BLOG 2: Is the Great Recession over now? Will profit motives overpower social responsibility again anytime in the near future? If so, what do you think is going to be the next bubble to burst?
Possible Answer: We may be coming out of the Great Recession but it could be short-lived because it may just be a matter of time before another economic bubble burst such as a Student Loan Crisis.
Evaluating Subprime Loans with the Notion of Social Responsibility. Comparing and Contrasting the Resulting Consequences for These Actions
The Global financial crisis was basically the culmination of multiple negative externalities all coming together at the same time creating a “perfect storm” of financial disaster. These negative externalities were a combination of the desperation of households, the appreciation of housing prices, and declining interest rates (Watkins, 2011, p.366). With the notion of social responsibility, many of the leaders in the banks, in the government and on Wall Street were following the Goldman Rule of pursuing profitable opportunities regardless of the effect it had on others (Watkins, 2011, p.363). Interestingly, this is the opposite of the Golden rule. It was an era of laissez-faire government. Laissez-faire means to let the people do as they think best; free from government intervention. Laissez-faire policies allow the pursuit of profits without restraint. Subprime mortgages were a way to pursue profits. It was a profit-making opportunity too hard to resist. The result was an increase in the opportunity cost for ethical behavior. Acting ethically, would result in a foregone opportunity to make more money. Ethical behavior to avoid hurting others would result in lower profits. The Goldman Rule suggests that lenders would be less likely to be ethical where the opportunity cost of such behavior is high. Banks provided subprime loans without regard to the effect on debtors. They did so assuming a continual rise in housing prices. The collapse in price precipitated the collapse in banking profits, prompting a call for “bailing out” the banks. Government bailouts rewarded banks for “bad” behavior (Watkins, 2011, p.363)
During medieval times, banking was considered unethical. Charging interest was seen as taking advantage of others. “In brief, interest placed the money tender above the social interest (Tawney, 1926). Today, Banking is a capitalistic activity. Bankers are in the banking business to make money. They make money from interest and fees. In a purely capitalistic society, there is little concern for the welfare of society, only concern for one’s self. “I work for nothing but my own profit which I make selling a product they need to men who are willing and able to buy it (Rand, 1957, p.451). In a country where we have property rights, there is incentive to work hard and build up a store of property. Milton Friedman said the only issue is how an individual allocates his property (Friedman, 1962). Friedman believed in free markets but the dominance of the market fosters a pecuniary mindset (Watkins, 2011, p.365). R.H. Tawney referred to “Acquisitive Societies” whose purpose is to promote the acquisition of wealth (Tawney, 1920, p.29). An acquisitive society makes each man the center of his own universe (Tawney, 1920, p.30). Prior to the Subprime Mortgage Crisis, one could argue that America was becoming an acquisitive society. It was a society dominated by self-interest. Since the collapse, Americans have become less interested in acquiring possessions than they were before the crisis. Also they have become more concerned for the well-being of others and for the community and world around them. As Americans, we have developed a greater sense of social responsibility. I believe the Great Recession is over but will profit motives overpower social responsibility again anytime in the near future? Some think the next bubble to burst with be the student loan bubble. Perhaps one could say the federal government is doing the same thing with student loans as the bankers did with housing loans because they are providing loans to people who can never pay the money back unless they get good jobs when they leave college. As we know, good jobs are hard to get these days even with a college degree. Is the current leadership in the government repeating the same mistakes of the banking industry? New legislation may be coming as early as the fall of 2015 that would increase the accountability of universities for the employability of its graduates. President Obama is trying to impose a new rating system for universities where prospective students will be able to tell if they are getting a good value for their money. Studies will be conducted to follow recent graduates to see if they were able to land a good job or not with the skills they learned from the degree they obtained in college. Hopefully, the increased accountability and oversight will be enough to prevent the burst of another economic bubble.
Friedman, M. (1962). Capitalism and Freedom. Chicago: University of Chicago Press.
Rand, A. (1957). Atlas Shrugged. New York: Random House.
Tawney, R. H. (1920).The Acquisitive Society . New York: Harcourt, Brace and World.
Tawney, R.H. (1926). Religion and the Rise of Capitalism. Gloucester, MA: Peter Smith.
Watkins, J. P. (2011). Banking ethics and the goldman Rule. Journal Of Economic Issues (M.E.Sharpe Inc.), 45(2), 363-372. doi:10.2753/JEI0021-3624450213