Steps a Utilitarian Would Consider Justified to Prevent another 2008-Type Financial Crisis
Financial institutions and accounting professionals have an obligation to perform their respective duties with integrity and diligently. However, it is easy for some individuals to exploit vulnerabilities that present in legal and regulatory frameworks. In addition, others choose to commit unethical accounting practices that lead to significant losses of investor funds and cause dire situations such as the 2008 financial crisis (Greenspan). The perpetrators of the crisis saw an opportunity and exploited it, without considering the potential implications of such actions to the members of society.
In a utilitarian ethics perspective, the actions of financial institutions that caused the crisis were unethical since they sought to benefit a few individuals while subjected the greater percentage of society to economic distress. This paper will evaluate the utilitarian perspective of ethical conduct with of view of potential implications of institutional decisions and actions on the wellbeing of society. Therefore, an emphasis on the assertions of utilitarianism on approaches towards the prevention of a potential financial crisis in future will be integrated in the assessment of institutional ethics and decision making.
The 2008 financial crisis was a consequence of unethical practices on the part of financial institutions that took advantage of regulatory loopholes to exploit the mortgage market (Greenspan). In essence, financial institutions such as investment banks were purchasing mortgages from their respective issuers, restructured the mortgages and sold off particular tranches of the mortgage debt to investors. As time progressed, the number of mortgages to securitize declined. This led to structured product groups in the respective banks to start repacking mortgage-backed securities. Generally, the banks were taking the unsellable mortgage-backed securities repackaging and selling them as new investments in the form of collateralized debt obligations.
Though in a theoretical perspective, the banks action to pool varied mortgages minimized risk and safeguarded assets, the reality was that the mortgages that were securitized were sub-standard and were quoted above their actual market value. Meanwhile, the agencies responsible for rating mortgages failed to do their duty accordingly since they overlooked the real value of the mortgages. Therefore, the collateralized debt obligations and mortgage-backed securities were significantly overrated and overpriced. In essence, these were junk mortgages that demanded payments of the highest rates of interest.
Since investors wanted the low-priced-high-return tranches of mortgage-backed securities, as such, the back continued to perpetuate the scheme. The issued mortgages were amounting to billions issued to an individual whose credit was not verified according to the required standards. As a matter of fact, the interest rates continued to rise gradually to the extent that a number of borrowers could not service their mortgages. When the boom ended, homeowners were unable to service their mortgages or remortgage their homes; consequently, they began to default on their mortgages. Given the high number of mortgage defaulters, investors lost confidence and the banks become exposed to risk of such overpriced securities.
Utilitarian Ethics Application
According to John Stuart Mill and Jeremy Bentham, an action that promotes happiness is right and ethical, however, it the outcomes of an action result in the reverse of happiness then it is unethical (Troyer 93). A similar sentiment is presented by Singer in his assertion that an ethical actions is that whose outcomes benefit people the most and unethical actions are those that cause people harm irrespective of their moral implications (Singer 233). These arguments are applicable to the 2008 financial crisis since the actions of various banks caused a significant number of people across the world to suffer; as such, they were unhappy with the outcomes of the banks actions.
The 2008 financial crisis occurred because a few institutions and individuals with significant influence and ability to determine the future of other people’s lives chose to ignore their professional codes of conduct and ethics in order to make profits (Greenspan). Though institutions were responsible for their collective actions, accounting professionals in their individual capacity are governed by comprehensive professional standards and codes of conduct. These require accountants to act accordingly in adherence to accounting and financial reporting standards. Since the perpetuation of the mortgage schemes involved accountants, it is evident that they failed in executing their professional duties. In fact, accounting ethics is utilitarian since they prescribe on following accounting procedures, rules and regulations with the aim of presenting fair and true accounts. These reports are relied on by various groups and individuals in society such as shareholders, investors, creditors and customers, among others. In a utilitarian perspective adherence to accounting, ethics enables the members of society to have an accurate image of the position and performance of an organization. As such, this information benefits the entire society since people can make decisions according to the information provided.
The accountants in the responsible financial institutions behaved unethically since they contributed towards the perpetration of a financial scheme that they knew would cause a significant percentage of people to suffer as a result of losing their homes and investments. In Singer’s perspective of utilitarianism, actions should be judged as wrong or right on the basis of their consequences or outcomes and not moral significance (Singer 233). Since accounting ethics are premised on reflecting accuracy, truthfulness and reliability of financial statements, the moral basis of accounting decisions may have been premised on a desire to make more people own homes. However, the morality of decisions made by accountants to perpetuate the banks schemes led to adverse outcomes not only for the homeowners but for the entire world.
However, though Singer’s assertion that utilitarianism should assess ethical conduct on the basis of an action’s outcomes, it presents various reliability issues as the primary approach in decision making. Utilitarianism presents a problem because its precepts require assigning values to the outcomes derived from actions (Valesquez, Andre, Shanks, and Meyer). Evidently, it is not possible to assign defined values to harms or benefits derived from a certain action. Therefore, the assertion that utility is measureable is unrealizable (Valesquez, Andre, Shanks, and Meyer); furthermore, it is difficult to implement the precepts of utilitarianism in order to save more people and sacrifice a person who may be close to you. In addition, the practical application of utilitarianism is difficult since it asserts that utility must be maximized for the highest number of people. Essentially, it is difficult to measure utility and the effects it has on different people in order to determine maximization (Valesquez, Andre, Shanks, and Meyer).
The utilitarian solution to the accountants’ failure to adhere to professional ethics through their inability to report accounting malpractices and fraudulent representation of financial statements entails the implementation of comprehensive regulatory frameworks. These include regular internal controls and external audit reports with the objective of ensuring that accounting professionals and managers in financial institutions do not engage in unethical accounting practices. It is evident that the 2008 financial crisis involved a few number of people; however, the implications of their actions were detrimental to the society on a global scale. A utilitarian decision and action would have ensured that the action taken by financial institutions benefited the entire world.
A utilitarian perspective towards the issues is premised on a comprehensive evaluation of current circumstances. Basically, decision making follows a systematic process where the morally correct decision is selected for a given situation. In the case of an impending financial crisis, a utilitarian would evaluate the available courses of action that he or she can perform considering the foreseeable benefits of each identified option including potential risks or harm to the society. After this consideration, a utilitarian would choose the option that has optimal benefits after considering the implications of each action. In the case of the financial institutions and agencies that benefited from the 2008 financial crisis, it is evident that they were driven by self-interests and were not concerned with the well-being of the mortgage holders after the crisis became full-blown.
The banks perpetuated self-interest through writing bad loans with the aim of making money off such bad loans on the premise that the device financial instruments were capable of spreading risk. In essence, banks were exposed to the risk to the extent that governments had to intervene in order to save the world’s economies. However, these governments can prevent such occurrences that might jeopardize the global economy and with it, the livelihoods of billions of people. The acceptable utilitarian strategy would be to ensure that banks to not perpetuate self-interest through the creation of potentially irregular securities. Thus, the governments must act ethically through enforcement of comprehensive policies, laws and rules that will ensure that banks act ethically. The concepts of utility place the government in a position to implement strategies that identify the various ways that a potential financial crisis in the future can be averted. In such a way, the government develops policies that identify the various ways that a crisis can be averted, the benefits versus costs of each identified course of action.
Among the acceptable strategies in the prevention of another 2008 financial crisis, there is the imposition of government regulation in the finance sector. Since utilitarian ethics is premised on safeguarding the masses, government regulation will have a significant impact on that end. The government will ensure that banks are not free to act as they wish, without considering the long-term implications of their actions on society. According to Singer, it is significantly difficult to live an ethical life given the various definitions of ethics presented depending on the context (Singer 235). However, he argues that the concepts of utilitarianism are applicable to any situation; therefore, there is no reason people cannot act ethically.
Singer presents a scenario querying the application of ethics and morality. In the example of Bob and Bugatti, singer asks whether it is unethical for a rich man to save his car instead of saving a child that he is not familiar with from a train. The case is applicable to the financial sector since the banks chose to repackage worthless mortgages and resell them to investors at higher rates. The banks’ actions are similar to Bob’s actions since they both decided to save something that would bring value to them instead of acting in a way that would cause them to suffer financial loss. Though each would make a justifiable claim that their respective actions are aimed at saving their futures, it is evident that the alternative would have derived more utility to a higher number of people.
In essence, Singer questions whether it matters that there are many individuals in need of help such as the malnourished in the world and the mortgage holders who had to lose their homes because of the banks actions. Therefore, this situation is preventable if institutions such as banks cared more about the welfare of their customers and investors instead of focusing on selfish pursuits.
The repealing of a section of the Glass-Steagall Act of 1993 that created a separation between investment banking and commercial banking and insurance was among the loopholes in financial regulations that enabled banks to exploit their customers and crash the economy (Rickards). The utilitarian would agree that any action that any law that allowed a few institutions to exploit the society must be removed since they can only cause harm to others. In this case, utilitarianism would agree with the reinstatement of the repealed section. This would prevent collusion and misconduct between commercial banks and investment banks. Thus, repealing this law would ensure that another 2008 financial crisis does not occur.
In addition, after the reinstatement of the repealed section of the law, investment banks should not be allowed to trade their stocks publicly. This happens because investment banks carry significant risks that are shifted around; therefore, in the event that such companies are listed, stockholders would be vulnerable to lose their investments. In this case, the utilitarian must enquire on what impacts a certain decision, whether it will result in positive outcomes or adverse outcomes. Therefore, though the action may not be considered as moral, the fact such an immoral action would lead to significant benefits to the highest number of people in society is justifiable. In such a way, though government rules, regulations and laws may be perceived as immoral to some extent, they are a necessary evil that will significantly contribute towards saving the investments of billions of people across the world. Hence, Singer’s assertion that actions should be judged as wrong or right based on their outcomes and impacts on society (Singer 233).
In a utilitarian ethics perspective, the actions of financial institutions that caused the 2008 crisis were unethical since they sought to benefit a few individuals while subjected the greater percentage of society to financial distress. Another 2008 financial crisis can be prevented only if ethics are integrated into policy development and decision making in financial institutions. The utilitarian ethics can only agree with those measures that can benefit the highest number of people in society at the lowest cost possible.
- Greenspan, Alan. How to avoid another global financial crisis. American Enterprise Institute, 6 march 2014. Web. 29 November 2014. < http://www.aei.org/publication/how-to-avoid-another-global-financial-crisis/>
- Rickards, James. Repeal of Glass-Steagall caused the financial crisis. U.S. News, 27 August 2012. Web. 2 December 2014. < http://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/27/repeal-of-glass-steagall-caused-the-financial-crisis>
- Singer, Peter. Famine, affluence and morality. Philosophy and Public Affairs, 1.3 (1972): 229-243. Print.
- Troyer, John. Ed. The classical Utilitarians: Benthan and Mill. Indianapolis: Hackett Publishing Company, 2003. Print.
- Valesquez, Manuel, Claire Andre, Thomas Shanks, S.J., and Michael J. Meyer. Calculating consequences: The utilitarian approach to ethics. Santa Clara University, August 2014. Web. 2 November 2014. < http://www.scu.edu/ethics/practicing/decision/calculating/>