Financial Crisis -- Critical Issues

Financial Crisis -- Critical Issues and Suggestions

In 2008 the United States economy experienced the most significant crisis since the Great Depression. Many analysts have suggested that without the implementation of various assistance mechanisms by the Obama administration in early 2009 the situation had the definite potential to surpass the seriousness of the complete collapse of the national economy following the Stock Market Crash of 1929. In retrospect, there were many different factors that contributed to the vulnerability of the U.S. economy at turn of the 21st century but few more significant that the incomprehensible complexity of modern commercial paper and investment transactions, the insufficient regulation of the financial services industries, and fundamental ethical problems and conflicts of interests.

Incomprehensible Complexity

Beginning in the 1980s, modern computer systems began processing financial transactions at speeds of many thousands of times as fast as had been possible previously (Nocera, 2009). Investment banks and other financial services institutions began exploiting the full potential of computer-based trading by employing graduate physicists and mathematicians to develop highly complex algorithms to structure financial obligations and investment strategies capable of maximizing their yield on investments. The problem was that even at the highest levels of investment institutions, those in position to make strategic decisions and to recognize and allocate risks appropriately no longer understood the financial investments they were making (Nocera, 2009). It would seem that this problem would be capable of resolution simply through the appropriate enforcement of existing requirements in connection with due diligence and other fiduciary obligations (Bradley, 2008).

Insufficient Regulation of Finance Service Industries

During two successive presidential administrations between 1997 and 2005, deregulation of the U.S. banking industry severely increased its vulnerability to dangerous relationships (Bhide, 2009). In that regard, the regulatory changes that allowed banks and other mortgage lenders to sell off their obligations (and the development of complex investment techniques to do so) undermined the integrity of the U.S. housing market. Specifically, Wall Street investment firms and mortgage banks began purchasing, repackaging, and trading in all of the individual home mortgages simultaneous to the elimination of any natural incentive of lenders to ensure that their borrowers were safe risks (Bhide, 2009). The obvious solution to that problem would be to prosecute lenders, mortgage brokers, realtors, and certain borrowers who deliberately ignored their legal duties to conduct business in good faith (Bradley, 2008).

Fundamental Ethical Problems and Conflicts of Interests