The Financial Crisis and The Scars We Felt

Posted Friday, August 1, 2014 in Finance

The financial crisis has scarred the world economy. Once valuable bonds thought to appear as a reasonably sound investment hit junk status at frightening speeds. The architects of disaster scrambled for a reason for their woes but not until the smoke cleared did a suspect appear: subprime lending. Digging into the weeds brought to light some poor practices such as predatory lending. Looking out for your own interests can do that. And with the law on your side why wouldn't you? Well, as the financial crisis made it clear and as Peter Drucker once wrote “a healthy organization, be it business or nonprofit, could not exist in a sick society” (Cohen, 2009).

Financial organizations were hurt by their own hubris and society, while licking it's wounds, took to litigation with the passing of the Dodd-Frank and Consumer Protection Act. Lending isn't and never was, a one way street. Even self interest requires social responsibility when evaluated at a holistic level. The financial crisis shows that self-interest in the short term without caring for the well-being of society won't be in one's best interest over the long term. Gilbert (2011) describes this as a moral duty to care for customers such as a surgeon would care for a patient beyond simply performing an operation. Likewise, the realization that lenders aren't always going to be looking out for the best interests of their customers should give borrowers a clear idea of responsible borrowing.

Ross & Squires (2011) note the personal feelings “shame, embarrassment, disappointment, and failure” from affected borrowers. As Ross & Squires (2011) reported from their interviews with those affected that there was a sense of trust that was given to their lenders. Things will need to change to reestablish such trust. With the Dodd-Frank and Consumer Protection Act we'll need time to tell if reforms to predatory lending and transparency are enough to weather a future crisis.

Event without further regulation one thing should be clear: Lending and borrowing is a societal endeavor that requires trust and care for both parties. When predatory practices and dishonesty enters the mix then the system breaks down and society suffers as a whole. Not even those outside the lending relationship can prosper when society itself is damaged by unethical lending.