29 Nov 2014
LoveToKnow, Corp (1996-2014). Dilemma Examples. Retrieved from
http://examples.yourdictionary.com/ethical-dilemma-examples.html. Date Accessed: 29 Nov 2014
The Economist (Oct 2014). Fannie Mae and Freddie Mac Structurally unsound. Finance and
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http://www.economist.com/news/finance-and-economics/21627699-america-restores-weak-lending-standards-led-housing
