The Fallout from the Global Financial Crisis - Essay Example

Name: Instructor: Course: Date: The fallout from the global financial crisis Introduction The financial crisis globally started in mid 2007. Stock markets in many countries fell by significant amounts and many financial institutions collapsed or had to be bought out. Governments had to offer financial institutions rescue packages to bail out them out. The global financial crisis began when banks and financial institutions offering mortgages changed the interest rates from being fixed to being variable. Many homeowners who had acquired homes thinking they could easily repay them were unable to pay their mortgages leading to foreclosures. Since the market prices for houses had dropped significantly below the mortgage loans led to huge losses to financial institutions. This was the case in many nations of the World. The purpose of this report is to examine whether the reactions of governments and institutions to the global financial crisis were planned or unplanned. It will also deal with the reasons why people and organizations would resist the changes brought about by the global financial crisis and whether the reactions of the Australian government to the global crisis are developmental, transitional or transformational change. The scope of this report is Australian though it will also deal with other countries such as the United States and China. Are the Governments and organizational reactions to the global financial crisis planned or unplanned change? Planned change in an organization is aimed at improving the effectiveness at any of the four different levels namely technological capabilities, organizational capabilities, functional resources and human resources. Planned change is a deliberate action on the part of the organization. Unplanned change is when unforeseen circumstances force an organization to change. Unplanned change is mostly as a result of external forces such as globalization, managing ethical behavior, technological change and workforce diversity. The global financial crisis leads to governments and organizations making unplanned changes. This is because they had to make adequate plan to cater with the crisis. The following changes were made to deal with the financial crisis. The bursting of the housing bubble in the United States is what triggered the global financial crisis. This was followed by a fall in the prices of mortgage backed securities and the collapse of hedge funds holding such securities. The situation was no different in Australia, though the problem was much smaller than in the United States. Australia companies which relied on financing from overseas were unable to deal with refinancing of maturing debt. The most affected companies in Australia were Centro, ABC Learning, Allco and MFS. Australian banks were faced with increased challenges because they are the biggest borrowers in the Australian economy. Banks borrow funds from offshore markets to finance Australia’s increasing borrowing habit. The global crisis leads Australian banks to pay very high margins on the borrowings they had obtained from US and European banks. The Reserve Bank in Australian like many central banks in the world had to inject cash into the financial system to deal with the liquidity crisis. In the United States mortgage companies Freddie Mac and Fannie Mae were unwilling forced into nationalization due to pressure from their Chinese and Japanese investors. This move resulted in the Lehman Brothers a leading investment bank to collapse. Banks were faced with deeper crisis in three ways; banks faced the risk of solvency , an inter bank lending panic was created by the change in Federal Reserve policy and investor panic in stock market resulted in bank shares losing value. Since banks lend loans as a fraction of their capital, the decreasing share prices led to banks refusing to lend money. This threatened the stability of the global economy. An effect that was felt throughout industrialized countries such as the United States (US), United Kingdom (UK) and Continental Europe. Governments did not plan to help out the financial institutions, but were forced by external factors such as pressure from investors. This can therefore be categorized as unplanned change. Banks refusal to lend out money is not a normal thing in any banks order of business. Banks make a bulk of their money from interest on the loans they advance their customers. Therefore a policy change to refuse to advance loans as a way of dealing with the economy crisis is an unplanned change since it is not a policy that was made willingly but as a result of the crisis. Many countries have introduced policies of bailing out banks though to varying extents in different countries. For example in the United States the Treasury Secretary proposed that the US government buy all the worthless debt from banks using the taxpayer’s money. The United Kingdom plan by the government involved the purchase of shares in banks a policy that was adopted in many of the countries in the European Union (EU). This was a way of the government having some control in the financial institutions though very minimal. The aim was a sale of the government’s stake in future when the industry becomes profitable again. In capitalist markets governments aim at letting the financial sector regulate itself. The change to the governments investing in the financial sector is not ideal but a result of the crisis. It is therefore an unplanned change. The United States government has used US $ 700 billion to bail out the financial institutions. However this money was obtained through debt. This money was used in three ways loan guarantees, direct assistance to banks and direct lending into the money market to stimulate money flow. The UK bank bail out is £ 37 billion. Most countries in Europe are also planning to use similar amounts for instance Italy intends to invest £ 24 billion to bail out banks as reported by the Financial Times on November 5, 2008. This expenditure creates huge deficits in the countries budgets. This is a great concern since financial advisers do not see this as a viable option in the future. Since the governments will have to repay these borrowed funds? All this changes have occurred as a response to the crisis. Most of them seem appropriate only for the short term. Questions are raised as to whether it is economically sustainable to borrow money abroad to provide funds which will be injected into the economy. Also the buying of shares in banks by governments creates a problem in the economy. This is because it will mean that financial products and services are no longer priced according to free market forces. Governments will interfere in the running of financial institutions a situation that is not ideal in a capitalistic market. Reason(s) that would lead to people or organizations resisting change caused by the global crisis and subsequent economic down turn. People and organizations resist change mainly because they feel that their freedom is being threatened. There several reasons that can result in resistance to change. These include fear of the unknown, fear of loss, fear of failure, disruption of interpersonal relationships, personality conflicts, politics and cultural assumptions and values. Fear of the unknown is because the global financial crisis has created a lot of uncertainty in financial sector and in the global economy in general. The result is ambiguity because people to do not known what will happen in the near future. Will the situation improve or will it get worse? Fear of loss is because employees in all sectors of the economy are faced with the risk of losing their jobs in coming days if the financial crisis is not resolved. Employees in the financial sectors are the most affected since this sector is the one hardest hit by the global financial crisis. For banks to cope with the reduced incomes and increased costs of doing business staff was retrenched. Investment banks for example Lehman Brothers in the United States collapsed. This means that their whole workforce was left without jobs. And with the crisis in most economies in the world chances of securing other jobs is very minimal. Fear of loss may also be due to increased costs of doing business and reduced availability of credit facilities. This means that organizations are unable to meet obligations to their clients. Organizations therefore fear losing their clients and thus loss of income in the future. Subsequently this will result in loss of profits. Fear of failure is as result of employee anxiety as they anticipate increased workloads or difficulty in performing tasks. The global financial crisis has lead to many people losing their jobs. Those employees left behind are expected to cope with increased workloads some of which might not be in there areas of expertise. The anxiety created by the fear of failure which may result in the loss of a job makes the employees up tight and prone to stress related disorders. This means increased medical expenses to the individuals or organizations. Disruption of interpersonal relationships arises when some employees are fired while others are left as organizations try to find ways to stay afloat. These means that interpersonal relationships developed in the course of working have to be destroyed. Relationships between banks, financial institutions and organizations are also destroyed when they are unable to advance organizations credit facilities. Politics take center stage when there is a shift in balance of power. A threat to loss of power as result of change creates resistance in people and organizations. The global financial crisis leads to the need for governments to bail out their financial institutions. In many countries this was done by purchasing shares in the affected financial institutions. The effect was resistance by many organizations since this was deemed as interference in the free market. Government interference is very much shunned especially in the world today where most economies are capitalist Cultural Assumptions and Values- Employees in cultures with high uncertainty avoidance may not be as receptive to change as those in cultures with low uncertainty avoidance. Also, some individuals tolerate ambiguity more readily than do others. This also applies to organizations. People and organizations are programmed to work in certain ways according to their surrounding. However, the global financial crisis has lead to the need to re – evaluate policies and strategies to ensure that the organizations and individuals survive this crisis. Is the Australian government’s reaction to the global financial crisis developmental, transitional or transformational change? The efforts by the Australian government can only be termed as transformational changes because the global financial crisis has lead to radical change, radical re-conceptualization of the society and organizations culture, values and leadership The Australian Government responded to the global financial crisis in the following ways. The Reserve Bank of Australia (RBA) on October 7, 2008 ordered a cut of interest rates by 100 basis points. On October 12, 2008 the government of Australia made an announcement that it would guarantee bank deposits and for a fee they would be a wholesale funding of Australian banks. On October 14, 2008 the Australian Government announced a $ 10.4 billion package to stimulate the economy. Of this $8.7 billion was allocated for low income families and pensioners, $1.5 billion was to support the housing construction industry and $ 187million was allocated for new training places. On February 3, 2009 the government announced a second stimulus package of $ 42 billion to support the construction industry. Seventy percent of this package was used on infrastructure. All these efforts were radical as the Australian Government aimed at cushioning its citizen and Australian companies from the severe effects of the global financial crisis. The first stimulus package was directed at the pensioners and the low income families. This was because the government saw that this bracket of its citizens was the one most likely to be adversely affected by the financial crisis. The second stimulus package aimed at injecting funds into the infrastructure. These funds were distributed among schools, new homes, road repairs, small business tax breaks and cash breaks for taxpayers earning less than $80000. The guarantee of bank deposits and for a fee they would be a wholesale funding of Australian banks by the government can only be termed as radical measures as this is not normally the case. This radical action was only because the Australian government needed to cushion its financial institutions. Conclusion The global financial crisis has affected all the world’s economies. The effects of the global crisis started in the United States in mid 2007 and spread to all major economies in the world. Australia has not been spared by this crisis though the problem was not as severe as in the United States. Organizations and people are resistance to the change brought about by the global financial crisis. The resistance is as a result of fear of uncertainty in the future. Organizations fear the loss of incomes and the closure due to the increased cost of doing business. Employees fear that they will be retrenched from their jobs or loss the benefits previously accorded to them by their employers. The Australian government has injected money into the economy in order to facilitate transformational change. This change was very much needed to ensure that the Australian companies and financial institutions were able to withstand the global financial crisis. This has meant that businesses as well as citizens of Australia were cushioned from the effects of the global crisis. References. 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