The Importance of Ethical Behavior on Financial Crisis

TheImportance of Ethical Behavior on Financial Crisis Abstract This paper analyzedthe economic crisis in 2008. It introduced the development history of American’s financial regulatory system. It also analyzed the framework of the financial regulatory system. This article analyzed the causes of the financial crisis. At the same time, itanalyzed the moral behavior and professional ethics ofWall Street financiers and bankers. The paper analyzed the standards, financial terms and the annual performance bonuses, to assess whether the financial markets was success. In the end of this paper, it analyzed whether it was possible to devise a global regime of ethical behavior to adequately address the problems in financial crisisand providedsome relevant suggestions for people or government department to prevent economic crisis. Introduction The global financial tsunami caused by subprime crisis happened in American hurts the world economy greatly, which was deemed by Soros that “it is the most serious economic crisis we have faced since the great depression”.The Wall Street investment banks, who have gone through a hundred years’ history, suffer a complete obliteration in legal sense within one year (Khaliq 2008). From then on, the nature of Wall Street experienced a change that had never happen since the Great Depression in 1930s. The scope and the level of the impact of this economic crisiswere beyond the reach of any economic crisis happened in the past. In the eye of Paul Krugman who is a famous economist in American, the economic crisis is a total outbreak: the bursting of the housing bubble is similar to the experience happened in Japan in 1980sand the monetary crises devastated some countries were similar to financial crisis in Asia in last century. In the primary stage of the subprime crisis, economic entities such as real estate investment trust company, commercial mortgages lending agency, investment bank and the mortgages lending subsidiary of the bank holding company were the most frequently influenced subjects in the crisis (Devinney&Eckhardt 2010). With the deepening of the crisis, thecommercial Banks began to suffered losses on subprime, leading to the Book financialdeterioration.The bank began limiting the growth of the money supply, tightened lending standardsand the intension of the market liquidity.That further prompted the rise of borrowers default rate, but also affects the insurance company engaged in bond insurance and credit default security products business.In conclusion, the crisis exerted an overwhelming influence on everywhere in the world from the United States to Europe to Asia, outperforming any regional financial crises happened in last century. Main body The Historical Evolution of United States Financial Supervision System After the big crisis in 1930s, people doubtedon the advantages of free competition of financial market, and they thoughtthat the financial system is unstable inherently.In order to ensure the implementation of the financial reform measures, the United States government issued a series of laws on bank system reform.On June 16 1933,it passed the Glass-steagall Banking Act (Lou 2008). After that, the United States Congress successively promulgated,The Federal Reserve System Q Ordinance, Securities Exchange Act of 1934, Investment Company Law and a series of act.It gradually formed a financial supervision system. The United States in order to conform to the international financial industry fusion trend and improve the international competitiveness of domestic financial industry, it relaxed the process of financial control. Its financial institutions broadened the scope of business gradually and got through the gap among banking, securities and insurance (Liu 2010). At that time all kinds of innovative financial products emerged.Just at this time, the U.S. government relaxed the financial control.On the one hand, it brought the vigorous development of the financial sector.But on the other hand, it also triggered a new round of financial crisis. Framework of Financial Regulatory System Before the outbreak of the financial crisis in 2008, there were many department can control the financial system (Jentz 2010). For example, the federal and statewere both had the power to financial supervision and there were many organization could perform the right.The financial regulators of federal level in the United States government were mainly as the followings: Federal Reserve System (FRS), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), Office of Thrift Supervision (OTS), NACI and so on (Conroy 2010). They carried out professional cross supervision respectively on all kinds of financial institutions. The Defects of United States Financial Supervision System The financial crisis exposed the defects of the U.S. financial regulatory system (Foreman 2010). The defects are mainly as follows: Many Institutions Supervision The financial institution was regulated by many organizations. But the financial institutions had entered the mixed management stage (Hagberg 2008).The financial products are closely related. Regulatory Oversight For example, the Long-Term Capital Management was suddenly bankrupt, but there was no one organization announced had supervision to it (Quagliariello 2009). Because, the regulators thought there might be other departments could had supervision to it. Supervision is Out of Control In the lack of supervision, financial derivatives expanded crazily. This would cause financial regulation with not control, and then lead to a variety of economic difficulties. TheInfluence ofEthicalBehavior to Economic Crisis It is not just a financial crisis, but the refraction of the culture crisis and belief crisis of American (Tirole 2002). After a year of the economic crisis break out, the American President Obama issued a speech, he angrily accused those financiers who once control the forces of nature in Wall Street were not human and greedy. He said that the Wall Street owed the American people a debt! What contributed to global financial tsunami? From macroscopic aspect, the United States monetary policywas too loose, leaded to liquidity flood; from the microscopic aspect, the United States financial innovation excessive, the regulatory system establishment couldnot keep up with is also an important reason. But the economic crisis caused by the most important factor is ethical behavior. The deep reasons of causing financial tsunami are the increasingly secularization, increasingly from the belief foundation and moral foundation (Sabalot& Khan 2010). Here is three points out that the pilgrims in the American mainstream influence increasingly decline, even already collapsed, and evangelical in the United States had never won the pilgrims had that to the mainstream of American society influence. Second, individualism, hedonism and indulgence socialist weregrowing floodin the United States. Third, generally speaking, the United States was more and more out of "the church market economy", greed, irresponsible business ethics pop and may become dominant (Arner& Lin 2003). Wall Street financiers in business ethics had already fallen "in order to cooked his own an egg, regardless of the burned the world house". Wall Street financiers’with powerful knowledge, secretly fierce in the financial products with poison, under the flag of financial innovation flicker around the world. On Wall Street the villains knew they were selling toxic financial products. However, in order to make money, they selling itin large number unconscionable. Take the Lehman Brothers’ bankruptcy as example to analysis what caused the economic crisis. Anton Valukas entrusted by a U.S. court to investigate who shall be responsible for L ehman’s bankruptcy. In his report, the chief executive officer Dick Fuld, and other executives and audit Ernst Young should response for the bankrupt (MacNeil 2010). Lehman wasan organization to pursuit for profit, ready to short-cut and could undertake great risk. Its internal control and accounting procedure was far from perfect. Lehman collapse had many reasons, all should undertake the responsibility, Anton Valukas wrote. He said that executives’ activities make a serious judgment. From his report,Lehman's bankruptcy, not only caused by the lack of supervision, more should because Lehman internal personnel's professional ethics,ethical behavior. The Author’sPoint of View The author agreed with the second opinion. In fact, defective never built a perfect system, and there was never a perfect system in this world. The United States, of course, was no exception. System was very important, but the system was dead, while the person was living and the world was high speed change. The change of system couldn't catch up with the change of situation (Csaba 2009).People should give up the fantasy on almighty system.One should not think with a good system would be no worry about.It was naive and superficial. How to avoid the financial crisis? The society should not only establishing effective regulatory system, but also increasing people's morality behavior and professional ethics. Some people thoughtto build a global moral standard to solve this problem and according to financial terms and bonus to assess whether the financial market is success. Financial terms can reflect in the financial market development. Financial terms are the basis of each reporting unit responsibility accounting report.According to that people can do comprehensive evaluation and analysis of the production of the financial market. It can provide financial information timely and accurately for the financial market management and business decision. So it can reflect the financial market success or not. Bonus is joint-stock company pay dividends to investorsevery year according to the certain proportion stock. It is the return on investment to shareholder of listed companies. Bonus is a way of shareholder earnings. Only stock company is in a profit, can the bonus be divided to shareholder. When employees get the company's share of bonus, it can be proved that the company is in profit.That is to say the company achieved certain success. When employees get moreprofit, it can conclude that the company achieves more profits. But the author thinks that it is impossibleto devise a global regime of ethical behavior to adequately address the problems of financial crisis in financial market. In the world, each region has different ethical behavior standard. And the ethical behavior standards arenot all the same. So it is difficult to establish such a global regime of ethical behavior. Even if established such a system, it cannot adequately solves the problem of financial crisis. Conclusion This paper introduced the historical evolution of United States financial regulatory system and the financial regulatory system framework. It analyzed the defects of the current financial supervision system in American. It concluded that the financial regulatory system defects caused the world economic crisis. The paper made a further analysis on economic crisis,and concluded that the Wall Street financiers’ and bankers’ moral behaviorswere the ultimate reasonsthat caused the world economiccrisis.It concluded the financial terms and annual performance bonuses can be used to evaluate the success of the financial markets. In the end of this paper,it concluded that the thinking of devising a global regime of ethical behavior to adequately address the problem is impossible and it provided somesuggestions for strengthening the financial regulatory system toimprove people's moral behavior. 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