This blog will briefly address ethical issues regarding subprime loans. As noted in the figure above, banks make prime loans to its favorite customers at low-interest rates. However, it can also make loans to subprime lenders who assume the risk and lend to subprime borrowers at high interest rates. In this scenario, the subprime lender may be able to make a huge profit based on the difference between its costs and the money it collects from the subprime borrower. The profit motive is supported by Milton Friedman (1970) who wrote that “the social responsibility of business is to increase its profits”. However, a problem arises when these risky subprime loans go into default, and if too many of these subprime loans follow suit, it can become a crisis. Consequently, McDowell (2010) noted that the crisis became apparent in 2007 when there was a significant rise in mortgage delinquencies and foreclosures in the United States that had a significant adverse impact on financial markets and banks around the world.
This blog will initially expand on the concept of subprime loans and the risks to lenders and borrowers. The role leadership played as part of the financial crisis that ensured will be addressed. Also, the concept of social responsibility will be covered from the standpoint of subprime loans. Finally, the blog will address what measures have been taken by government and other institutions to ensure that it will never happened again.