Question: A bank finds that a certain area within a city contains many risky investments and therefore refuses to give loans to people who live and work in the area. Do you feel it is ethical for government to step in and ban such a practice? Why or why not?
I feel it is ethical for the government to intervene in cases where banks are not lending because of a high number of risky investments in a given area. However, I do think that the banks are not entirely wrong to be hesitant to lend to those in this area.
If the bank lends money to individuals in this area that in-turn spend the money on a risky investment, the bank cannot be sure that they will get the money back that they lent. The risky investment means that there is a significant risk that the investment could fall through or not be successful. We can look at the subprime mortgage crisis of the late 2000s to understand what risk the banks are assuming when risking when lending to customers for high risk investments. The banks were financing homes with adjustable interest rates, rates that went much higher than the individuals who owned the home could afford. The banks lent to these individuals despite the fact that the increased interest rate would be unattainable for most individuals. Thus once the housing market crashed and the value of homes began dropping more and more mortgages were coming up for foreclosure because the individuals simply could not afford the payments anymore (Herszenhorn, 2008). Because I found it ethical then for the government to intervene, I again find it ethical for them to intervene in this situation.
I do not feel it is ethical for banks to ban giving loans entirely to individuals in the given area, yet I do not feel it is ethical for the government to require the bank to provide these loans. An ideal situation would be for individuals in this area to give the bank all information possible on the investment they are looking to make and then the bank can make their decision from there. This is when I think it is ethical for the government to intervene. I believe it is ethical for the government to set what risk is too high of a risk to loan to. If the government bans the practice all together the bank could very well have a similar situation to the subprime mortgage crisis on their hands, but on the other hand not lending to the community at all is stalling economic growth and development. Therefore, there should be some kind of compromise so that loans are still being given but only to investments that fall within a certain range of risk established by the government and the bank.
Herszenhorn, D.M. (2008, September 20). Administration is seeking $700 billion for wall street. The New York Times, Retrieved from http://www.nytimes.com/2008/09/21/business/21cong.html?hp