The Financial Crisis 2007: A Technical or Ethical Issue?

CELE Controversy Paper 2013

20 weeks

Business School

PhD in Accounting

Permission given to use this project

Word count: 3541

The Financial Crisis 2007: A Technical or Ethical Issue?

17 June 2013

Abstract

There is a general agreement among researchers that the financial crisis in 2007, which began in the United States, is the most serious and complicated crisis since the Great Depression of the 1930s. On account of that, researchers disagree about what caused this financial crisis. A number of possible causes have been identified by researchers, with particular attention being paid to US banks and their mortgage lending activities e.g. subprime and securitization (technical issues). However, there is much evidence that the Financial Crisis 2007 is a result of unethical behavior which spread throughout the workers in the financial sector in the previous years of the crisis such as greed, selfishness, lack of transparency and responsibility (ethical issues). This paper aims to explore the controversy surrounding the causes of the Financial Crisis 2007 from two aspects, technical and ethical issues, in order to decide on which one of these causative factors has played an important role in the creation of the financial crisis in 2007. The paper concludes that the ethical issues have played a more important role in setting up the Financial Crisis 2007 than the technical issues.

Contents        

Abstract

Introduction        

1. Background        

2. Critical discussion        

2.1 Technical failures in mortgage lending        

2.2 Ethical failures in mortgage lending        

Conclusion        

List of References

Introduction

The term “financial crisis” is a broad concept, in general, it can be described as a limited supply of money and liquidity becomes a problem for all the actors in the market (Pop 2009: 55). The consequences of the financial crises come in many shapes and ways, some of them are associated with banking panics, and recessions coincided with these panics. Other situations that often include crashes after speculative bubbles in the economy (Ibid). In the recent era the economic world has faced a number of recessions and financial crashes (e.g. The Wall Street Crash of 1929; the Mexican collapse of1994; the 1997 Asian financial market crisis). More recently, between 2007 and 2009 the U.S. faced a number of banking failures that led to an extended financial crisis. This crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s (Melvin and Taylor 2009: 1243), and it is also considered as an unmatched in magnitude and its serious implications on the global economy (Furceri and Mourougane 2012: 822). Unlike previous crises, it simultaneously hit the stock market, the housing market, the labor market and the economy as a whole. Lending came to a sudden stop, triggering a severe banking crisis.