Economic Slump: Ethics Loom Large

Article excerpt

It used to be that post-World War II recessions in the United States were the bad part of plain vanilla business cycles - inventories had piled up too high as a result of too few sales, or the Federal Reserve raised interest rates and slowed the supply of new money into the economy to battle inflation.

But the mild 2001 recession and the current slump are a bit different. Their cause, at least partly, has been dishonesty, greed, and weak business ethics. The accounting scandals at Enron, Global Crossing, WorldCom, etc., combined with the bursting of the dotcom stock bubble, pushed the economy down in 2001. Today's sinking economy, to some degree, is the result of sagging real estate values and the bad behavior of many in the mortgage industry and on Wall Street. Losses from today's financial crisis have already reached $500 billion.

In mature, highly developed countries like the US, individual acts of malfeasance are unlikely to have a widespread effect on the economy, notes Frank Vogl, cofounder of Transparency International, a nonprofit group which ranks nations each year by their degree of corruption, as perceived by investors. (Its next report is scheduled for release next week.)

But, he adds, when "so many people engaged in so many aspects of finance have lost their ethical compass and put their short-term personal gains above other considerations," such as was the case in the subprime mortgage market in the US, it can have a "profound macroeconomic impact." In other words, the broad economy gets hurt by greed and selfishness as ensuing financial losses mount and trust fades.

It is difficult, of course, to disentangle quantitatively how much of today's financial mess has resulted from shady practices and how much from simple mistakes, bad decisions, and false perceptions that home prices would rise indefinitely.

Brokers placing mortgages with new homeowners unlikely to afford payments on adjustable-rate loans could perhaps tell themselves that rising real estate values would enable new owners to refinance their homes later and keep them. Is that bad judgment or unethical behavior by brokers, with some home buyers going along?

Certainly it's unethical if dubious information about an applicant's finances is included in the documentation.

"Individuals get carried away," says David DeRosa, a finance professor at the Yale School of Management in New Haven, Conn. …