The Global Financial Crisis of 2008-2009 Has Been Blamed on Corporate Greed - Coursework Example

The global financial crisis of 2008-2009 has been blamed on corporate greed, and inadequate regulation and oversight in the United States of America” The topic “The global financial crisis of 2008-2009 has been blamed on corporate greed, and inadequate regulation and oversight in the United States of America” 1 Introduction 2 Executive Summary 2 Causes of Recession: The Literature 3 Sub-Prime crisis 3 The Global Recession 5 Financial Engineering 6 Corporate Greed 7 Regulation and corporate Governance 7 Conclusions 8 Reference 8 Introduction If one were to define the term in economic language, one could state that in essence recession is the disturbance in the economic environment within a nation over a continous period of time, in the nature of a business cycle (Singh and Yadav, 2009). When responding to times of economic deceleration, most governments tend to respond through the adoption of policies at a macroeconomic level-these are inclusive of things such as escalating money supply, escalating spends undertaken by the government by way of infrastructure spends and lessening taxation. If one was to go by the Keynesian theory, a fall in AD then will mean there will be a fall in Real GDP. Summary Having provided a short definition of the meaning of recession one can now outline the exact focus of the following essay. For the most part, the essay will try and bring into context the assumption that the recession was in effect the result of a mix factors including primarily those of corporate greed and the lack of a financial regulatory mechanism that could prevent the US and the UK economies from falling into the property bubble trap. The essay will also seek to outline the major impact that recession has had on the real estate development, both commercial and developmental. I its concluding analysis the essay would put forward a gamut of ideas as have been propagated by theorists about how best to deal with recession. Causes of Recession: The Literature The primary cause of the recent economic downturn can be traced back to an entire range of factors. These factors are inclusive of the extreme debts that were taken on by people, an over inflation in property values and prices, immense greed at the corporate level coupled with ignorance (lending firms deficit ) to accept loans that they could not afford and the ignorance and unwillingness to act on part of the Bush administration (Zamaan, 2009). Dependence on foreign merchandise and energy are also responsible for the crisis to a certain extent. With regards to a detailed yet simple analysis of the causes behind this recession one needs to necessarily refer to the points that have been made by New York Times columnist and Nobel rice Winner Paul Krugman.  He states in no uncertain terms that for an understanding of the cause of this recession one needs to look at Asia (Krugman, 2009). After the 1997-98 Asian Financial Crisis, countries in that part of the world started protecting themselves against future currency corruption by creating huge reserves of foreign revenue and assets and by exporting the added capital to the West. This export of assets was in terms of real estate primarily, thereby driving up the prices of real estate in the West by leaps and bounds (Begley, 2009). Sub-Prime crisis There was in other words, a big savings surplus and most of this surplus flowed to the United States. A large part of it actually in per cent of GDP terms actually flowed to Europe but the depth and freedom of US financial markets led to among other things, quicker money flow to mortgage financing and households' accessing that wealth. Complicating the situation further was the fact that there was also the irresponsible behavior on part of bankers looking for manners and methods by which to create wealth for themselves while resulting bankruptcy for companies aiding transfers of loan risks to others. The result of all of this was the creation of a bubble of wealth which was false and was therefore bound to burst sooner or later. What this did in essence, was that it led to the creation of a building boom which in essence was a bubble. The manifestations were things such as the availability of cheap mortgages. These ended up attracting buyers that were incapable of repaying the payments of the houses that they ended up buying-basically houses that they could not afford (Coy, 2008). Most of these buyers, if they would be made to undergo the stringent procedures used for the screening of candidates eligible for housing loans, would end up being not eligible. Causes for eligibility such as sufficient income and /or poor credit history were ignored on a mass scale (Coval, Jurek, and Stafford, 2009).The financial institutions nevertheless, qualified such borrowers for the mortgages because by now they have learned how to shift the credit risks through securitization to greedy and /or obtuse investors (Ewing et. al., 2009) It is the theory of the housing bubble which is in fact the driving force behind explanations that seek to help understand the causes of recession. The basic problem was simple. There was a system in place that ensured widespread right to ridiculous mortgage products. There were other factors like the lack of job growth during the Bush administration stay at the white House (Ewing et. al., 2009). It created less than four million jobs in eight years. Had the administration done what it needed to do, job growth would have been enough and ensured that there was an adequate rise in wages. This in turn would ensure that many would have bypassed problematic, risky, and often-destructive home equity loans and other odd and peculiar mortgage products. What is interesting an in fact ironical to note here is the fact that the crisis had its impact in the nations of Asia and in the emerging markets (The Bush recession, 2009). They felt the resultant impact of the bubble burst just as well as the US did. When demand for goods and products declined in the US, economies of Europe were consequentially dragged into recession with the global economic giant as well. Declining demand by Americans for goods manufactured in Asia dragged their economies into recession as well, along with Europe. This can be attributed in large parts to the innate characteristics of the WTO regime i.e. the domino effect-the fall of one ensures the fall of the rest (Rosen, 2007). Interestingly most of the housing market continued its trend of flourishing, until early 2006 when cracks were beginning to become evident. Housing prices sustained their uphill stride (albeit at a rate that was relatively slower), this also meant that by way of inventory, the trend began to build (given the fact that it was increasingly more difficult to sell these houses), and buyers went missing anticipating price cuts, (James, 2007). By January 2007, 14.3 percent of sub-prime loans were at least 60 days late up from 8.4 percent in January 2006. Together sub-prime and Alt-A loans would ultimately count for more than half home mortgages originated in 2006. Alt-A loans are taken by borrowers who have good credit scores but other factors such as documented income and down payment. The Global Recession This is in the simplest terminology the reasons for the recession the world over but there have to be distinct factors besides those of the US example that are the driving forces of slowdown in other economies. It is in this regard that studying the recessionist pattern in the UK becomes interesting. The reasons can be surmised as: Credit crisis and a shortage of funding and money Decreasing real estate costs that is again in turn related to absence of mortgages and credit crunch Cost driven inflation which eats into savings and incomes thereby resulting in plummeting disposable incomes Collapse in confidence of finance sector causing lower confidence among real economy The problem with the regulatory mechanism is also one that contributed heavily to the recession. The idea was that an investor could invest in extremely risky ventures and lose their money-the company offering the investment would either fail or teeter on the verge of death-what happened then was that the government had to get involved and take on the role of the savior, bailing everyone out. The key to this could be accounted the lack of disclosure and responsibility. Credit-default swaps made a tremendous return on one’s money in the times of turmoil. There is therefore the need for the presence of simple, straightforward disclosure of the things that were being bought-this would end up making the process more transparent. Financial Engineering Here, one could also look at the role of financial engineering. The process of financial engineering itself is the result of the process that was once initiated through mathematics in the process of sculpture by economists along the likes of Robert Merton and Myron Scholes, showing the usage of share prices for valuation of derivatives (The Economist, 2009). This is the phenomena that let loose that formation of original hybrid securities that promised high returns to investors. In a situation that has been defined by the absence of intelligible regulation of securities that are in essence speculative, it would be automatically easy for unscrupulous people to engage in trades of banking with help. Most of of which is easily available aimed at the creation of protected investment grade ratings, cover, and market these instruments to people and investors which are institutional. Corporate Greed The thing with credit default swaps was that the transactions in themselves would tend to be highly lucrative, despite the fact that they were risky. Incidentally, when a transaction would go south, the bank would still have to put value to the commitment it made. This would mean that the loss would need to be made up for, through the use of the process of drawing down of the bank’s equity-in no way equitable for covering demands such as these. The transpired result therefore would be the inevitable bankruptcy as in the case of Lehman Brothers that were allowed to go under or bailout such as the kind offered to CitiBank and the Bank of America by the US Government (Huntington Post, 2008). In the case of credit swap, the primary problem therefore was the absence of a regulatory mechanism supporting scrutiny of these transactions- in essence shady and backhanded. Regulation and corporate Governance With the recession and the impending research also came the wave of scholars who focused on the importance of corporate governance (Clarke,2004), for example focused on the need for governance of large corporations by way of increasing accountability. According to his estimates, the idea remains that focus on reforms is a cyclical eventuality. Waves of reform and regulation tend to go on the upswing, during periods when recession and economic crisis hit markets. These periods, he says are characterized by re-examination of the practicability of regulatory institutions, whether or not these are sufficient for regulating the economy. On the other hand, when the economy is on the upswing, during periods of boom, there is little to no active interest in the conformance aspects of governance, especially given the fact that in these periods, companies as well as governments tend to become more focused on the maximization of profits and wealth generation, instead of making sure that there is a mechanism to ensure proper working of institutions that guard the retention of wealth, and its use for agreed purposes. The cycle, tends to rotate around the enduring agency and stewardship dilemmas of governance. Complacency concerning corporate governance during confident times compounds ensuing crises (Crawford and Young, 2008). Conclusions This recession especially which seems to have taken everyone by surprise has been the creator and perpetrator of many such crisis. Many shops and multinational brands have been forced to down shutters on outlets that were even remotely in the red because of the fact that rent is now not a luxury that many can afford. Occupancy in most commercial profiles has now fallen (Economist, 2009). Moreover, new projects that were in the pipeline are being forced to sell on lease out space at prices that are reduced rather than corrected. This kind of an impact has further tightened the noose around the liquidity crunch factor of most bug real estate developers around the world (Economist, 2009; Reinhart and Rogoff, 2009). Efforts to rid the world economy of the recessionist trend are being made by governments all around the globe. Stimulus packages are now the order of the day with aid of about 13 trillion US dollars already having been doled out and greater aid even now in the pipeline. In the mean time there need to be certain corrective measures that need to be taken in order to ensure that the real estate sector does not collapse. Other corrective steps in this regard obviously include infrastructure spending, reduction of interest rates and a reduction of taxes so as to encourage spending. Reference Begley, S.(2009). “Why Pundits Get Things Wrong,” Newsweek, February 23, p.45. Clark, T., (2004). ‘Cycles of Crisis and Regulation: the enduring agency and stewardship problems of corporate governance’. Corporate Governance: An International Review. 12(2). pages 153–161. Coy, P. (2008). “Housing Meltdown,” Businessweek, February 11, pp.40-46. Coval, J., Jurek, J., and Stafford, E. (2009). “The Economics of Structured Finance,” Journal of Economic Perspectives. 23(1) pp. 3-25. Crawford, Peggy J. and Terry Young, (2006). “The Real Estate Market: House of Cards?” The Graziadio Business Report. January Ewing, J., Matlack, C., Stecker, T. et.al. (2009). “What’s Dragging Europe Down” Businessweek, March 9, pp. 36-41 Economist, The., (2009). “Briefing Globalization and Trade: The Nuts and Bolts Come Apart,” The Economist, March 28, pp. 79-81. Economist, The., (2009). “Greed--and Fear: A Special Report on the Future of Finance,” The Economist, January 24, pp.1-22. Huntington Post., (2008). Citigroup Bailout: Feds Offer Massive Rescue Package To Financial Giant. Retrieved November 12, 2010 < http://www.huffingtonpost.com/2008/11/23/feds-consider-plan-to-res_n_145856.html> James, H., (2007). “Payment Woes Worsen On Riskiest Mortgages,” The Wall Street Journal. Published April 4., 2007. ppA-2. Krugman, Paul (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company Limited The Bush Recession. (2003). Democrat staff, Senate Budget Committee. Retrieved November 4, 2010, < http://budget.senate.gov/democratic/press/2003/fs_bushrecession073103.pdf> Reinhart, C. M. and Rogoff, K. (2009). “The Aftermath of Financial Crises” American Economic Review: Papers & Proceedings, May 29, pp. 466-472. Rosen, S. M., (2007). The Domino Effect: Dominate the Marketplace: New Product. AuthorHouse. Pp55-60 Singh, J., and Yadav, P., (2009). ‘Impact of Global Recession on Indian Economy with Special Reference to India’s Export’. School of Management Sciences Journal. 5(2). Pp93-102. Zamaan, R., (2009). ‘The Causes and Ramifications of the 2008-2009 Meltdown of the Financial Markets on the Global Economy’. Eurasian Journal of Business and Economics. 2 (4). ppp63-76. Read More