The Reasons which Caused the Current Hard Economic Times - Research Paper Example

Current Hard Economic Times Introduction The current economic crisis has come at totally unexpected period. Even the economic pundits failed to forecast it correctly. Even the developed countries struggled to face the realities of financial crisis. In fact U.S. and U.K. are some of the worse affected countries while China and India like Asian countries escaped from much severe problems. The recent G-20 summit held in London has mainly discussed the global economic crisis and the possible solutions because of its importance. Many people believe that the current financial crisis will be solved one day, but the situation following that may be probably even worse. The current crisis is only a beginning. The reasons for the current crisis may not be due to the policies alone. Moreover, many economists believe that the current recession may continue longer than anticipated. Inman (2009) has mentioned that unemployment may cross more than 3 million in Britain because of recession. Moreover, the UK economy may be lessened by as much as 2.9%, which may result in the risk of deflation this year (Inman, 2009). The current recession seems to be one of the worst in recent times. Most of the economists think that the current one is worse than that happened in 1990s. Even though many reasons cited as the causes of current recession, we can summarize that the major reasons for the current recession is the changing life styles, life philosophies and the greedy financial institutions which were ready for lending without proper evaluation of the loan seekers financial abilities. This paper briefly analyses the current economic hard times with and its effect on countries particularly United States and on organizations. Recession in US Bianco, (2008) has mentioned many reasons for the financial crisis in America: The Federal Reserve, is making credit cheap; Home buyers, who took advantage of easy credit contributed to bid up the prices of homes excessively; Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses; Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes etc (Bianco, p.3-20). The life style of American people is entirely different from countries like India or China. Americans believe in spending rather than saving. For them today is important and tomorrow is not in their dictionary. Whatever the earnings they get today will be spent completely without saving anything for the future. They know very well that the financial institutions are ready to assist them in case of an emergency. The financial institutions were ready to give loans without conducting proper enquiry about the financial capabilities of the loan seekers. Most of the people who took heavy loans failed to repay it in time and as a result the financial institutions started to collapse. Miller & Jackson, (2008) have mentioned that Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase have weathered the financial crisis in reasonably good shape, while Bear Stearns collapsed and Lehman Brothers has entered bankruptcy (Miller & Jackson). Compared to Americans, Indian and Chinese people have the habit of saving the extra money after their expenses. These saving habits helped them to survive even in the current economic crisis scenario. India is following a mixed economy whereas China is following a socialist economy. In both the cases, the private participation is critical sectors is not allowed. America and UK follow a capital economy in which private organizations have upper hand over the public organizations. Private people are always motivated by the profit making motto and they will try to exploit the critical sectors as much as possible in order to double their profit. Even the biggest American Banks were under private sector without much governmental control. The absence of regulations encouraged the private organizations to engage in activities which may bring short term goals. They never thought about the long term impacts of their policies and paid the price when the recession enters the global arena. The major reasons for the current economic problem are because of the foolish lending habits of the banks. The banks miscalculated the global economy as a renewable source of money. They thought that the global ocean of wealth will never be exhausted. Banks allotted loans to all the people who approached them without proper evaluation of the repayment abilities of the loan seeker. The greedy customers accepted the offers (loans) from banks with both hands. Banks thought that their business will grow once they will be able to lend as much money at a higher interest rate. In their opinion, global economy will never exhaust and whatever the goods and services sold in the market will bring profit. The banks have given more focus to the goods or services sold rather than the goods or services bought. They were more interested in selling of their services. They never though too much about the returns against the services they provided. Once the balance between the services and goods sold and bought were destroyed, financial crisis came into the picture. Both the democrats and the republicans have many differences in dealing with the current recession. Palermo, (2009) has mentioned that the Republican views of tackling the current crisis is based on the slogan cut the taxes, cut spending, deregulate, let the market work its magic, and so on whereas Democrats think that the costly occupations of Iraq and Afghanistan should be stopped to escape from the current financial crisis (Palermo). The current war on terror was started by the Republican president George Bush and hence they have difficulties in speaking against the war on terror. At the same time it is a fact that America is wasting lot of money both in Afghanistan and Iraq in the name of war on terror. In Rowe’s (2008) opinion, America is doing less to escape form the recession. In his opinion, the left blames Bush, the Republicans, and deregulation whereas the right blames Obama, the Democrats, and the Community Reinvestment Act (Rowe). The exercise of blaming is still going on in America rather than taking any serious steps to counter the challenges raised by the recession. When the democrats try to take some serious measures, republicans protest against it and vice versa. America should be united in dealing with this type of serious crisis in order to escape from it as soon as possible. Political differences should be kept on aside and both democrats and republicans should work unanimously to tackle the crisis. The politicians have their own agenda; winning the election. If they exploit the current recession for that purpose, it is difficult for America to escape from the recession in near future. Everyone should leave their interests behind and should work for the country’s interest. Miller & Jackson, (2008) pointed out that the proposed $700 billion rescue package for Wall Street's financial crisis has been utilized for political gains rather than for the country’s interest. The democrats have criticized Sen. John McCain and Republican allies who supported banking deregulation. Republicans on the other hand accused that the Democrats blocked reforms leaving taxpayers on the hook for billions (Miller & Jackson) Steinhauser, (2009) reported as President Obama saying “Ending the economic crisis will not be "easy," but the nation will emerge "more prosperous" through swift and bold actions” (Steinhauser, 2009). The principles learned from this crisis should definitely serve as a lesson for future for the Americans. Apart from the ordinary people, financial institutions and the governments have learned a lot from this crisis. The banks may not provide loans any more for the greedy customers without proper evaluation and at the same time the public may be forced to rework on their spending habits. Moreover, governments will enforce more control over financial institutions and the financial institutions would be forced to work under tight control in future. Effect of recession on organizations Most of the organizations were forced to revise their business strategies in order to survive in the recession period. They are focused on studying the external environment, analyzing organization’s competitive advantages, implementing new strategies, changing the existing management styles, studying organizational culture and efficiency to counter the problems caused by the current recession. The famous British economist, Herbert Spencer, who first coined the phrase ‘survival of the fittest’ to summarize Darwin’s revolutionary thesis, says that only the companies that were most adept at competing for and garnering the limited resources in a given environment would survive (Bartolini). Aggressive business strategies without proper evaluation have given way for matured business strategies with proper evaluation. Earlier prospects theory (Risk taking) was used by the organizations for taking decisions whereas recession forced them to switch back to the conventional standard expected utility theory (Risk averting). Prospect theory encouraged the aggressive business strategies with high risk in order to make maximum profit whereas the expected utility theory encourages business strategies of low risk. It is a fact that an organization’s competitive advantage will considerably be reduced during the recession period because of the reduced economic activities in the market. Organizations will reduce advertisements and sales promotions during recession period. During recession period organizations have limited options and they will do everything possible to cut he expenses down to a minimum point. For example, automobile manufacturers organize many trade shows and other expensive marketing activities to attract customers and to boost their selling. At a time when customers don’t have enough money in their pocket, such activities are waste for organizations. Organizations will concentrate in developing new strategies tailor made for recession periods to compete with the dull market. Michiels, (2009) has pointed out that strategies like spending in social media, email marketing, email personalization, direct mail, search engine marketing, and online interactive mediums etc are main channels of marketing for organizations during the recession period (Michiels). These channels are mostly cheaper compared to other marketing strategies and moreover it is personalized. These channels are useful in predicting customer behaviour, at present and future. Mukerji, (2008) has argued that recession is a global phenomenon. In his opinion, signs of a recessionary US economy are being seen thousands of miles away in India. India’s apparel exporters are facing cancelled orders as a result of a weakening US economy and a strengthening Indian Rupee against the US Dollar (Mukerji). Economic changes occurred in one country can affect another country as well because of the globalization. Moreover the worst affected countries like United States and U.K will be forced to enforce tight rules on imports and exports. For example, outsourcing of jobs and offshoring of businesses were some of the major business strategies adopted by the developed countries and organizations in order to exploit the cheaper labour markets in India like countries. The administrations in US and UK are now thinking in terms of putting restrictions on outsourcing and offshoring like business strategies to stabilize their economies. In a recession the expectations from customers are higher. This puts a lot of stress on the Managers, to perform. Changes have to be made to improve the efficiency and effectiveness of the management team (Lau & Yau, p.1) The customers will be more focused about the quality and prices of the product they purchase during recession period because of the increased value of money they are spending compared to the earlier prosperous periods. This will put the sellers on the defence as their bargaining abilities will be less during recession period. Organizations will cut down the salaries of the employees and will ask them to continue their work even after the regular schedules. Employees will be forced to obey the organization because of their fear of losing jobs. Such employees often raise protests when they were forced to work on long shifts with reduced salary. It is difficult to convince the employees that the change is inevitable in the organization because of the recession. “It is necessary to make staff become supporters and followers to implement change. However, pruning is required when there is apathy and inertia from those staff who cannot change” (Lau & Yau, p.7) In some cases, even after the management’s repeated efforts, some employees may not be willing to change their established working culture. Under such circumstances, the management may force to take disciplinary actions against them which may result in trade union strike like unhealthy activities. Neeta (2009) has suggested some strategies for the recession period; review cost operations, focus on core fundamentals, communicate with internal and external customers and employees and be forthright or take strong actions against those who hesitate to accept the organizational change (Neeta) Conclusions The current financial crisis served as a lesson for many entities like people, organizations and the government. People have realized that saving something for the future is essential. Organizations realized that the global economy is not a renewable source and it can the economic bubble can burst any time. Governments learned that it is foolishness to allow the private organizations to function freely without any supervision from the government. Works Cited 1. Bianco, Katalina M. 2008. “The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown”. 8 May 2010. 2. Bartolini Andrew. 2009. “Global Supply Management Insights”. 8 May 2010. 3. Lau C K and Yau David. “Management of Change in a Recession8 May 2010. 4. Miller Joe & Jackson Brooks. 2008. “Who Caused the Economic Crisis?”. 8 May 2010. 5. Michiels Ian. 2009. “How Best-in-Class Organizations Maintain a Competitive Advantage in This Recession”. 8 May 2010. 6. Mukerji Anupam. 2008. “Change Management: US Recession Impacting India”. 8 May 2010. 7. Neeta B, 2009. “Managing Change in the Times of Recession. 8 May 2010. 8. Palermo, Joseph A. 2009. “Blue Dog Democrats and Republican Triangulation?”. 8 May 2010. 9. Rowe Nick. 2008. “What Caused the Financial Crisis?” 8 May 2010. Read More