by Kodjo Adadevoh

Created on: December 08, 2008   Last Updated: January 22, 2009

A lack of business ethics on the part of corporate leaders, clearly contributed in some way to the current demise of the financial sector in particular and the larger economy in general. However, a lack of ethics is but one factor in a myriad of factors that contributed to the current crisis and I would argue that ethics were by no means the most significant contributing factor to the current debacle.

Attributing the current crisis solely to a lack of business ethics is equivalent to the assumption that the private sector and specifically, Wall Street is capable of self-regulation. Ethics do not exist in a vacuum; even in a very sophisticated economy such as the U.S, rules and regulations are necessary to ensure that consumers are protected and corporations abide by the laws of the land. The existence of asymmetry with respect to information and the presence of uncontrolled greed eventually lead to economic decline if not control.

Corporate greed is perhaps one of the most significant causes of the current economic crisis and was the key ingredient or fuel that flamed the fire. However, as we examine the root causes for the current downturn we cannot loose site of the very cheap money that was made available by the central banks for a very long time. We also cannot loose site of the very lax mortgage lending standards and the associated instruments that were created to continue to fuel the growth in the real estate market.

Low interest rates on borrowed money makes it easy for people to gain access to loans easily and as a result creates an incentive for people to borrow more than they may otherwise be borrowing. Secondly, the various banks and investment houses devised clever ways of luring in new investors by bundling both residential and commercial mortgages into instruments that could be purchased by institutions and governments. Governments of the developed world, including Europe and Asia saw these instruments as opportunities to invest their surpluses in the real estate of the most powerful country in the world, the United States of America.

So what went wrong? Well, the fact of the matter is, there really weren't enough good loans to satisfy the ever increasing demand for these new investment vehicles, as a consequence, the mortgage companies and their underwriters decided to lower the standards for issuing mortgages and this ushered in the era of no down payments for mortgages, interest free mortgages and various other variations from the standard mortgage.

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