The Financial Crisis of 2008 that engulfed United States of America and later spread out to the rest of the world was a sure show of negligence and lack of moral responsibility within the corporate world. Amid the presence of the crisis, top corporate executives took home large amounts of money as payoffs for their services, an action that was unwarranted. In essence, it was an indication of greed and lack of social responsibilities within the business world, which is merely driven by the need to make huge supernormal profits. The derivatives markets were one of the reasons behind the near collapse of a global economy. According to the social theory curtailing moral obligation and responsibility of individuals (in this case financial institutions), the financial decisions typifying the crisis are unacceptable given the inherent greed.
Social contract perspective
Social contract places the acts in the financial markets as the responsibility of the government, which is charged with the regulations, and control of all economic activities within an economy, which it failed due to ignorance or vested interest by individuals within the government. The unquestionable rating practices were plagued by fraud because they led the new investors into falsely believing that the investments were free from any risks whatsoever. In addition, the lenders were also prompted to give out mortgages without any regard for the risks involved because the mortgages were stacked together to disguise the presence of any material risks in these investments. The lenders favored the high interest borrowers because the risks were disguised in the large investments, which were packed together into one investment. The events were catastrophic because a majority of the individuals involved in the purchase of the said investments ere people who had invested their life savings within these mortgages, which had the assurance mark of return such as the AAA rating identical to those issued in the purchase of government bonds. From a social contract perspective the society exists in the presence of liberalism where people are equal in the eyes of the government hence they should receive equal treatment form the government and its agencies. However, this is not true in the American society as people who have aided in robbing the needy through bogus entities driven by greed and the need to make profits remain in public light without prosecution. The government put pressure on the organizations, which were in the real estate market to provide poor people with housing opportunities. In addition, this was further made possible by the government with specific reference to the Clinton administration, which instigated the acts of forcing banks to give people mortgages at relatively low rates. In addition, senate democrats insisted that the Fannie Mae and Freddie Mac were to purchase more of these loans to enable poor people to access the housing market and own homes.
The increase in home loans was albeit suspicious despite claims by companies like the Fannie Mae Corporation that, “In a move that could help increase homeownership rates among minorities and low income consumers, the Fannie Mae Corp. is easing the credit requirements on loans that it will purchase from banks and other lenders.” (Davis, 2008). This brings to question how the banks allowed for relaxation of the lending policies within a volatile real estate market. Hence it is sufficient to state that the laws of lending to people were not adhered to the latter, and there is a high possibility that there was an ‘inside job’ to allow these huge corporations to make such undertakings without providing the necessary security to the new home owners and more so the banks.
From a social contract perspective the society exists in the presence of liberalism where people are equal in the eyes of the government hence they should receive equal treatment form the government and its agencies. However, this is not true in the American society as people who have aided in robbing the needy through bogus entities driven by greed and the need to make profits remain in public light without prosecution. The government put pressure on the organizations, which were in the real estate market to provide poor people with housing opportunities. In addition, this was further made possible by the government with specific reference to the Clinton administration, which instigated the acts of forcing banks to give people mortgages at relatively low rates. In addition, senate democrats insisted that the Fannie Mae and Freddie Mac were to purchase more of these loans to enable poor people to access the housing market and own homes. This was made possible because the securities issued by these entities were backed and owned partially by the government. This was further fueled by the resale of these mortgages to the investment banks, which were solely responsible for bungling these investments and selling them to people from all over the world on claims that the said investments were risk free. The Federal Reserve had a part to play because they enhanced the sale of these investments by providing a good climate with low rates of return. The low rates provide the perfect opportunity for these entities to increase the prices of these mortgage investments, which had turned out as a lucrative market.
The high prices and increased sales created a ‘real estate bubble’ which eventually burst leading to the loss of numerous jobs and crumbling of entities and the near collapse of the American economy and more so the financial markets around the world which were dictated by the events within the real estate. This goes on to show the relevance of responsibility and ethical practice within the corporate world. If such had been adhered to, there would have been no real estate bubbles or loss of large investments of over nearly $20 trillion dollars (Davis, 2008). This resulted in people being unable to repay these high-risk mortgage loans as majority had other loans to pay. In essence, it was the collapse of a large real estate market whose growth could not be sustained. This was all but a capitalist approach in efforts to enable all people access to adequate and cheap housing whereas the ‘unseen hands’ controlling the undertakings to reap the numerous profits which characterized the stock exchange market.
Politics had a major role in the near collapse of the American economy as well as the financial markets. There was politicking as to which camp, either democrat or the republicans who had the greatest bearing on the events. In the world of business, the government has the obligation and the ability of protecting people from fraudulent activities. The real estate menace, which the American economy is still reeling from its effects, was the worst in history since the Great Depression. The ‘unseen hand’ in social responsibility should ensure that the rights of the people are respected and guarded with utmost pride (Krugman, 2009). In addition, the ‘unseen hand’ should also regulate the markets for the overall welfare of all without regard for a specific class of people. However, the Federal Reserve on its part failed because it did not ensure that the market was regulate but instead was reluctant to cap the rapid growth of the real estate and ownerships markets. It should have been one of its primary aims to ensure that the markets were not plagued by rapid rises or a ‘bubble’, which had the potency of ‘blowing up’ (McLean, & Nocera, 2010). In addition, the senate should also have made efforts to ensure that the mortgage market was adhering to the stringent credit laws and regulations within the lending markets. This would have decelerated the rate at which the purchase and uptake of the mortgages was heading at, leading to the collapse of the real estate market.
The Fannie Mae and Freddie Mac did not have any moral inclination because they were driven by the mere need to make quick and supernormal profits. In addition, banks like Lehman’s Brothers and Goldman Sachs, which were considered too large to fail, collapsed because they had given out unsecured debts. The risk involved in such investments was high; hence, it was questionable as to how issue of the said mortgages was arrived at without the necessary intervention from the relevant authorities. These entities operated with utmost disregard for the owners or shareholders’ funds, and they proceeded to give unsecured and risk mortgages to the public via the unscrupulous entities Fannie Mae and Freddie Mac, which enabled people to access these risky loans, which were eventually defaulted as things became expensive and people were unable to repay the loans.
The bailouts for the large banks and organizations, which were on the verge of collapse, were due to repay for the defaulted loan repayments by the people who could not afford payments at the high interest rates. On the other hand, justice seems inevitable because the culprits who disregarded the credit laws in order to reap form the large numbers of people who were desperate to won homes have never been fully investigated or prosecuted. This is a clear indication of the phrase justice delayed is justice denied. Distributive justice according to Nozick ensures that there is fairness irrespective of the political or racial grouping, equality among all people and that people get what they rightfully deserve in terms of justice. Thus, those who lost all their life savings should be refunded and an additional sum for the inconveniences caused due to the loss of their funds. Moreover, those who were responsible should be held solely responsible and prosecuted for the crimes of fraudulent and unscrupulous conduct to make profits from innocent people in America.
The idea to provide people with affordable housing was noble in itself but this became a game for banks and the real estate brokers. They were driven by the mere need to make profits and not to enable people get their houses. It is uncommon or impossible to have banks lending out money for mortgages based on unsecured loans. This is both immoral as it exposes the shareholders’ funds to the risk of default and eventual loss of their funds.
Justice is not administered selectively. Thus, the government should be quick on its promises to give people justice and those responsible for the near collapse of the American economy prosecuted because if not prosecuted there might be a likelihood of repetition of similar events. Some entities like Goldman Sachs and subprime lenders like Countrywide were responsible for bringing on board people with inadequate or no means at all to service any kind of loan to the mortgages. The need was to make profits and claim as many people to access mortgage for higher returns (Davis, 2008).
Social contract theory states that the individual and political morals lie with the agreements with the society upon which the society is to be formed and governed. The American politicians and more so the government agreed to uphold and protect the people and more soothe law of the United States. It is evident that the government failed in its role of protecting the people from the greed of the banks and the real estate brokers. The public was shortchanged as they were again subjected to pay for bailing out these entities, which were on the verge of collapse.
However, this was not the case as the mortgages for the poor families proved to be expensive and unbearable for these families leading to very numerous cases of mortgage defaults in the vent of failure to pay. The devastation caused by such acts led to the destruction of lives of many workers who were unable to sustain the payments and those who were laid off by their organizations, which were on the brink of collapse. The government however failed in its role of protecting the public form the mouth of the greedy and fraudulent firms, which sought to make supernormal profits, ate the cost of people’s life savings and jobs. This is indication of an inside job because such events could not have happened under the clear watch of the regulators and more so the government.
Davis, J. F. (October 14, 2008). The Cause of the 2008 Financial Crisis. Retrieved form http://www.aim.org/guest-column/the-cause-of-the-2008-financial-crisis/ on 28 May 2012
Ferguson, C., Marrs, A., Beck, C., Bolt, A., Damon, M., Volcker, P. A., Soros, G., Sony Pictures Home Entertainment. (2011). Inside job. Culver City, Calif: Sony Pictures Home Entertainment.
Krugman, P. R. (2009). The return of depression economics and the crisis of 2008. New York: W.W. Norton.
McLean, B., & Nocera, J. (2010). All the devils are here: The hidden history of the financial crisis. New York: Portfolio/Penguin.