Why moral failures precede financial crises

This paper aims to explore the linkages between greed and governance failures in both financial institutions and financial markets.

The paper described how innovation changed the US financial system through an analysis of recent events, and employs the philosophic concepts of hubris and greed to explain certain developments.

The development of the shadow banking system and opaque products was motivated in part by greed. These developments made governance at both the institutional and market levels extremely difficult, if not impossible. In part the findings are limited by the current opacity of the markets and the dynamics of events.

The implication of the research is to reinforce the need for transparency if the risk of innovation in the financial system is to be both identified and managed. The creation of central clearing houses and/or exchanges for new products is clearly indicated.

Understanding the linkages between greed, hubris and governance in the development of opaque products provides insights of value to those trying to understand the current crisis – from academics to practitioners.