Financial Meltdown 2008 & Deregulation

What are the ethics of supporting bailouts of companies who were major contributors to the financial crisis of 2008? The Federal Reserve took historic steps to save investment bank Bear Stearns, in an effort to stop financial panic from infecting Wall Street.

But the credit crisis isn't just a problem for the investment community, says former Treasury Secretary Robert Rubin, it is also "a Main Street problem" that could affect all Americans. As such, Rubin says policymakers must examine the series of events -- and the failures in the regulatory process -- that led to the current crisis of confidence in financial markets in order to prevent a similar crisis in the future.

"There were a goodly number of observers who felt over the last three, four, five years that excesses may well have been developing in the financial markets..." says Rubin. He cites the confluence of events that allowed things to spin out of control -- including historically low interest rates and ratings agencies that gave top marks to complex financial instruments with risks that weren't clearly understood. The market relied on those ratings. "All evidence suggests that should not have been done," says Rubin.

"If it were only a Wall Street issue, I don't think anybody would be terribly worried about it except people on Wall Street," he says. "But if there are problems in the credit markets, and if credit extenders aren't willing to extend credit, and mortgage availability dries up, that affects vast numbers of Americans. And that's what all this is about, that is the focus of these various policy measures by the Fed." The questions are, (a.) what can we learn from this, and (b.) what do we do moving forward?"

History reveals many similar situations of abuse in the banking, financial, and investment worlds over the history of the country. Each crisis has been followed by a series of regulatory reforms such as the creation of the Securities Exchange Commission in response to the Stock Market Crash of 1929.

More recently, the Savings and Loan scandal of the 1980s, prompted additional reforms intended to regulate credit and mortgages. However, after each of these crises, businesses found a way to work around the new regulations or convince regulators such as the Federal Reserve to relax enforcement of the rules until it's too late.

During International Business Ethics Month, assign students to study the Savings and Loan scandal and its causes, and then compare it with the current financial meltdown.

Pathfinder: Click the Topics tab > The Reagan and Bush Administrations > Savings and Loan Scandal.

Students should cite at least three resources in a report of about 150 words that addresses the following essential questions for critical thinking -- teachers can include or substitute others.

• What major abuses led to the Savings and Loan financial crisis of the 1980s?
  
  
• What existing regulations were not enforced that could have prevented the crisis?
  
  
• Who benefited and who was hurt by this crisis?
  
  
• How did the government try to solve the problem to avoid a panic?
  
  
• What lessons are there in this past crisis that should have helped prevent the current financial crisis?

Click here for a teacher's guide to written reports. Or, click here for a student PowerPoint report template.



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