A Critical Perspective of the 2007-8 Financial Crisis - Case Study Example

A Critical Perspective of the 2007/8 Financial Crisis (Student Name) (Institutional Affiliation) (Subject) (Instructor) April 18, 2013 A Critical Perspective of the 2007/8 Financial Crisis The 2007-2008 Global Economic down Turn was a unique economic challenge that has ever engulfed the world since the great World Great Depression of 1929-1934. It started in United States of America and spread to the other parts of the world (Petrovic, 2010). The origin of this recession can be traced to; easy credit conditions from financial institutions that encouraged high-risky lending and borrowing, international trade imbalances, real estate bubble, government fiscal policies in terms of revenue and expenditure. Because of its far reaching repercussions like the threat of collapse of large financial institutions, bailout of banks by national governments, downturns in stock markets, sky rocketing of commodity prices and the persistent decrease in value of  many economies’ local currencies against major currencies and  in many areas, the housing industry got almost crippled. This made economists and financial analysts to try and diagnose the root cause of it and the possibly make a suggestion on what ought to be done to avert or deter the resurgence of another economic crisis of such magnitude. One of the Economists who have written about this is former Nobel Prize William Joseph Stiglitz. In His book ‘The Free Fall’ he clearly writes about how negligence and greed by the banking industry players in the US led to a worse economic crisis in the World than even the World Great Depression of 1929 to 1934 which also hit the world over. In an excerpt from his book ‘Free Fall’ (2010), he clearly indicts organization strategies as ruthless, profit motivated instruments and of management being complicit agents of capitalism at least within the financial cycles whose only motivation is abnormal profits regardless of the means employed. He also argues that in order to enhance effectiveness in the business industry and the general performance of the whole economy, the market should be self regulating through the market forces of demand and supply and the way of managing risks should be done in a sober manner and efficient organizations will survive while the less competent will be outdone from the industry by the most efficient firms and that customer will always be the final arbiter. A critical consideration of the above argument can be made in terms of: culture, motivation and strategy. Also on how power is exercised in organization in relation moral values. Organization culture can be defined as a set of beliefs, norms and values within a particular organization. It is this organizational culture that often defines a given firm’s goals, and objectives.  Rodrcik (2009) describe organizational culture as a set of shared mental assumptions that guide interpretation and action in organizations by defining appropriate behaviour for various situations. From the above definitions, it can be agreed that, different organizations have different organizational values, visions, norms, working language, systems, targets and habits. In some cases, the culture of a company is defined by the top management and other employees merely being objects of executing it. In relation to Joseph Stligz arguments, it can therefore address that prior to the Global Financial Crisis, the culture of most financial institutions was so (and may be is) so skewed towards profit maximisation at all cost and this led to an economic abyss of its own magnitude that seven years later many economies are yet to make an economic come back. It can therefore be asserted that were it not because of a deep entrenched culture within the co-operate world of always ‘money first’ and other things later, this economic down turn will been avoided. This is a dangerous culture which must be stopped at all cost.  To stop it is not an option but a moral duty of instilling a sense of responsibility and decorum in a free market economy. Motivation can be defined as the underlying reason as to why an individual or different organizations act differently in different situations and circumstances. It can also be defined as the drive engine of different co- operations. According to Joseph Stligliz, money making at all means was the motivation of the American banking. He seems to say that, these organizations believed in the Machiavellian Theory. The end justifies the means. That whatever measures adopted, money must be the guiding principle! It is common knowledge that profit is the motivating factor for any entrepreneur to venture into business and anything other than profit should be discouraged at all (Dvosky &Scheiber, 2009). But, it must be clearly understood that the pursuit  of profit without following the laid down rules and regulations and even at times exploiting the loopholes in the legislative system is immoral and unacceptable because it would leave the customers and generally the ‘have nots’ at a dangerous economic and even social position. For example the many people who lost their mortgages as a result of the ‘home bubbles’, and others lost their daily livelihoods in form of jobs. Therefore, the entrepreneurs have a moral and economic responsibility of adhering to their respective industry rules and regulations. It is often argued that markets should be allowed to operate with minimal national government controls so that efficiency can be promoted and this in the long run will generate economic growth. However, the national government ought to put in place proper safe guards not as a way of interfering and intimidating the market forces of demand and supply, but a precautionary measure of deterring any financial institution or firm within the economy from manipulating the laid down rules in the pursuit of making abnormal profits and also cushioning the economy from any uncertainties. Therefore, it will be so unfortunate and very unfair for the National Governments to take back a seat while leaving their citizens at the mercy of entrepreneurs who are majorly less concerned about the customers but only the profits from their business ventures. For instance, at the start of the height of the 20007 to 2012 financial crisis, the government should have forced the banks to restructure financially by wiping out the shareholders and handing ownership and control to those who held their debts. This would have protected and cushioned the majority of the shareholders from being into a messy economic situation that little knew about. Strategy is a method or plan chosen by a particular organization or individual towards the realization and accomplishment of their desired goals and aspirations. Different organizations always tend to deploy unique strategies towards the achievement of their both short term and long term goals. Unlike in controlled economies where national governments always controls markets, in liberalized economies, co-operations tends to operate freely with minimal government interference and this is what makes them come up with their own  sophisticated and often very risky strategies so as to compete in an economic environment where cut-throat competition is the norm.. This is done through recruitment of top notch strategists to assist in the analyzing of market trends, the possible future certainties, and the measures to be adopted in the pursuit of always remaining relevant in the industry and also making economic gains. Therefore, to ensure maximum protection of consumers from being exploited by the firms’ crude and usual exploitative and predatory strategies, the respective national governments ought to put in place proper legislations with clear demarcations and the possible sanctions to those organizations that often do flout these rules and regulations. Due to the excruciate effects of the 2007-2012 Global Economic Recession, it should be affirmed that, never again should financial and other organizations be allowed to operate, through their well orchestrated exploitative strategies with unchallenged impunity. A red line must be drawn and whoever doesn’t operate by the set rules and regulations, to face the full force of the law. This will not only boost the already lost public confidence in these economic organizations but will also go a long way to remedy the management flaws in the cooperate world. Secondly, it must be emphasized that, public-private partnership should be promoted so that the private sector doesn’t need to deploy predatory strategies in order to be relevant and survive but they ought to apply more humane and informed measures towards the realization of their short term and long term economic targets. If this is soberly done, cases of firms adopting very risky and adventurous strategies with an aim of getting their competitors flat footed and thus make more money will be minimized (Joseph, 2010). According to Mohan (2012) power is the ability to influence the behavior of people. In organizations, it can refer to the ability to influence employees towards the realization of a given firm’s short term and long term goals and objectives. In most cases, organizations have a hierarchy of power. This shows who reports to whom within that particular organization. In other words, it shows who is at the top of the management ladder and who reports to him/her. This is important as it organizes and mobilizes labor to direct their energies towards the targeted goals of that organization and also to avoid undue competition where everybody wants to be the boss within the organization. If organizational power is given to visionary men and women of a strong zeal and determination to excel and they exercise this power with utmost transparency, accountability and within the morally accepted social and economic maneuvers, firms will record high and sustainable growth rates (Abiad and Mody, 2012). Sadly, in most cases, power has always been used to the detriment of the less fortunate with an aim of making an economic ‘kill’.  In relation to Professor Joseph Stiglitz’s argument, the 2007/2008 global economic crisis, one wonders on the roles played by the financial institution power brokers. What can be agreed is that, power within these organizations was exercised in a manner that didn’t reflect the true leadership where integrity and accountability forms the cornerstone, but in a dubious, reckless and predatory manner. It is so sad that such weird behaviors led to the suffering of many innocent people not only in America, but the world over. Even now, economies especially in Western Europe and the developing world are still reeling from the catastrophic effects of this financial turmoil that took the world by surprise (Gregori, 2009). It is therefore incumbent to organizational power brokers within an economy to learn from such dreadful mistakes and resolve to be vigilant and always to be mindful of their actions and be ready to play by rules and regulation that do guide their respective industries and also understand that their businesses thrives most when trust in them is guaranteed. Professor Joseph Stiglitz also appears to question the soundness of American economy and even the true shape of a capitalist system. He believes that free markets should self regulate and the ways of managing risks should be in such way that is sober and the most efficient organizations survives while the customer remains secure from any market uncertainties (Siedschlag, 2012). He also argues that the 2007-2012 Global Economic madness was also of a result of a careless government that took no measures against financial institutions that openly flouted the industry regulations and rules. Take for instance the banking in America that lowered interest rates to a very low point sparking a high-risky lending and borrowing! When the crisis became serious is when the Federal government tried to remedy the already messy situation. Unfortunately, it was so little so late. The mess wouldn’t be undone all that easily. Imagine the numerous jobs, home owners and fragile economies that would have saved world over if the US government would have acted in time before the whole economic crisis escalated (Scadler, 2010). It is against this background that I make an honest opinion on free market economies. Yes, economic liberalization is essential for the growth and flourishing of any economy. But too much liberalization of economies is not only dangerous, but also a threat to the existence of a free society where the people lives in a decently. It gives the corporate extreme power of even undermining a democratic state. For instance, one of the American founder fathers-Thomas Jefferson is quoted to have said ‘‘I hope we shall crush......in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial strength and bid defiance to the laws of our country,’’ Also Franklin D Roosevelt in April 29 1938 in a message to the US Congress, he warned that the growth of unchecked private power could lead to fascism. I have deliberately used the two examples to demonstrate the fears of the two former American presidents on free economies and the world experience of 2007-2012 confirmed it. That a free corporate can do anything with little regard to the possible effects of their actions after all, their language is profit! Profit! Profit! In a nutshell, the 2007-2012 Global Economic Recessions was whose effects like retardation of world economies, sky high inflation, loss of jobs and loss of homes especially in the US were so catastrophic not only to citizens of the US, but also to almost the entire world where its ripples are still being felt. It was very unfortunate that an economic crisis that could have been avoided eventually hit the world with an almost crippling effect and the leading world economies the US, China and Russia underestimated its magnitude when handling it and swung into action when the damage on the economies was already done. This must therefore set an example to all the world economy stake holders to always remain vigilant and ready to tackle any economic crisis in time before it escalates. References Abiad, A. and Mody, A (2012), “International Finance and Income Convergence: America is Different”, IMF Working Paper No. 07/64. Dvosky, T. Scheiber, H. (2009). “CESEE Households amid the Financial Crisis: Euro Survey Shows Darkened Economic Sentiment and Changes in Savings Behavior”, Focus on American Economic Integration Q4/2009, Oesterreichische Nationalbank, pp. 71-78. Joseph E. Stiglitz.(2010). Freefall: America, Free Markets, and the Sinking of the World Economy. Norton & Company, In. Lane, R. (2008). The Macroeconomics of Financial Integration: A European Perspective, IIIS Discussion Paper No. 265. Scadler, S. (2010). Do Economists’ and Financial Markets’ Perspectives on the New Members of the EU differ?, IMF Working Paper No. 07/65, March. Martin, R., and Winkler, A (2011). Real Convergence in America and Central, Eastern and South-Eastern Europe, Palgrave. Mohan,M. (2012). Liberalisation and Regulation of Capital Flows: Lessons for Emerging Economies, Standford Centre for International Development No. 399. Petrovic, A. (2010). National Rescue Measures in Response to the Current Financial Crisis, Legal Working Paper Series No. 8, July, European Central Bank. Rodrcik, D. (2009). “The Social Cost of Foreign Exchange Reserves”, International Economic Journal, Vol. 20 (3), September, pp. 253-266. Siedschlag, T. (2012). Managing Capital Flows: Experiences from Central and Eastern Europe, ESRI Working Paper 234, March. Zumert, T. (2011). “Credit Developments in CEE: From Boom to Bust or Back to Balance?”, Slovenian Journal for Money and Banking, Vol. 58 (11), November, pp. 94-101. Read More