Need or Greed: What have we learned from the financial meltdown?
The WCF Moral Maze discussion in November 2009 in Southwark Cathedral was based on the recent financial crisis.
The following were the trigger points for the current financial meltdown.
Stage 1: Giving ordinary banks the right to create money and charge interest for its lending. Bearings and Leman Brothers that became bankrupt lent out 30 or more times money than the amounts that their depositors had given them. This is termed fractional reserve.
Stage 2: Placing a deposit on housing projects in US with the view of selling them at completion. If the housing prices and demand is high large profits are made, and conversely large losses are incurred when demand fails. This is termed leverage.
Stage 3: Deregulation in US mortgage based derivative (i.e. Mortgage backed securities) leading to a range of new financial instruments..
As the US house prices consistently rose, organisations and individual investors considered these new financial instruments to provide good comparable rate of financial return than shares or deposits in the bank, and there was insurance to provide cover in case of default of underlying mortgages.
This created great demand which led to large number of mortgages at very high percentage levels, being approved without completing due diligence prticularly to individuals considered as high risk (e.g. poor credit history, no assets, no job).
Companies like Freddie Mac and Fannie Mae have existed for decades prior to deregulation
Stage 4: The US housing bubble burst. The housing prices fell, and as interest on mortgages rose there was a lot of default by high risk individuals. Organisations that had used leverage in the housing sector lost money, those who had invested in new financial instruments attempted to claim insurance, however insurance companies such as AIG were so inundated with claims and could not pay out, and that resulted in huge losses.
Stage 5: Due to losses, people were concerned about their money in the bank and more people than usual started to take their money out of banks, and banks eventually stopped lending to each other in the short term as they were concerned about their own position and the stability of the other bank. As global banking is based on fractional reserve, and it common to lend 10 times more money than the amount of deposit, this led to financial meltdown through lack of confidence in banking system, that had to be averted.
The reason for the financial meltdown: investors were consistently making so much money in the short term that they lost sight of the inherent risk in their decisions. Can this be termed greed?
Expert witness views ranged from associating developing countries’ debt to developed countries as the negative aspect of capitalism, to comparing capitalism to freedom of expression that has an innate positive effect which can be misused.
Overall the panel emphasised associating greater importance to non-materialism than materialism. Two members condemned usury on religious principles.
posted by Pejman @ Thursday, November 12, 2009
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