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Technology or Human Gaffe – Who’s to Blame for the “Great Recession?”

February 23, 2011

Just as technology is outrunning the government, so is its influence on the financial sector; hence the ongoing ethical debate  about flash trading

But, regarding the financial collapse of 2007 – 2010, I’d argue that actions by individuals, ethical or not, far outweigh any role technology played in this recession.

Not one person or institution is entirely at fault.  More so, an overlap and repeated history of bad business decisions and poor judgment can be attributed to what is today coined the “Great Recession.”  Broadly, it is the result of greed, ineffective regulation and poor judgment: 

–Greed on the side of Wall Street, who knowingly sold dubious mortgage-backed securities;

–Ineffective supervision by the government, who neglected to monitor the activity and ensure the stability of the market; and

–Poor judgment by the public, who, for the past 40 years, have “borrowed, borrowed, borrowed” and consciously lived outside their means.   

Basically, banks started buying up mortgages and selling them to investors (as triple- A rated mortgage-backed securities) in order to free up liquidity for the bank and increase its ability to lend.  For example, it used to be that a bank issued a loan for $50,000, and then collected on that $50,000 over the life of the loan.  Now, that same bank can sell that loan to an investor and recoup the entire $50,000 in a matter of weeks. 

A simple supply and demand problem quickly emerged.  Banks ran out of lendable loans, however, mortgage-backed securities were in high demand.  So, banks lowered their lending standards in order to keep up with demand.  This decision subsequently came full circle when homeowners ran out of money and stopped paying their mortgages.

So, was it unethical for banks to alter their lending standards?  Even when the government did not raise objections or question the changes?  Was it ethical for homeowners to take out loans they knew they could not afford? 

In conclusion, people need to balance their aspirations with prudence and moderation.  In the same way, institutions need to exercise similar judgment in the creation and application of new products and technology platforms.

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