Ethics in Financial Markets - Essay Example

Ethics In Financial Markets Introduction Financial markets involve financial transactions that an investor engages in, in order to make money, resulting in the growth/ expansion of the business. It encompasses: the stock market –these are ownership shares of a public listed company that are sold to investors in order for them to raise capital. The owners who are the investors benefit in form of dividends that are paid out to them when the company registers a profit. Mutual funds do help a prospective investor to buy a lot of stock at once. Hence they offer an easier avenue for investment than the stocks. They are known to reduce the stock market volatility and offering a cooling effect on the US economy. The bond market is also part of the financial market that is traded at the stock exchange. Bonds can simply be termed as loans. When the prices of the stock go up, those of the bonds go down and vice versa. Most governments and other corporate entities usually borrow from the market in form of bonds listed on the capital markets and they have a big effect on the mortgage interest rates. Commodities are also traded in the commodities future markets e.g. Crude oil, copper and other minerals. Futures involve a mechanism where a commodity is paid today for its delivery in future. Futures have a tendency to goad traders to borrow money so as to purchase the commodity making the deal to go sour should the price of the commodity dip, hence has a major impact on the stocks and the overall economy as a whole. Another form of the financial market is the Hedge fund. Hedge funds have over the years become popular due to the high returns it offers to the high end investor. Hedge funds do invest heavily in the futures and some analysts have argued that they help check the volatility of the stock market and in extension the US economy. Hedge funds though are being blamed for the 2009 recession. Financial markets therefore do involve the financial institutions that are the banks, insurance companies, stock brokers and other closely related institutions. Ethics is perceived as a set of societal standards of conduct and moral judgment that encompasses the norms of a given community. Ethics are a personal set of values used by an individual, a group or a profession; so as to guide them in their action and help them fulfill or carry out their obligation. Its subjective rather that objective and its relative to our perception of reality dependent on circumstances and life experiences of the individual or group, thus making it a continuously evolving code of conduct. It addresses issues pertaining to morality, i.e. good and bad; right or wrong etc. BODY Financial markets ride on the premise of free market where the market is left to regulate and correct itself based on the principle of demand and supply enhanced through competition. The cost of the goods and services plus the overall state of the market is determined through the action of consumers and suppliers. Capitalism has been accused to be Darwinian in nature due to the market volatility that is brought by competition and the natural forces of demand and supply. Companies that are fit do survive while those that are unfit collapse especially during a recession. During recession bad debts is wiped out of the market leaving those who remain the task of rebuilding the market making the process to be cyclic and this is how market correction occurs. Competitive markets has made companies to do everything in their power so as to maximize profits by engaging in monopolistic practices, offering minimum wages and commercialization of everything making capitalism to be amoral as it prizes the self above others and the natural checks and balance that capitalist have been advocating for in most cases than not has always not emerged. Capitalism is generally volatile thus fails from time to time and the correction mechanism has proven to be wanting during financial crisis prompting governments to artificial correct the markets. This counters the notion of free market to which the financial markets operate. For example in the united states the New York stock exchange was formed in 1817 and operated for 116 years without government regulation till the crash of 1929 where the securities and exchange commission was formed to oversee the stock market . The scenario is the same across several sectors making the US economy to be referred to as a managed economy that does not function exclusively to the forces of demand and supply. These governments regulatory institutions are ever there in times of calm and crisis but there presence is mainly seen in times of crisis e.g. during the global economic melt down of 2008 where the true form of a managed economy was seen through the $700 billion bail out plan in the US and the temporary nationalization of the banks purchased by the government. How then is a free market free if it’s regulated? The theory of rational maximization that stipulates that one has an inner desire to gain as much as it can for himself as it can get. This theory has always been applied in the financial markets with disastrous effect as individuals and companies get possessed with greed in order to maximize their profits and earnings- a key fundamental of capitalism, thus engaging in financial activities that do border on immoral and amorality-two key ethical issues. No wonder the current and past debate over how much a free market should be allowed to operate especially after the financial crisis of 2008 that led to a credit crunch and the global economic melt down that was averted by prompt government intervention in the market- an anti thesis to the notion of capitalism and free markets correction mechanism. The global economic melt down has made most of the developed and middle income countries to be greatly concerned with financial crisis. Politics and business goes hand in hand and in most countries the financial institutions do sponsor political parties and the politicians, compromising them should they win an office in order to further their agenda that might be against the popular good. The global economic crunch started in the USA and spread around the world sending major economies to a worse recession ever experienced since the end of the 1930s depression, leading to a decline of the economic power of the United States whilst increasing the unemployment level, battering its manufacturing sector and initiating a slow but general decay of the social life of the under class and erosion of the quality education of its education system of the country. These problems can be traced to nothing but the speculation on the Wall Street. The stock market is generally an indicator of the general state of a country’s economy i.e. whether it’s healthy or not. The prices in the stock market are generally volatile and fluctuate either way on the basis of slight news on a major event or rumors issued by a politician or a high ranking business or government official, that the traders and investors sense has an effect on their stock. These speculations on the stock market are what ails the US economy with a contagious effect to the rest of the world. That should there have been a code of conduct for the financial market then, probably the crisis could have been avoided. These rumors can either have a positive or negative impact on the stock exchange. The stock and bond markets across the globe do react differently depending on who comes to office. In the USA democrats are viewed as interferers of the stock market who spend heavily, while the republicans are viewed as the laissez-faire type that lets the market find its own way and do embrace cost cutting measures. Thus generally the stock market picks when republican assume office and fall when they exit. Traders and investor also do have influence on the financial markets e.g. through insider trading. When the government policies are not favorable to them they artificially create price volatility making governments in a way to react to their stance, making them to increase their lobbying. The investor’s expectation is measured by gauging the political and economic outlook. VIEW: FINANCIAL MARKETS & THE GLOBAL ECONOMIC MELT DOWN. The global economic crunch originated in the USA which first stated with the collapse of the mortgage industry. One by one the mortgage companies sunk as other shrunk while people were forced to abandon their homes due to their inability to pay for their mortgage; a clear sign that they had little to spend else where in high mass consumption economy. This was a clear sign that there was a shortage of money in the economy suffering from a recession. Most Americans had no money to pay for their houses as the Banks tighten the conditions for lending while the number of mortgage companies collapsing reaches an unprecedented level as the government, through the various oversight authorities just watched as millions were being lost. (Remember it’s to be a free market?) With time the manufacturing sector was hit next with the car industry suffering from the recession and facing imminent bankruptcy, they called for help from the government with little response. The money had gone to the wall street as people were withdrawing their deposit to go and buy stocks and to the brokers loan that are attracting high interest rates of up to 20% leaving nothing to finance the various industries. These is what precipitated the bankruptcy of major banks leading to the global economic crunch and the economic problems that later befall the leading economy and the world over. These leads to one asking the question. Can financial markets reform themselves or should a code of conduct be imposed on them? FINANCIAL MARKETS AND ETHICS Financial markets are generally amoral as they operate on the principles of capitalism, to make them ethical in function, action and outlook out of their own free will be difficult and may in the short foreseeable future hit a barrier. To some the financial market is seen as some sort of a game- of money making where winning is measured by material possession and accumulation. The brokers and the financial institutions do not see a moral obligation or aspect towards their transactions, but only where it fulfills the need of the capitalism. The traders, stock brokers and the investors in most case do not reflect on the impact and outcome of their action nor the moral consequences as the self is more important and the inherent belief that the financial markets acts for the overall good of the society, though indirectly. This makes the idea of a self imposed code of ethics to the financial markets a difficult and challenging task. The stake holders in the financial markets rarely feel the pressure to be morally upright even where there are structures to ensure that. This makes the notion of an external code of conduct to be favorable as it has a greater chance of success and acceptability. These external codes are formulated by international bodies and regimes e.g. the Institute of Chartered Financial Analyst, World Trade Organisation and the International Monetary Fund. These codes of ethics and standards of professional conduct are general guidelines to financial institutions on the interconnection between values, ethics and business. The codes and standards were first created in 1960s and covers aspects that relate to ethical standards pertaining to investments professional around the globe so as to be able to maintain and enhance the public trust in the financial markets. The code of ethics covers issues pertaining to; the integrity of the profession where the interest of a client is put above ones own the interest. The officer(s) or a professional in a financial institution is supposed to act with integrity, competence and with respect to the clients and all its needs. Also he is expected and encouraged to uphold, improve and maintain its professional competence at all times. The standards of professional conduct on the other hand concerns aspect relating to professionalism in the conduct of business i.e. the integrity of the capital markets, duties of an individual or corporate towards the clients. Duties pertaining to the employer, acceptable ways by which conflict arising ought to be resolved and it also cover the investment and analysis and recommendation. These are generally done under the umbrella of Business Ethics. BUSSINESS ETHICS This can be defined as the general action that a business adheres to in its daily conduct of business. It affects how the business deals with the outside world and also how it deals with its customers. Question of ethical behavior are being raised up due to the manner in which these business raise money and the repercussion of their businesses. The ethos of business ethics should be apart and parcel of every business and it can be applied any where and it’s the duty of the public through the media and the governments to ensure that these are followed to the later as the businesses do operate in the society hence the need for accountability. To corporate institutions it involves them maintaining honesty, being fair and humane- what some have called capitalism with a human face. FINANCIAL INSTITUTION AND BUSSINES ETHICS IN A GLOBALIZED WORLD. . Globalizations is a term that is used to refer to a global phenomena where the world is experiencing an increased connectivity and interdependence that has been brought about by improvement in the information communication technology, transport and communication infrastructure leading to the integration of the national economies into the global capitalistic economy as well as the integration of the national cultures into a global one. It entails the free movement of labor and capital and goods that enhance trade between nations and increased competition between transnational companies. Globalization generally resulted into; the liberalization of the financial markets, internationalization of cross border environmental dangers, increased proliferation of the multinational corporations, the spread of western culture and norms through the mass media, increased migration and erosion of the sovereignty of the state. This integration is therefore either positive or negative. The process of globalization that started in with the end of cold war resulted into the extension and spread of business and investments finance a cross the globe, thanks to the internet and electronic banking. This resulted into distance being reduced between the nations of the south and the banking capitals of the west. The liberalization, extension and internationalization of the financial markets are one of the major causes of globalization. In today’s liberalized world it’s held that liberalization of the financial markets will result into capital inflows from the wealthier parts of the globe, promote savings and investments, employment and increase productivity. These will result into the overall general growth of an economy leading to the improvement of the social and welfare of the populace in general. But under liberalization most financial institutions due to less regulation do not always uphold the principal of honesty. The liberalized world has seen the financial institutions engage in corruption while undermining democratic regimes in the third world all for the quest of monopolies and profit. The issues afflicting the financial markets tend to be addressed from a legal and economic view point where ethical issues are divorced from the overall picture. But with time the frequency of the cyclic economic melt downs and recessions that originate, more often than not, from the financial markets raises a lot of questions. The industry can no longer afford to avoid the issue of ethics in global finance. Proponents of financially opening up the market do not see the need for an ethical code for a globalizied financial market as to them unfair practice in lending is what is considered as unethical. For the others they appear to quickly condemn the global system too fast by referring to the already existing inequality between the north and the south and the widening of the gap due to liberalization of the financial markets. For the poor countries of the south are bound to suffer due to financial globalization meltdown. Thus the need by some proponents of an ethical code that will ensure policies that safe guard the people of the poor nations, who have been forced to open up their markets to financial corporations that will offer undue competition to local firms, distort their economies and offer little in return in case of financial crisis . Proponents of liberalization argue that these inequality are a result of structural inequality that produce unfavorable outcome as a result of the financial globalization and its up to the nations of the south to fend for themselves and find ways to deal with the problems generated, of which most are incapable of achieving. Financial market instability in the global world is generally rooted in unequal globally powerful financial nations and capital of the world in the north that do pose the greatest danger to developing countries than to the developed countries themselves. .The rich nations posses a variety of ways by which they can resolve the effects of a financial meltdown unlike the developing nations who face some sort of punitive measures should they pursue policies that are considered too expansionary e.g. devaluation of their currencies and imposition of conditions on their terms of borrowing. The increased capital flow and the hyper mobility of finance has resulted into increased instability in the macro level of national economies coupled with the debt crisis faced by many nations incapacitating a nations political leadership from increasing its peoples well being. These generates the need for a global code of ethics that is external in nature to try and address these issues as well as rectify the structural inequalities that lead to human suffering in the wake of transnational financial institutions expansion in their quest to looking for new business opportunities and wading off of competition. But to what extent will these be applicable in the globalized world. Their is a necessity for regulation in the global world that addresses the urgency to share the need of the risk involved between borrowers of money and the lenders of money. The conduct of the multinational financial institutions also needs to be checked in their operations CONCLUSION It’s imperative that all oversight authorities make practical steps to formulate or adopt codes of conduct and standards of practical professional practice, so as to make them to be more accountable of their actions and to be accountable to the effect of their business outcomes. The financial institutions operate within a society and it’s imperative that they become conscious of their actions. This can be achieved through government legislation as the government can choose out of free will to either intervene in a market or not, but it’s extremely difficult to undertake this in a globalized financial market. Hence the need of some kind of international regime to undertake this. References Amy A., & Ray S. (1997). Financial Markets Money and me. Rourke Publications. Carol W. (1995). Ethics: Current controversies. Green haven Press. CFA Institute. (2005). Business Ethics: Standards of Practice Handbook. John W.D., & Jordan C. (1998). Business ethics: a reference handbook Contemporary ethical issues. ABC-CLIO. Joseph E. S. (2003). Globalization and its discontents W. W. Norton Malcolm W. (2001). Globalization. Routledge. Peter S. (2004). One world: the ethics of globalization. Ed 2. Yale University Press. Roland I. R., & Dwayne W. (1974). 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