The Financial Crisis and Competition Policy - Book Report/Review Example

This is a critical analysis of the article written by Mr. John Vickers on the top financial crisis and competition policy for the players playing out there in the market. This article can be found on WWW.GLOBALCOMPETITIONPOLICY.ORG. This article has aimed at the conditions, strategies, policies and causes of the demise of world's largest banks which in affect resulted in the global economic recession and mind depression of millions of people around the world. The said article gives an insight to the gravity of the situation through instep understanding of the reasons of this financial crisis with the help of examples of some of the biggest banks of the world. Background: The cause for this economic recession has been defined as the expansion of balance sheets of banks and other financial institutions over their own capital which resulted in the management problems of all of their finances, assets and liabilities. This was due to the fact that eastern economies had a more savings trend whereas western economies were spending more money. Moreover writer has criticized the overall macroeconomic environment and the prevalence of laissez faire concept in the economy. Laissez faire is a vital concept for the well being and grooming of the economy but it is to be argued that this concept was in place and is still in place but with some limitations and the market was never let go wild otherwise the result would have been more malignant. The situation gets even worsen when more and more lending were made to people in order to boost interest profits through mortgages and house loans etc. which resulted in the insolvency of individuals and eventually big financial institutions. All these factors went to the breaking point of the economic bridge and therefore causing a chain of events which fueled the engine of non trust between individuals and institutions, institutions and institutions and every matter involving money. All of the events are interlinked and resulted due to the failures of biggest companies of the world. This financial crisis being started in west engraved the whole world in it and suddenly the whole world started to see the affects of financial crisis on themselves. This was mainly due to the reason that west and particularly USA is the biggest consumers of goods and services and when their demand decreased because of the economic downturn, the whole world felt its affects. Warren Buffet, who is considered the godfather of investment business, said while speaking to the students of Columbia University that greed is the major cause of this economic recession. This thought of someone who has seen the ups and downs of economy for about fifty years of his life really shows what lies beneath the story of great bank's insolvency. The writer in this article discusses the chain of events which resulted in the current economic situation. Whether that was the over lending of financial institutions or people withdrawing their money from the banks, it is clearly a case of mismanagement on the part of financial institutions. These institutions were unable to manage their finances, their strategies and were unable to prepare themselves for any uncertain event which is bound to happen within one's lifetime. The government after the financial crisis was there in the economy acted fast to help accelerate the economy through some of the remedial actions. The writer has shown some of the policy responses that government took to heal the economy. Policy responses have taken various forms, including: - further vast injections of central bank liquidity - Extensions of bank deposit guarantees to stave off bank runs by depositors - Temporary bans on short selling - The U.S. troubled assets relief program - Large-scale state ownership of banks and other financial institutions - Sharp cuts in official interest rates - bypassing competition law to allow competition-threatening bank mergers. The writer discusses the vulnerability of banks to the people's behavior and the fact that they were lending for the long term and borrowing for the short term. Another problem that has been identified is the issue confidence among banks and the consumers. One more issue has been raised and that is the triggering affect of one bank's insolvency for the insolvency of other banks as well. This issue is worth considering because it is not exactly so. If one bank fails to perform it surely affects the trust and confidence of people on other banks but the failure of tens of banks was due to the non compliance of some general business rules and the over investment in the loans market which enhanced the solvency and liquidity problem. This overall failure and instability of financial institutions has resulted in the downsizing of employees all over the world and thus creating an environment that is not conducive to the investment. According to the writer the failure of the economy was a systematic process and that the actions taken by the government were right except in some case like the case of merger of TSB and HBOS. As the last resort the government devised the bailout plan for the financially disturbed companies which were necessary for retaining the jobs in the job market and not going towards the further depression. This is good move according to the writer because other alternatives were even worse as compared to this one. It is however suggested that the government should keep an eye on the utilization of resources that are provided by these bailout plans. Once all the resources are provided that will help the companies to get out of their current bankruptcy situation and start the business they were doing before all that menace had happened, the one and only factor stopping them will be the time and allocation of those provided resources to the result oriented decisions. This can be achieved through the adoption of excellence for sale of the products and services in the market. Another matter frequently addressed by the writer in this article is the effect of the global recession and government policies on the competition policies of the economy. Although government policies have not threatened the competition policy but the writer seems to be afraid of the afraid in some cases. However, it is not thought that the competition will reduce because of the slowdown in the economy. On the contrary this economic recession deems to increase the competition between the companies to attract customers and therefore, drive themselves towards achieving excellence. Thus, a new competition statement seems to be written in the new market which is deemed to emerge out of this bad economic condition. This economic recession can also be named as an economy shift because it has changed many principles of doing business in the market and a whole new virtual economy is also emerging and strengthening itself because of many businesses getting online. This recession will change the norms of doing business in the world and the survival of the companies in the world's market. An economics concept that will best suit with the topic of this article is related from macroeconomics and called the 'Aggregate Demand' concept which says C (Capital) + I (Investment) + G (Government Expenditure) + X (Exports) - M (Imports) is the real income of an economy, and if we relate this concept to the article we're doing, it would mean that Conclusion: All and all the article was a good one addressing all the factors responsible for the recession and the counter measures taken at the macro economic level to strengthen the economy. This was further analyzed by the example of some of the leading UK's banks and other financial institutions and where necessary some references of other banks of the world were given. Read More