- In what ways did the video “The Crisis of Credit” demonstrate the failure of the banking industry’s Fiduciary Relationship to investors and home owners?
The video explains a worldwide financial disaster that effected everyone. It started on the burst of the dot com bubble when the federal reserve of the United States decreased the interest rate to 1%. This value dramatically dropped the investment level because of the reduced ROI. This action made banks to take more and more loans from the Federal Reserve. The leverage increased as it became very easy to return a loan, so the demand for credit increased rapidly.
The banks took a lot of credit, and they were easily able to payback and made a lot of profits. Investors saw this as an opportunity, and they start to look for their piece of the pie in this financial party. The banks came up with an idea to connect homeowners with the investors through mortgage. In simple terms when a family is looking for a house they go to a mortgage broker. The mortgage broker takes a down payment from them and leads them to the lender who gives them a mortgage (A loan with interest to buy a house). The mortgage broker gets his commission, and the family gets a house. In all this process, the family’s income and financial strength is taken into consideration to ensure their eligibility for the mortgage.
In order to take advantage of the credit situation, the mortgage lenders and investment banks come up on a deal. The investment bankers buy the mortgages and borrows large sums of money and buy many more mortgages. A typical investment banker combines all the mortgages and the ongoing monthly payments and creates a deposit. The deposit is divided into three separate financial entities are rated as AAA, BBB and “unrated” categories by rating agencies. The AAA rating is the safest but has a lowest Return on Investment (ROI). It is offered to investors who want to keep their investment at low risk. A portion of the deposit that is rated as BBB has risk higher than AAA but carries a higher ROI. The bottom portion of the deposit is usually unrated. The investors who want safe investment get the AAA rated portion and BBB rating is given to the investor who want a higher ROI that comes with a higher Risk. The investment bank makes a huge profit and pays off the loans.
This product that is created by the investment banks to attract investors is called CDO (Collateral Debt Obligation). When everything goes well the demand for CDOs dramatically rises. To keep up with the supply the investment bankers push for more mortgages from the mortgage lender while the market for mortgages has dried up and this is where the problem starts. In order to get more mortgages the mortgage lenders relax the conditions and the risk factor increases. The mortgage lenders softens certain very important conditions such as no down payment, no proof of income and no such documents. It makes the people who are not financially capable of even qualifying for mortgage to get into the funnel and things started to go worse. These mortgages are called subprime mortgages. The same aforementioned cycle begins with a difference. Most of the subprime mortgage started to go default, and the houses was put on sale and soon there were more houses on supply than there was demand in the market. The prices of houses started to plummet, and most of the house owners started to wonder that why they should pay more for a house when they could find an identical house at a lot less price.
When this happens the investment bankers CDO’s demand drops and no one want to buy from the CDO offered by investment bankers. The investment bankers have taken millions and sometimes billions of dollars in loan which they cannot pay back. The investors have also bought thousands of these defaulting mortgages. The investment banker denies the mortgage lender also from selling to the mortgage brokers are laid off. The whole financial system comes to a halt.
The following two points are prominent in the failure of the banking industry’s Fiduciary Relationship to investors and home owners.
(The Crisis Of Credit Visualized)
(a).The improper and lose conditions for offering subprime mortgages was the biggest mistakes.
(b)The greed and taking excessive credit also contributes to the financial crisis.
- .When University professors permit cheating and inflate grades, how are they failing in their Agency Relationship to their institution? What is the impact of these actions upon the organizational ethical climate, justice and harms done?
When a University professor is working for an academic institution, he is selling his skills to the institution in return of pay and privilege. He is acting as an “agent”, and the academic institution is the “principal.” The agent behaves on behalf of the principal, and he is obliged to be loyal to the principal. He is expected to carry out and execute the instructions from the principal. The agent is expected to perform his tasks with responsibility and without any margin of negligence. The agent is also not allowed to take any personal advantage. The agent and the principal relationship is based on trust and confidence by nature, this type of relationship is called fiduciary relationship. When a professor is allowing students to cheat to inflate grades, he is jeopardizing the fiduciary relationship that exist between him and the academic institution and portraying his irresponsibility for a personal gain (Ruf.rice.edu).
Organizations including academic institutions are becoming more and more concerned with the ethical wellbeing. A professor who is violating the ethical is jeopardizing his honor, privileges and respect by killing his fairness, equity and honesty. These actions can weaken or destroy the competitive strength of the academic institution. In many cases the proper functioning or even survival of the academic institution depends upon ethical values (‘EFFECTS OF ETHICAL BEHAVIOUR ON ORGANIZATIONAL PERFORMANCE: EVIDENCE FROM THREE SERVICE ORGANIZATIONS IN LAGOS, NIGERIA’). If the students are allowed to cheat in the presence of the professor, it is completely unjust for students who have worked hard and are competitive in their academic endeavors.
- According to Kohlberg’s six stages of moral development, what level of moral development are students demonstrating when they cheat or assist others in cheating? How is the professor failing their Profession, when they do not take action against academic misconduct?
At level 2 of the Kohlberg’s six stages of moral development, students realize that others have goals and preferences, so they either conforms to them or deviate from the norm. Those who conforms to the norm are less likely to cheat. Those students who deviate from the norm are more likely to cheat. At level 3 the student sees from a social relationship perspective, and they recognize good or bad intentions. At level three, the students may help each other’s to cheat. (Education.com)
Professors have an obligation not only on professional grounds but also on ethical and moral grounds to prevent cheating unless if it is an open book exam and the professor has confidence in the students that they will academically benefit with information in front of them.
- Reflecting upon the two videos, “The Crisis of Credit,” and “Subprime Mortgage Crisis”, how would the bankers use Utilitarianism to ethically justify their actions while the economy was growing during the “Housing Bubble”?
Ethics and social responsibility are under great debate in corporate America. The damage done by the Housing bubble came in the process of alleviation when the Federal Reserve and other institution intervened in the situation. The problem started when the subprime mortgages were issued to families who had bad credit history, no proof of income and no security, etc. The bankers can ethically justify this claim that the people who need their own home has the right to get one, and the bank is providing them the opportunity to do so.
- What specific problem is posed to Utilitarianism from the credit and mortgage crisis that resulted in the global economic recession/depression?
The problem was the issue of subprime mortgages on very lose conditions because of which everyone who did not have the financial ability to payback his mortgage wanted to have his own house. These bank policies also dried up the houses in the market; there were no more houses on sale. When the subprime mortgage holders could not payback their mortgage, they became defaulters. The price of houses started to fall, and the people who already paying were off their mortgage found that they have to pay more, because the prices of houses started to fall. So the interest in the mortgage deals was lost, and soon there were more houses and prices that fell further and the situation got worse.
- What would an Act utilitarian and a Rule utilitarian say differently when evaluating the case of banking industry practices?
The “Act Utilitarian Theory” and the “Rule Utilitarian Theory” both have its applications on the banking sector.
Act Utilitarian says. The act utilitarian says that an action is right when it unfolds to benefit the greatest number people in terms of the greatest number of goods. When this theory is applied on the banking industry it tells us that entrepreneurs taking loans and successfully return them, they are providing happiness to a greater number of people in the form of jobs, better living standards and a healthy economy even if the society has to sacrifice the finance of small number of people who default or go bankrupt.
Rule Utilitarian says. The rule utilitarian focus on rules that bring the best. It is argued as the rule to pay big bonuses has pleasant effects on the financial conditions of the people and bring more happiness to the society. (Good Explanation Of The Subprime Mortgage Crisis)
- According to Kant’s ethical reasoning, why is neo-classical contemporary Capitalism failing to create a moral social economy? Analyze the video “The Crisis of Capitalism,” using the key features of Kant’s theory.
Kant believed that if we rationalized out ethics we can act better. When dilemma is faced by us, we should ask ourselves is the action good for everyone?
The capitalism is a system that is plagued with greed for wealth, predatory instincts, Instincts of mastery and many sorts of ethical defects. It is happening because the capitalists are exploiting the working class and disregarding an ethical rule that you should not do anything to someone that you do not want to be happened to you. (RSA Animate – Crises Of Capitalism)
- According to the video “Crisis of Capitalism,” are capitalists ethically virtuous? Why or Why not? What are the attractive features of Virtue ethics and what are its limitations in business decision making?
No, according to the video ”Crisis of Capitalism” the capitalists are not ethically virtuous. The reason is the overwhelming power of capitalism. A capitalist gains immense wealth and power in a very short span, this makes him arrogant and proud and surrenders his soul to greed and develops habits that are not ethically virtuous. Plato indicated four features of virtue ethics, wisdom, courage, temperance and justice (Cline). The following features of virtue ethics are also mentionable,
Benevolence, compassion, courtesy, dependability, friendliness, honesty, loyalty, moderation, self-control, toleration, etc.
The Ethics of virtue has the following limitations in business decision making.
- The Ethics of virtue cannot tell us about many aspects of human beings such as rights and obligations therefore as a theory of ethics it does not serve well for decision making to separate the right and the wrong.
- It does not tell us to cultivate those virtues that will make a successful businessman. It also does not give us the preference of the ideals. (Slideshare.net)
- Given the video “Monkey’s Moral Outrage” depiction of rights and justice amongst animals, what moral reasoning could people in business justify for behaving unfairly and what can be done to support a morally just economy?
Moral reasoning is the process in which a competitive entity such as a human being or more specifically a management executive, for instance, is judged by a certain moral standard. Moral reasoning has two main components (1) Understanding of moral standards (2) Evidence that proves that the entity can adhere to the moral standards.
To justify and evaluate the moral reasoning the following three criteria are employed.
- Moral reasoning should be based on logic
- Evidence should be based on facts and should be complete, relevant and accurate
- Consistent moral standards should be implemented
Morally Just economy. Morally just economics or moral economies can be sustained in many ways.
A moral economy always discourages the monopoly of a single organization and motivate competition. This pro-competitive and anti-monopoly rule has to be there.
Moral economies are always proactive and should be able to protect the poor people when actions are taken to create policies, laws and theory implementation of any sort.
The creation of a moral economy requires great diplomacy when the welfare of poor people becomes a concern for political leaders.
Moral economy should be able to accommodate the moral duties toward the Environment. Policy making and legislation with implementation should be executed.
The moral economy always provides its people the opportunity to gain moral and spiritual education and enlightenment. (Mkeever.com)
- While most of Walmart’s business practices are currently legal, in what ways has the company violated the rights of its employees and been morally unjust to society?
Walmart offers very low prices for her customers. These competitive prices are made possible by cutting the wages and denying benefits to her employees. Early in around the mid of January 2014 Wallmart illegally fired and disciplined 60 employees because they were protesting against low wages and unpleasant working conditions in many states throughout the US. Walmart was making great profits from low prices but at the same time the labor force that was working at Walmart was denied of rightful wages and better working conditions. The rights of employees were also violated when they legally held protests under the “National Labor Relations Act.”
- In what ways is the Capitalist free market an inherently unethical economic system that opposes the values of the Happy Planet Index?
Capitalist free market is a system in which the prices are not regulated by government or any other body rather the prices of goods and services are determined by market forces of supply and demand. The capitalist economies provide opportunity and employment to individuals. Capitalism also allows entrepreneurs to go into ventures and create, develop and maintain goods and services that benefit the society in many ways. Capitalism is partially blamed for exploitation of earthly resources on humongous scale that is robbing the planet of its resources and adding pollution in different forms to the planet. The advents, discoveries and development in environmental sciences have led many think tanks to a whole different approach. There is a rising awareness at a global scale to protect the planet from the destructive effects of greed. The Capitalistic economies are also aiding in this shift and more and more money is being poured into research and development to improve the condition of the planet. Companies are using their “Green” products and services to promote themselves and there is a huge effort and willingness to save the planet. Capitalism had been the greatest culprit in ruining the Planet and inflating the Happy Planet Index (HPI). Happy Planet Index of a country collectively measures the happy and healthy lives of a country on the planet. It does seem at a glance, that capitalism is affiliated with HPI. It is arguable that the capitalist countries have the most resources to come out of this problem and help other less resourceful countries to better manage their environmental conditions.
- In what ways can Capitalism best serve us to achieve the goals set by the Happy Planet Index?
Capitalist economies usually are abundant in wealth. They also have other resources such as environmental products and services, technology, professionals and scholars, etc. These resources can be mobilized and directed towards the improvement of the environment and the welfare of people with emerging and poor economies. The results of these actions may not be immediate but in the long run it will be paramount in achieving the goals set by the Happy Planet index.
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Good Explanation Of The Subprime Mortgage Crisis. https://www.youtube.com/watch?v=-vboCTGpI8Y: N. p., 2012. video.
RSA Animate – Crises Of Capitalism. https://www.youtube.com/watch?v=qOP2V_np2c0: The RSA, 2010. video.
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Cline, Austin. ‘What Are Virtue Ethics?’. About.com Agnosticism / Atheism. N. p., 2014. Web. 12 Jun. 2014.
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Frans De Waal: Moral Behavior In Animals. https://www.youtube.com/watch?v=GcJxRqTs5nk: TED, 2012. video.
The Crisis Of Credit Visualized. https://www.youtube.com/watch?v=bx_LWm6_6tA: Jonathan Jarvis, 2011. video.