The Fallout from the Global Financial Crisis - Assignment Example

The Fallout from the Global Financial Crisis Module Title Module number Tutor: Date: The Fallout from the Global Financial Crisis Introduction The global financial crisis, which had been brewing for a while, hit the world in the middle of 2007 and the real effects were seen in the year 2008, when leading world economies started to feel its effect. Prior to this, major economies of the world had experienced a prolonged period of economic boom, when all of a sudden trouble started to appear in the United States and quickly spread to other countries. Within a short time, large financial institutions were collapsing, stock exchanges took a downturn and governments had to come up with rescue packages in order to bail out the financial systems (Munro 2009). In the United States of America, leading financial institutions like the American Insurance Group, Lehman Brothers, Freddie Mac and Fannie Mac started the avalanche of collapse of financial institutions (Gross 2009). The shortfall in liquidity in these institutions triggered the chain effect that was felt throughout the world. The United States has a significant financial influence in the world and therefore, even countries that were not prone to the financial crisis like China were eventually affected. This is because the United States is a considerable trade partner with China and once the normal trade is disrupted, China would certainly feel the effect. Other leading economies in the world such as Australia, Germany, Canada, UK and France also felt the sting, but have since then recovered. The cause of this financial crisis, which is regarded as the worst financial crisis ever since the 1930s when there was the Great Depression, can be attributed to risky and adventurous practices that financial institutions adopted in an attempt to make more money at the minimal risk possible (Harding 2010). The rising cost of mortgages led to banks to target even people with poor credit rating. Banks started to trade extensively on securities, which offered them less risk, and in the process, they could afford to lend more than they had in depositories. At that moment, the value of property in the United States was highly inflated and when people began to sense some trouble, they started to reclaim their securities that owners could not afford to pay. This led to banks being required to pay more than they could afford and some like Lehman Brothers went under. The government intervened by injecting a stimulus package into the economy, worth US$ 700 billion (Taylor 2010). Question 1 Do you consider the global financial crisis and government and organisational reactions to it to be examples of planned or unplanned change? Justify your answer. The global financial crisis raised concerns on the efficacy of the United States business system and its business education. However, this also occurred in Australia. The question that lingers is whether the recession was foreseen in advance or it just caught many Australian systems unawares. One of the consolation factors that the Australian economists and planners can rest on is the fact that it did not start here, but was because of the happenings that started in the United States (Kennedy 2010). The reaction to the financial crisis in the United States was through bail out for those firms that were collapsing. The basic step was just to pump more money into the economy by giving banks money, which they would loan, to people, hence promoting the circulation of money into the economy (Cowan 2009). This way, even the stock exchanges would start to pick up again. The main sectors that were affected by the recession in the United Kingdom include the financial and banking industry, and the manufacturing industries. These forms and contributes a substantial amount of input into the economy. Although this was not a UK only affair, reports indicate that the United Kingdom took a little bit longer to emerge from the recession, unlike other countries like the US, France, Germany and Sweden. The industries were a bit slow to pick up as sales had diminished while local consumption had gone down. In order to be prepared for such situations in the future, it is crucial that the there is a proper understanding of what led to these events. Many theories to explain this have been formulated, but this is mostly for the case of the United States. Many other countries just experienced the ripples of what was happening in the United States. A careful analysis of what took place in the period preceding the financial crisis shows that there were many financial mistakes that the financial institutions which set forth a stage for the financial crisis to occur. Many have argued that the crisis was caused by greed, moral meltdown and public policy disasters. Other arguments raised for the cause of the financial crisis was that it might have occurred due to imbalance of trade between different countries like the United States and China, whereby the Chinese people spend remarkably little while their American counterparts are committed spenders. The global economic crisis is an example of an unplanned change, while the government and organisations’ reaction to the financial crisis can be termed as a planned change. What the government and other organisations were doing was trying to stay relevant in the face of environmental pressures. The crisis was never precisely predicted, although the conditions that would lead to it were easily visible. The financial institutions had considerably ventured into subprime lending, which is quite a substantial financial gamble. When the economic balances shifted, banks were not left in an awkward position whereby they could pay their debts nor did they have enough deposits to pay the money (Pullin 2010). The global economic crisis is an example of unplanned change because what was happening was the economy trying to balance itself to fit the prevailing conditions, since the financial institutions had created a situation that was technically unsustainable. The skyrocketing prices of real estates, which many financial institutions had as collateral, were extremely inflated, and no one had anticipated that this would have changed within such a short time. In addition, the values of stocks in the various stock exchanges were to fall considerably due to the ensuing economic recession. These stocks had been hyped, and in the economic recession that followed, the prices drastically fell. This was an adjustment to suit the market condition, and to reflect the real situation that existed. This unforeseen happening caught even many economists by surprise. The fact that the global recession was not expected or systematically planned makes it an unplanned change. On the other hand, the government and organisations’ reaction to the global economic crisis is an example of a planned change. The governments needed to maintain a vibrant economy amidst shrinking consumer spending (Pettifor 2008). This was risking the performance of the economy and the government needed to do something that would help to keep the economy running. One of this was to pump money into the economy through the banks and thus avail money for the banks to lend to people. By doing this, the government was being reactive to the problem that was at hand. Financial institutions quickly reduced the rate of lending to people in the period after the onset of the global financial crisis (Kardas 2009). At that time, the risks of deleterious debts were high as there were many defaulters and people who were not able to pay for their loans and mortgages. Lending to people with poor credit history would thus raise the risk for banks and there was a high possibility that people would default payment. When the central banks tried to lower the lending rates in order to encourage other banks to borrow money and inject it into the people, banks were hesitant as they were already grappling to recover the lost cash and to stay afloat. This reaction was thus a planned change that would be used to shield them against further losses, and ensure that they remain relevant in such times when the risk of collapse and liquidation was extraordinarily high. Question 2 Which reason(s) would lead to people or organisations resisting change caused by the global financial crisis and subsequent economic downturn? The global financial crisis of late 2000s led to an economic recession that was felt globally by the almost all the leading economies. Even after recovery, it has brought with it some lessons for almost all the stakeholders in the financial sectors and also for the ordinary people that cannot be ignored (Taylor 2009). The way people spend and plan was altered, while the organisations had to re-assess their risk factors when doing business in order to ensure that future financial meltdowns leave them intact and not affected. Governments had to intervene to bail out collapsing firms and ensure the stability of the economy, but it was an excellent learning point on how future intervention programs should be carried out, without drawing much criticism from people and other stakeholders. The changes caused by the crisis were immense and far-reaching. Different governments had their own ways of dealing with the problem, depending with the magnitude of the problem. In places such as China, the effect was minimal and this has enabled it maintain a steady economic growth rate even throughout the entire period of economic recession. Other countries like the UK were dragged deep into the problem and have even had a hectic time getting out of the recession. Institutions and organisations that were affected had to implement changes that would see their return to profitability. Resistance to changes that were brought about by the global economic crisis is due to various reasons. First of all, one of the main causes of the crisis was the almost uncontrolled lending by the banks, in the hope of making more profits (Keeler 2010). Onset of the crisis necessitated a liquidity management policy, which would be used to control and regulate borrowing, by setting tougher conditions for the borrowers. They would be required to prove their credit worthiness before being given money, so that in case of the system failing again, banks would be spared. One of the resistances to adopting such control measures is the desire to reach more people and lend more money, in order to make more profits. This is argued as one of the causes for the economic crisis, and for the same reason, some were resistant to adopting a change policy that would mean that they do not target the subprime group without putting the necessary precautions (Griffin 2009). This would simply mean that they would have less revenue and consequently fewer profits. The government was forced to bail out the financial institutions that were on the verge of collapse in order to save further damages to the economy. The collapse of these institutions, which were among the biggest, would have brought serious economic problems to different stakeholders and therefore, there was a need to bail them out so that they would stay afloat. However, there was serious objection to this program by many people who said that this was tantamount to the state controlling private companies (Jack 2010). The amount of money that was involved in bailouts was immense. The objection was that taxpayer’s money was being used to keep private companies afloat, whereas it was these companies whose poor policies had caused the crisis. Other smaller firms, which were also affected, did not receive any bailout or incentives from the government, leading to opposition for the plan to bail out large firms, yet they are the ones who had caused all this mess. Question 3 Does the global financial crisis and the Australian government’s reactions to it fit with developmental, transitional or transformational change? Justify your answer. The global financial crisis and the Australian government reaction to it fits well as a transitional change. A transitional change involves an implementation of a known knew state. This involves changing the current ways of doing things and substituting it with another methodology or a way of doing the same thing, which though it is new to the situation, it is well known. It is a form of temporary development that aims at making things work in the meanwhile, while one is waiting for situations to change for the better. The intervention policies that were done by the government were nothing new than what had been happening for a long time. The government has intervened in various cases to bail out companies that risked collapse even out of their own managerial mistakes. Some companies have in many cases faced liquidation and put the investments of many people to risk. To avoid such a scenario, the government usually intervenes to ensure that the interests of other people are well catered for. In addition, various large manufacturing companies faced collapse and their performance was declining. There were reduced markets for goods and services as consumer spending increased. To change this, the government had to encourage banks to borrow money from the central bank in order to lend it to the people. Lending people the money would thus lead to a situation where consumer spending increased and there would be a market for other goods and services. In this way, the market for Australian companies would collapse. The intervention of the government was therefore, not a new concept that was developed but an existing that has been done many times before. Even before the global financial crisis, the government’s fiscal policies have at other times encouraged the banks to lend more money to the people and therefore, make people to spend more money. Such an incentive is necessary when consumer spending has declined, and many goods are lacking markets. Once this is done, there is increased market for goods and services and the economy ends up performing well. Conclusion The global financial crisis of the late 2000s has shaken the ways in which economic planning and policies are formulated. First, it is difficult to understand how economists both in the USA and in the Australia failed to forecast this happening in time so as to avert it. Instead, the earliest signs that things were not going well started to surface when some leading financial institutions in the United States started to collapse and the chain effect followed. After the collapse, there was a general panic among different groups of stakeholders in the financial sector, making the financial institutions to face collapse as securities were withdrawn and people went into panic mode. This is what unearthed the various practices that banks and mortgage institutions had taken in order to increase sales and get more clients. Since there was a significant market in the subprime people, this had become an easy target for the financial institutions that scrambled to sell their products to these people, many of whom were not credit worthy or had poor credit history. To supplement the problem, prices for property were highly inflated and the banks had depended on these as collateral. They did this knowing that if anyone defaulted, they would be left with high-value properties, which they would dispose off at a high profit. When the prices for these properties normalized, the financial institutions were left with a tough call since they had low-value collateral and subprime creditors. This is what led to all problems that faced the financial institutions. The decline in consumer spending was also another critical problem to the economy. This meant that there would be decreased sales in consumer goods and many industries would have to operate with reduced revenues. The United States is a leading consumer of goods and services from different countries, including Australia. When the purchasing power of the Americans declined and they started spending less in the wake of the global financial crisis, other countries experienced problems when markets for goods and services decreased. The government and organisations had to come up with some change mechanisms that would be used to counter the effect of the economic recession that was being experienced in different countries. This included the government bailing out firms and the financial institutions adopting practices that would help them to withstand the tough economic situations. The government needed to increase consumer spending among people in order to sustain demand for goods and services, while the industries on their part had to adopt a mechanism that would help them to stay afloat. With the global financial crisis over, leading world, economies including the United States and Australia have shown signs of full recovery. There are many lessons, which have been learnt, and as of now, there will forever be a significant change in the way financial predictions are done, and the extent to which risks can be taken without being regarded as greed. The world will need to be more watchful for future recurrence of such situations, and the way economic forecasting is done should be made to be more precise. Bibliography COWAN, J. (2009) Federal Budget deficit in 2009? Super Review, 22 (22), pp. 16-19 Griffin, R. (2009) Market cycles. Journal of Money Management, 23 (5), pp. 19-24 Gross, D. (2009) BAILING OUT OF THE BAILOUTS. Newsweek (Atlantic Edition), 154 (26) December, pp. 8-12. Harding, J. (2010) Wall Street Runs on Fear. Phi Kappa Phi Forum, 90 (3), pp. 22-26. Jack, C. (2010) Recession claims more victims. Journal of Commercial Motor, 212 (5369) February, pp. 12-14. 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