Credit Crisis

B BUS 307

Credit Crisis

Until September 2001 investors were turning great profits on treasury bills. The Federal Reserve changed their return rate by dropping interest rates down to 1% so the Investors no longer saw this as a suitable investment and wanted to explore another avenue. Banks had an abundance of cheap credit available to them so they decided to use the moneymaking method of leverage to grow their future investments. Prospective homebuyers thought, “Now would be a great time to buy since the rates are so low!” A mortgage broker would wake up and go sell more homes, point them to a lender to get them approved for their exciting new purchase, finally the bank would loan them borrowed money in order to sell the mortgage to hungry investors. Everyone gets a piece and everyone wins. Leverage is risky for a business to do and the return is outrageously disproportionate to the investment. Does that make it unethical or just good business?

Naturally, when the going is good nobody wants to stop making money. The demand for more mortgages was really high since all the investors were making money hand over fist. So the lenders signed more even if the buyers were, maybe, not as qualified as previous ones. Lets be real, a mortgage is a glorified IOU, an agreement to pay. But when families can’t pay they have to default. Now, everyone loses. The next-door neighbors’ house value just went down since the market is flooded with defaulted homes and the investors were left with lots of empty promises.

Can we pinpoint where things went wrong or was this just a moving train that couldn’t slow down until it crashed? When business is booming how do you know when to stop and when is enough? In many notorious business scandals, such as Enron, it’s hard to unanimously place blame on one person/thing and it’s hard to say that the people involved were consciously making unethical choices. However, there had to have been a driving force behind all of those...