Moral hazard occurs when a party to a contract understanding that the consequences of their actions will be borne by a different party puts themselves under more risks. This paper aims at analyzing the characteristics that make the 2008 financial crisis an ethics and specifically moral hazard situation and the measures taken for effectively eradicating the recession.
Reasons for the 2008 financial crisis include massive nationwide residential housing bubble, financial sector overleveraging, unregulated subprime lending growth at a large rate, and lack of transparency in new, complex, and more popular mortgage based funds. The other reasons for the global financial crisis in 2008 was resultant inability to measure risk, screening of borrowers and bank lending of precarious loans and lack of concern on ability to pay with main aim being origination of loans (Dowd, 143). These factors that resulted in the financial crisis shows the blatant disregard by the financial institutions of the needs of the stakeholders through taking on precarious loans depicting an example of the lack of ethics or moral hazard situation. Securitization and subprime mortgage origination rose until 2006 when household debt was 100% of US GDP, causing rising interest rates making refinancing difficult and drop of housing prices and 1.3 million housing projects were on foreclosure in 2007, the crash had began. The proceeding days would be so tough for banks and other financial institutions owing to bank runs and collapse including certain governments that depended so much on foreign market loans.
The crisis could have been prevented through a reduction in the bailouts or the expectation of bailouts by firms since set precedence for firms to invest in risky activities. This is because when these activities are successful; the investors benefit, but in case of failure, there are bailout by the government. Having a law holding each person responsible for the risky actions that led to the