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Was The Credit Crunch Caused By Irresponsible and Greedy Behavior? Essay Sample

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Was The Credit Crunch Caused By Irresponsible and Greedy Behavior? Essay Sample

Introduction

Corporate social responsibility is a new trend that is emerging in the business world since 1980s. Corporate Social Responsibility entails the obligation that an organization has towards different stakeholders including employees, shareholders, environment, customers, and other people who are in contact with the organization.  CSR is seen as a framework under which an organization can meets its moral obligation and ensure ethical practices in its operation. CSR and ethics are important in business operation since they avert situations where organizations use their position to exploit stakeholders driven by profit motives. While it appeared incidence like Enron scandal had taught the world the important of CSR and ethics in organizational practices, the current credit crunch crisis illustrate the opposite.  If we had practiced CRS and ethics, the world could not be in the current credit crunch crisis.

Among the many reasons that have been speculated as the main factors leading credit crunch, the role of financial institutions and individuals wielding power in those financial institutions cannot be ignored. Different reports and review shows that unethical practices like risk lending behavior and greedy in the financial institutions was the main reason behind the current crisis. Different banks in the U.S and the U.K like the Northern Rock can be used to illustrate the role that financial institutions have played in advent and aggravation of the credit crunch. The main factors that contributed to the current crisis revolve around lending regulations in the financial institution. The greed to acquire more and irresponsibility in assessing the credit worth of their customers eventually drove these financial institutions into a credit crisis. Had there been ethical practices in the financial institutions, the current crisis would have been averted. This paper will trace the genesis of the credit crunch. The paper will specifically look at unethical practices and the role they played in advent and aggravation of the crisis.

Corporate social responsibility and ethics in business

For many organizations, business ethics has been interpreted in terms of compliance with the legal standards of operation including the internal rules and regulations. However, this has completely changed with the emergence of the corporate social responsibility concept.  There is a growing attention to ethical practices in business among organizations with realization that for business to succeed, it has to do more than just making profits.  Organizations have realized the importance of improving business practices not only in legal and ethical behavior but also in responding to environmental demand (Grace 2005, p. 310).  The increased consumer rights awareness has seen the consumer demand more accountability from business organization hence the increased demand for corporate social responsibility.

Corporate social responsibility which is also referred to as corporate citizenship is a way of corporate self regulation which is integrated in the overall business strategy.  It is seen as an internal mechanism through which an organization conforms to law, ethical standards the norms in business practices.  Through corporate social responsibility, businesses are taking obligation for the impact of their operation of the environment, customers, shareholders, surrounding communities, and the public in general.  It encompasses different strategies that an organization uses to include public interest in its decision making and operation model (Wood 1991, p. 49). CSR has been described in triple bottom line including people, plant, and profit, which means people comes first, environment second, and profit comes last.

Corporate social responsibility and business ethics are the same since they are implemented within the same framework.  However, CSR is one aspect of the wider business ethics framework. CSR helps business to fulfill their ethical practices in the society particular in reference to the mitigation of effects of business on the natural environment (Wood 1991, p. 62). Business ethics encompass applied ethics which looks into the ethical principles and the moral problems that may arise from business operation.  Business ethics is a much wider field that looks which can be grouped into different categories including accounting ethics, human resource management ethics, sales and marketing ethics, production ethics, intellectual property ethics, and many other categories.

There are different areas in which business today are engaging in CSR activities.  In most cases, companies are engaging in CSR activities which are specific to their areas of operation in which case CSR fosters close interaction with the community and hence becomes a part of the business marketing strategy.  For example British Petroleum (BP) has engaged in a number of activities which are aimed at mitigating the environmental impact of their operation. The company has undertaken several projects especially in North African where it has been mining oil to protect the environment.  Other companies like TATA group of India have embarked on massive education funding program for girls.  One of the key aspects in the implementation of CSR programs is that companies engage in activities that their customers can closely engage in. Apart from response to the environment and the surrounding communities, companies are also implementing programs which ensure their obligation towards the shareholders including opening in corporate government and timely delivery of corporate report (Wood 1991, p. 47).

Corporate social responsibility and ethics are therefore important in ensuring that companies are open to the public and they meet their moral obligation towards various stakeholders in their operation.  Although CSR and ethics has become modern yardstick for sound operation of business, the current credit crunch clearly demonstrate how this idea may be a far fetched dream.  Let us review the current credit crunch and how lack of CSR and ethics has contributed to irresponsible and greedy behavior contributed to the credit crunch.

Irresponsible and greed behavior in the current crisis

CSR and business ethics encompass the framework under which business meet their moral obligation. However, we seem not to have learned from the scandals like Enron and others and in the last three years, our financial institutions have created yet another scandal of subprime mortgages that has precipitated to the current credit crunch. Turner (2008, p. 90) describes credit crunch as a reduction in the availability of loans and credit. It can also be understood in terms of tightened conditions for obtaining loans from the lending institutions.  It is generally marked by reduced credit for lending which his independent of rise of the interest rates.  In most instances, a credit crunch is tied to tendency by lending institutions to invest in less risky areas (CentreRight, 2008; Birger, 2008). This is accomplished at the expense of the medium size enterprises which are the backbone of many economies.

Based on the experience from the past credit crunches, it has been observed that   credit crunch mostly result from a sustained period that is marked by careless inappropriate lending practices (Gross, 2008). This result of massive losses in the financial institutions and debts degenerate to bad debts. This further reduces the amount available to lend to other borrowers and consequently increase in the cost of accessing loans through increased interest rates (Budworth, 2008).  In the deteriorating situation, the rate of defaulting may increase and the financial institution becomes unable to lend due to accumulated losses. Credit crunch also results from reduction in value of assets that have been previously over inflated.  Therefore, it may be used to refer to the financial crisis that results due to collapse of price of assets (Robin 2008, p. 38; Rowbotham1998, p. 5).  This leads to foreclosure and bankruptcy for investors who entered the market rate and consequently defaulting of loans.   These are the main factors behind the current credit crunch.

Many analysts of the current credit crunch have heaved blame on one side alone while there have been many players in the credit crunch saga (Steverman 2008, p, 81). While financial institution may be blamed for crisis, Americans and the United States government ought to assume a share of liability for the credit crisis. One of the problems that can be identified from the above is that there was full practice of American capitalism (Muolo and Padilla 2008, p. 63). More than ever, Americans were driven by the greed to own more and more houses despite being unable to finance the ownership. Americans engaged in an irresponsible and greedy consumption which led to increased debt-financed consumption (Stan, 2009, p. 3). Although the government intended to increase the well being of Americans, the call for increased consumption was ill advised since it was not backed up by regulations in the financial institution. With easy access to credits, Americans were drowned in irresponsible consumption behaviors (Lasch 2008, p, 4).

Apart from the consumers, the financial institutions engaged in the most irresponsible and greedy behavior (Timesonline, 2009).  In the years preceding the credit crisis, financial institutions had changed their lending behavior drastically.  In America, the repeal of the Glass-Steagall Act had opened new unregulated lending frontiers and financial institutions moved to exploit it (The First Group, 2009). Initially, financial institutions enticed borrowers through the adjustable rate mortgages in which lenders repaid their loan below the average market prices for a specified period of time and later repaying according to the market prices (Timesonline, 2008; Bernanke 2008, p, 30).  This meant that buyers who could not repay their mortgages at once h ad time to recognize their payment period.  Although this looked enticing to consumers, it also led to high profits for the financial institutions and as a result, banks offered more loans to consumers (Caine, 2007). High profits lend to engage in unethical lending by banks where even illegal immigrants were given loans which is a clear indication of poor underwriting practices.

Another unethical and greedy behavior by the financial institutions was development of NINJA loans which were commonly advertised as no income, no jobs, and no assets loans.  For example the interest-only adjustable rate mortgaged required the borrower to pay only interest rather than the principle initially (Subprime-Refinance, 2009). These were some of the practices that attracted more and more people to borrow loans which they could not repay. Some ARM came with teaser rates which were far below market average which later doubled or tripled the rate making it difficult for the borrowers to pay.

This illustrates that money was too cheap to be accessed by everyone even the illegal immigrants who had no stable employment (Blakey 2008, p. 25).  The greedy cats manning the financial institutions threw money in all direction at a higher risk since they believed that the market would not relent from it rise. They did not think beyond the housing bubble since it was a part of their financial gratification. Greed had consumed the financial institutions while Americans had been consumed by irresponsible consumerism culture, making a perfect match for the current financial crisis. Even the biggest world banks like Citigroup in United States and Northern Rock in London were consumed in the same greed for quick returns and they are not reeling under the negative effects of their greed (Kumar, 2008, p, 29).  The integration of the world economy saw American financial institution repackage massive bad debts and then sell them to international financial organization. For example UK banks had made substantial investment in subprime backed mortgages which led to loss of billions of pounds.  It is through such integration that credit crunch eventually spread all over the world (Mortgages.co.uk, 2009).

In a bid to get more borrowers, financial institution engaged brokers who offered ARM to individuals with poor credit ratings.  In exchange, brokers received yield premium which was sometimes 2% higher than the premium rate received by lender from the borrower.  Therefore this encourages brokers to entice more borrowers into loans which were far beyond their financial capability. Their greed for yield premium made them ignore the credit rating of consumers. At the same time, the credit rating agencies received payment from investment banks such that they did not thoroughly vet the credit worth of the borrowers (Gerry and Feldman 2007, p. 69).

These are some of the factors that clearly illustrate that greed and irresponsible behaviors were responsible for the current credit crunch crisis (Credit Crunch, 2009). Consumers had their share since they engaged in high risk consumerism culture leading to increased borrowing. However, the greed and irresponsibility of financial institutions was responsible for the crisis. As Robert Riech, an Economist at University of California comments, “some greed is necessary to keep capitalism going. But too much will bring it down” (BBC, 2008) It is therefore a case of capitalism at work.

To reinforce the Roberty Riech’s claim, it seems greed had overridden the important aspect of CSR and ethics in our financial institutions which eventually culminated to the current crisis. Had the financial institutions become more proactive towards ensuring ethical practices in their operation, some of the irresponsible lending behaviors we have seen would have been averted. It is clear that capitalism has overridden these important business practices which would have ensured adherence to the laid down guidelines.

Conclusion

Corporate social responsibility is a framework which assists businesses to meet their moral obligation to the customers, employees, environment, and shareholders. Since the inception of the idea of corporate social responsibility, business organizations have come up with different project including environment, education, and others which are a part of their CSR.  The current credit crunch has resulted from failure of business organizations to adhere to CSR and business ethics. Credit crunch describes a condition where there is general decrease in the amount of fund for lending in financial institutions. Consumers were driven by greed to acquire more assets and engaged in debt financed consumption. On the other hand, financial institutions were greedy to lend and more fooled by the bubble that was experienced in the housing sector. They engaged in risky lending behavior where even the illegal immigrants were given loans. As the rate of defaulting increased, they were engulfed in a financial crisis. It is the combination of these greedy and risky behaviors that eventually led to the current credit crunch.

Bibliography:

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Bernanke, B 2008, Mortgage delinquencies and foreclosures, Columbia Business School, New York

Birger, J 2008, How congress helped create the subprime mess, Retrieved 21st April 2009 from http://money.cnn.com/2008/01/30/real_estate/congress_subprime.fortune/

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