Financial Crisis and the 2008-2012 Great Recession - Essay Example

FINANCIAL CRISIS AND THE 2008 GREAT RECESION Tutor: Date: Economic Recessions The economy of any country or the world moves in different cyclic patterns on different factors prevailing in that country. There are times when the economy is performing well and there are increased money incomes for people to spend. At this time, businesses are said t enjoy great profits because people’s purchasing abilities are usually high. This is the time when different governments enjoy increased economic growth, with most people getting employment opportunities that they are qualified for at the prevailing or improved wage rates. On the other hand, the economy can go into a depression; this is a time that is highly undesirable, not only for business practices, but also for people employed. This is the time when business and organizations are finding it tough to manage survival because people’s spending abilities reduce. The economic cycles should therefore provide a better framework for businesses to know the best approaches to take amidst all the cycles, A drop in people’s general spending usually arises from various events, with major contributing factors being financial crisis, external trade shocks as well as the adverse supply shock. In response to recession, different governments use various expansionary macroeconomic policies to address the different challenges arising from the challenges. Some of the methods that are usually adopted by various governments to address the challenges of recession include increasing the supply of money in the economy or by increasing government expenditure, in addition reduction in the level of taxes also plays an important role in tackling the problem of recession. However, the process of increasing money supply and increasing public expenditure has other problems as well, if not well implemented, there are high chances that the government can end up into inflation, which is another undesirable economic condition that hampers economic activities. The 2008-2010 Economic Recessions One of the hardest economic challenges that has rocked not only most economies in Europe, but also different nations across the world was the economic recession that happened in the year 2008-2010. During this time, there was a general slump in economic activities in many countries in Europe with many people losing employment opportunities. At present, globalization processes have seen many businesses employ people from different countries, the loss of jobs by these people in some of the businesses and companies in these countries meant that other countries were equally affected by this recession. Causes of the 2008-2010 great recession The great recession ever to have been recorded in Europe and many other parts of the world is said to have started in America and later spread to affect other countries that were said to have some of the strongest economies1. This was through these countries having an unswerving exposure to some of the subprime properties, as well as the steady decline in confidence of holding certain kinds of asset classes. However, one of the main causes of this recession was the general drying up of financial wholesale and retail financial markets in many stock exchange systems of the world. The effect on financial markets brought home grown financial imbalances in different advanced economies of the world, especially those that were characterised by extreme overreliance on wholesale funding sources like the banking system. In the same way, residential property markets also received a good share of the effects, with many of them collapsing to levels never thought of rising again. Up to date, there is still an ongoing discussion among economists and policy markers around the world about the specific causes of the recession, that had the ability to affect many economies of the world to large extends. While it has been clear that some people pointed to failures in the regulation and supervision systems of financial systems, with efforts to strengthen the system all being futile. On the other hand, there is still a strong argument on whether the crisis was purely from poorly planned and coordinated monetary policies or if the crisis was simply a result of the increasing international imbalances as well as the related capital flows2. In fact, it is assumed that in most of the advanced economies these causes were majorly linked to the crisis3. Failure of monetary policies Other policy makers have held different perspectives about possible real causes of the great recession, in the analysis they say that it might have been possible the crisis was caused by a combination of monetary policies as well as the prevailing imbalances in capital outflows across economies of the world4. It is important to note that if this assumption can be found to be true, then there several unfinished tasks that are seeking urgent attention by policy makers and economists. The American market has different characteristics compared to how different great economies are run. In the United States, the demand for housing is a sensitive issue compared to other countries such that it is sensitive to the interest rates in money markets5. In fact, it is said that in the year 2001, this concept of interest rates is likely to have played a major role in the increased demand for houses and other kinds of related assets. On the other hand, during the boom in the stock markets that happened in the late 1990s and later collapsed, there was a similar drop in the interest rates. This analysis brought a close connection between the interest rates and the recession that was witnessed in 2008-2010. Effects of the sub-prime housing markets Some other economists who also carried out research in the causes of this recession observed that influence of the accommodative monetary policies on the prices of houses and other assets was insignificant relative to the general price increases of the houses in the country during that time and the previous years6. Other people have pointed out that the prices of houses in the United States are much related to the long term interest rates experienced in the money markets and such during the period that the recession started, there was a weak relationship between short and long-term rates. This means that people who are expecting to buy houses and other properties have to be speculative enough about future expectations of a fall in the prices and interest rates of these companies. It is assumed that those who had brought sub-primes houses as well as home owners saw the value of their houses falling and affect their mortgage payments in unprecedented levels. In the same way, other economists have argued that due to principle, monetary policies are known to have little or no control over interest rates especially in the long term. Instead, they point to the persistent prevailing imbalances in the global financial markets as the central causes of low nominal as well as real rates during the recession period in the United States as well as other developed economies of the government Some critics have argued that the financial issues felt in this recession cannot be directly articulated to the failure of the government to provide firm regulation of financial markets. This implies that the growth of financial institutions never involved public institutions or the disbandment of social institutions, instead, they cite the introduction of new organizational relationships through forgery. Later on, certain norms and relations control among financial institutions came into existence, only members of the society that were privileged enough got access to the mechanism of the state including financial help as well as leverage on the power resources. The reason for this is the political influence in terms of different ideological perspectives where they had more control of the financial resources, which is the sole reason for the financial crisis of 2007-2010. From the foregone discussion, it can be seen that the recession has been responsible for the failure and total breakdown of most of the companies and businesses in America and other parts of the world. Due to the recession, companies found it challenging to maintain their normal human capital. Other companies found themselves in great losses and could not manage to rise beyond these debts; as a result, they were declared bankrupt and had no other business but to close down their operations. Collapse of confidence in relation to the banking markets One of the main causes of the great recession is said to be the failure of banking systems in United States and other countries in Europe. In essence, baking markets are supposed to manage as well as distribute risks, at the same time, they are meant to ensure that capital for investment is effectively allocated. During the period when the great recession took place, banking and other financial are said to have failed in ensuring capital investment was effectively managed. Baking institutions are said to have failed in their mandate in monitoring the performance of capital markets, as a result, clients and investors a like lost hope in the systems. This triggered a response from the E.U regulatory body that was based on the institutions that they established. The European Banking Authority (EBA) ensured supervision of banks, with an inclusion of recapitalization as well as creation of a “single rule book for the banks.” The European Securities and Markets Authority (ESMA) ensured supervision of the capital markets, also the credit rating supervision and the trade repositories while the European Insurance, and Occupational Pensions Authority (EIOPA) was concerned with supervision of insurance. The European Systematic Risk Board (ESRB) ensured monitoring of threats related to financial stability that came because of developments in macro-economics in the financial system during and after the same period. Lehman Brothers Lehman brothers are said to have had humble beginnings, their history can be traced back to the times when the established and operated a small general store, which was founded by the German immigrant by the name Henry Lehman. The Lehman brothers, Emanuel and Mayer founded their financial Investment firm in 1850, managing to take it to international levels. Henry Lehman, their father mentored them into the field of business in 1844, opening them the general store which they operated before developing to register and run their financial investment bank. As the firm developed its roots in the United States, they received a good market share, with the United States economy growing to become a powerhouse. The growth of the brothers though did not come easily; they had to content with several challenges, although their good management enabled them to manage to increase their market share, becoming one of the highest performing companies in the United States as well as in other countries. The sound management saw the company manage to sail through different economic times including the great depression of the 1930s, the devastating effects of both the first and the second world wars and the bankruptcies prevalent in the 1800s. At the same time, the company managed to survive the long-term capital management collapse as well as the Russian debt default that happened the 1998; this made the firm to stand as one of the financial companies with sound management structures in the United States of America. Despite of all this management strength, the great economic recession of 2008-2010 was strong enough to make the company come to its knees. The move by the company to make an investment in the subprime mortgage market became a disastrous affair different from the lucrative profits the venture had looked to have. The inability of the company to sail through the economic challenges is said to be one of the factors that played an important role in the developed of the great recession. During its prime years, the company had played an important role in the development of the economy of the United States; this meant that the collapse of money markets in the US was a huge blow to the economy of United States, because the company provided employment opportunities to a great number of the citizens of the country. The firm as a prime culprit In 2003-2004, the economy of the United States was experiencing a depression and things were looking good for most businesses, firms and even the citizens. It is during this time that Lehman brothers acquired five new mortgage lenders which specialized in advancing of Alt-A loan facilities, under this product, clients were able to acquire loans and other related facilities without full documentation, something that attracted many clients into the firm compared to other companies. This approach seemed to be a good and lucrative, in fact, the company managed to record an increase in its revenues in capital markets, recoding an increase of up to 56% from 2004 to 2006. This was a fast business growth that had not been recorded in any business dealing in investment banking as well as asset management in the country. In the same year, there was also an increase of up to 10% in its mortgages since 2005, the firm recorded an increase in its profits consistently from 2005 all the way to 2007, with the firm recording a net income of close to $4.2 billion in that very year. Collapse of the Lehman Brothers At the time of the Great Recession, Lehman Brothers Holdings Inc was an international financial services company that provided financial solutions to residents of New York, America as well as in other parts of the world. It is recorded during the period before the start of the financial crisis, this firm was the fourth largest investment bank in the United States in the provision of financial solutions. Besides financial solutions, the firm provided a platform for people to do banking, trading in stocks as well as sales of fixed income. At the same time, it was also instrumental in facilitation of research in investment management as well as private equity and private banking services, in this way the company had great assets that nobody ever thought that it could ever collapse for any other reason. In the year 2008, the news of filling of the firm’s bankruptcy caught many people with surprise. The company was forced to undertake this move following a number of events that preceded its decision. During the recession period, the ability to stay relevant and active in business was making workers to lose their jobs through massive layoff that was rampant in many parts of the country. During the same period, the firm witnessed a huge exodus of most of its faithful clients, there was a sharp decline in the prices of the firm’s stocks in the stock exchange markets as well as devaluation of most of its assets by agencies that operated in credit rating. A combination of all this factors triggered management incompetencies that the company could not sail through, making it to undertake the painful decision of filing bankruptcy files. In the history of the United States, this bankruptcy filing is estimated to have been the largest to be witnessed. In fact, it is said that considering the role played by the firm in the economy of United States, it played a big part in the development of the economic recession. After making the filing, Barclays Bank Limited is said to have announced its decision to buy the firm, although the decision was subject to approval. In 2008, there was a new revised version of the agreement that was later given final approved by the United States’ Bankruptcy court. Other companies expressed their interest in buying of some of the many other assets of the firm including their franchises in America, the Middles east as well as other parts of the world especially in the Europe. Lehman Brothers was not the only company that is recorded to have been hard hit by the great recession, there are many other companies too. The only interest in these companies follows its profile as one of the greatest companies with a great contribution to the country’s economy. In future, it is expected that economists and other policy makers will have to play a central role in ensuring the monetary policies and other financial systems are made in a manner that provides economic security not only to the business community, but also to individuals. The collapse of Lehman brothers rocked financial markets in the United States and other countries for several weeks because of the size and status that the company commanded in the United States as well as in other countries on the international front. Many economists and policy makers questioned the fact that government of United States did little to help the firm stay afloat despite of the fact that the firm had helped Bear Steams in 2008 when it was faced by bankruptcy challenges. The collapse of the company saw more than $46 billion of its market value being wiped away helplessly, as such many companies have ended up learning from the collapse with different recommendations on how to manage tough times. 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