The
Global Financial Crisis – 10 years on

A
brief account of what went wrong – could it happen again?

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Introduction

“In the modern era, the largest and the sharpest drop in the global economic
activities had an enormous impact on the world” (McKibbin & Stoeckel, 2009,
p. 6). Despite, bringing an era of prosperity and
growth to a sudden halt, the global financial crisis resulted in a recession
that led to a disaster for millions of people who lost their jobs, homes, and
savings (Grant & Wilson, 2012). For example,
the collapse of a 154-year-old investment bank, the Lehman Brothers, distorted
the subprime crisis into a catastrophic global financial crisis that led to the
Great Recession (Sharma, 2014).

 

The Global
Financial Crisis raised many ethical issues surrounding the causes and responsibilities
for the crisis. Well-renowned corporations such as Fannie Mae and Freddie Mac,
Merrill Lynch, Bank of America, Lehman Brothers, American International Group,
with recognised reputations, were involved in corporate financial scandals due
to the questionable activities of some of their senior leaders (Sharma, 2014, p.
1-2). The onset of the global financial crisis led management researchers’
interested in the dark leadership further investigated why dark leadership
arose during the economic crisis. An example of dark leadership is the corporate
psychopath (Boddy, 2011). These leaders are known as dark leaders who are
greedy, and through their actions, they destroy corporations. The senior
leaders involved in corporate scandals walked away with a clean conscience and
huge money. Their actions revealed that they were not concerned about the
corporate collapse which they created, not worried about those who had lost
their jobs, investments, and savings, and even do not show regrets for what
they had done (Boddy, 2011).

 

This paper first outlines
the plausible theory of the global financial crisis. Then, it includes the
causes and the consequences of the global financial crisis that began in 2008
and whose effects are still being felt. It also includes suggestions that a similar
crisis could happen again and what we should do to avoid it. Lastly, it
concludes that the global financial crisis was due to the bad management
theories, greed, economic imbalance, housing bubble, and lax of government
regulations.

 

Corporate
Psychopaths Theory of GFC

According to Boddy
(2005), the term corporate psychopaths marries to the word psychopath from the
psychological literature and the term corporate denotes the area of
organisation while psychopath means those who work for the organisation (p. 30).
Robert Hare (1980), the world’s leading experts on psychopathy, said: “if he
did not look for psychopaths to study in prison, he would look for them in the stock
market” (as cited in Boddy, 2011, para. 10). Hare has repeatedly drawn
attention that the corporate psychopaths can lead to major destruction in the
organisations. The expert commentators pointed out that the corporate
psychopaths are found in the top-level of the organisation and not at bottom
level. Research on corporate psychopaths by Baliak, Neumann, & Hare (2010)
in the USA, and Board & Fritzon (2005) in United Kingdom had shown that
indeed, psychopaths are found at senior management levels.

 

According to Bolman
& Deal (2015), the senior leaders do quite dump things and have narrow
thinking perspective. They do not have common sense and the ability to think
that their actions can have dire consequences for others. Boddy (2011), states
that “the presence of corporate psychopaths at senior levels of the organisation
favoured working with others money in the large financial organisations has created
the Corporate Psychopath Theory of Global Financial Crisis” (p. 257). The
changes in organisation nature, such as rapid changes in key staff make it hard
to spot the corporate psychopath because their behaviour looks invisible
(Boddy, 2011). Similarly, Westerlaken & Woods (2010), mentioned that those leaders’
extrovert personal charisma and charm make them appear normal and ideal leaders,
so it is difficult to identify that they possess corporate psychopaths.

 

The Corporate
Psychopath Theory of Global Financial Crisis indicated that senior leaders with
most power influenced the moral climate of the organisations that resulted in
the crisis.  Corporate psychopaths are
narrow-minded people who pursue their own self-interests without any
consideration for the corporate social responsibilities (Bakan, 2004). In
addition, the changes in the way people acquired knowledge facilitated the rise
of corporate psychopaths at senior position (Boddy, 2011). The organisations
that collapsed had the corporate psychopaths because corporate fraud, financial
misrepresentation, greed, and unethical behaviour was revealed. Another
consequence of the counter-constructive behaviour was the collapse of huge
companies, resulting in the global financial crisis that we are now in.

 

Causes and consequences of Global Financial Crisis

Many researchers pointed out that major causes of the Global Financial Crisis
are the results of global imbalances, greed, defect from free market system,
and the lack of prudent regulations and supervision.  Moreover, the members of
United States Congress were blamed for the collapse of Fannie Mae and Freddie
Mac (government-sponsored enterprises), which had more than USD 5 trillion in
mortgage-backed securities and debts outstanding. Despite red flags raised and
warning by some, the government allowed the corporation to increase in size and
risk and encouraged them to buy lower credit quality loans (Sharma, 2014). According
to Howard (2010), in the 2008 crisis, there was
lax in the government regulation of sub-prime mortgage and the Federal Reserve
failed to step in and investigate lenders affiliated with national banks.

 

However, Porte (2009), claimed that “global economic imbalance was the
underlying causes of the crisis and not only the greed, incentive problems and
weak regulation” (p. 2). He stated that the global imbalance led to an increase
in dispersion in the current account and placed pressure on the intermediation.
In addition, the capital flowed from developing countries to developed
countries, resulted in a surplus in the current account for developing
countries and increased deficits in current accounts of developed countries
(Porte, 2009). For example, “in 2008, the United States current account showed
a deficit of USD 600 billion, while on the other hand, China, a developing
country’s current account had a surplus of $900 billion” (Tricker, 2015, p. 17).
Moreover, the financial ecosystems are made by interdependence between
developing as well as developed countries, and if there was a problem with one
economy, the whole system collapsed rapidly.

 

McKibbin
& Stoeckel (2009), stated that the United States is the epicentre of the global
financial crisis because of the housing bubble, sub-prime market, and lax lending
standards. In early 2000’s, interest rates were low, and the households considered
housing as a new investment. “During the period 1996 to 2006, the housing prices
in the United States increased by 134%, while in the United Kingdom it increased
by 150%” (Allen, 2013, p. 68). The housing boom was also noticed in other
countries. Economic theory assumes when the price of good increases, the demand
decreases for that good, however, the housing bubble case was different. In the
housing bubble market, as the price of houses increases, the demand also increases
because the households assume the price of houses will continue to grow
(Tricker, 2015). However, in 2007 the price of houses dropped which resulted in
the negative equity in the accounts of the homeowners. The mortgage loan was greater
than the value of their homes and households default payments. Foreclosures
escalated, driving the house prices down further (Howard, 2010). This resulted
in bankruptcy and collapse of many banks and the financial institutions, which
further led to the global financial crisis.

 

Furthermore,
Altunbas, Kara, & Ozkan (2014), believes securitisation of asset opens the
new source of funding for banks and credit risk bear for the investors. The sub-prime
loan was common to banking sector that gave the loans to people with bad credit
history.  The interest rates on sub-prime
loans were higher than the prime loans and the banks and mortgage brokers do
not care about it due to securitisation of these bad loans. Lenders were only
motivated by profits and they pass the loan as well as the credit risks to the
investors. However, the problem grew significantly, as the bank who gave the sub-prime
loan, invested in the Asset Based Securitisation and Collateralised Debt Obligation
market (Tricker, 2015).

 

According
to Grant & Wilson (2012), the institutions involved in securitisation
activities had shadow banking practice such as the mark to market and off-balance
sheet. Altunbas, Kara, & Ozkan (2014) emphasis that during the crisis the
securitisation market collapsed catastrophically after mortgage-related
instruments experienced severe credit quality deterioration. As such, the
institutional investors had lodged and won the cases against banks and mortgage
brokers. For example, in the “United States, the JP Morgan and Bank of America
had to pay USD 4.4 and 9.1 billion, respectively, to settle the court cases
with intuition investors” (Altunbas, Kara, and Ozkan, 2014, p. 4). Similarly,
the US Federal Housing Finance Agency had to pay USD 16.5 billion to 18
institutional investors in violation of securities law and fraud (Altunbas,
Kara, and Ozkan, 2014). Therefore, the financial contagion of the crisis was so
fast and from the housing market of the United States, it went to the real
economy all over the world (Grant & Wilson, 2012). Now in the following
section will discuss whether the similar events could be expected again and how
we can avoid another catastrophe.

 

Could we expect similar crisis soon?

Today,
the world is becoming unsustainable because the corporations have become
world’s dominant institutions and it governs our life (Bakan, 2004). I think we
could expect similar or even worse crisis very soon. The corporations have
failed to solve, and even worst, some of the world’s direst problems such as
poverty, environmental destruction, war, ill-health and much more.  Moreover, the corporations have become ambiguous,
complex, deceptive, and surprising (Bolman & Deal, 2015).

 

Firstly,
the reason for future catastrophe is due to the failure of educators to teach,
encourage and develop future leaders to acquire a proper understanding of
complex issues. Recently, some of the Universities have holistic education, but
mostly more emphasis still focuses on scientific methodology (Bolman &
Deal, 2015).  Scientific methodologies are
based on objectivity and ignore the subjective matters and perhaps the students
are not fully equipped to face the challenges of this complex and ambiguous
world. Today, most of the business decisions are made on “gut feel”, which the
leaders are not taught at Universities because it lacks the brutal clarity (Kelly
& Morse, 2000). Boehnert (2015), also mentioned that the root of the economic
crisis is epistemological, which I agree with her. The executives of high
profile corporate collapse in America possess a Masters of Business
Administration qualifications from top-ranked business schools and have a
narrow perspective in the business decision making (Howard, 2010). This shows
the business school is teaching economic theory and not ecological literacy. As
a result, these executives have a narrow perspective in their decision models
and are too focused on maximising the profit. As a result, they tend to practice
immorality and unethical behaviour that causes harm to themselves, people and the
environment (Boehnert, 2015).

 

Secondly,
I think the economic and financial instability can happen again because the
capitalist system has made people too greedy and selfish and most of the
corporate collapse anywhere in the world are the results of unethical behaviour
of the leaders. Gordon Gekko “greed is good” factor overrode the usual
principles of deferred consumption and prudence (Howard 2010, p. 203). Further,
the human greed is present everywhere and this could lead to another crisis
soon. For example, in the New Zealand housing market, some people own many
houses and they keep on bidding a higher price. This shows the exploitation of
the first home buyers who cannot afford to purchase a house. Besides, the
housing bubble is still observed today where we can see that the price of
houses is increasing and so does the demand for houses because buyers assume
that the price of the house will further increase. Eventually, after some time
the housing bubble will reach its peak and then burst, turning into the
financial instability in the market.

 

Another
reason we can expect crisis is that the world is becoming digital and many of
the businesses are online. The closure or automation in many shops has created
unemployment to many people who now rely on government social benefits. The
government is not able to get enough tax revenue due to the closure of many
businesses and their expense increased. Thus, they tend to borrow and this
leads to an increase in their debts, which results in a deficit in the account
of the economy.

 

Besides,
the growth of global debt continues unabatedly, and many countries’ debts have
increased in recent years including the United States.  According to Amerman (2017), “the United
Nations national debt is currently about USD 20 trillion, and the Federal
government is paying some of the lowest interest rate in the history on that
debt” (p. 1). The buyers (individuals, companies, and foreign governments) own
two-thirds of those debts (U.S Treasury bill, notes and bonds) and one-third
are the intragovernmental debts (Amadeo , 2017). Although, after the 2008
financial crisis, the Congress passed Dodd-Frank Wall Street Reform Act to
reduce bank size and risk, the banks keep getting bigger and even trying to get
rid of this regulation. This show there could be a financial crisis in the
United States and the whole world will suffer again (Amadeo, 2017).

 

Furthermore,
there is speculation on the war between America and North Korea and if this
builds into war, then it will have a severe impact on the whole world. The
Capital Economists, Gareth Leather and Krystal Tan argued that if there is war,
then the consequences would be devastating and the United States debt will
skyrocket. This will have an impact on the global economic growth, global
supply chain, global inflation, and massive loss of life (as cited in
Tikhonova, 2017).

 

How can we avoid this catastrophe?

Therefore,
to avoid the global economic and financial instability from happening again,
people and nations should work together in various ways to solve this problem.
In my opinion, I think there is a need for a paradigm shift in the University
education system. That is, all Universities should offer a holistic education
not only in business school but also in other disciplines. Howard (2010),
argues that “by training tomorrow’s leaders to manage the risks of the
financial system effectively and ethically, we’ll have a fighting chance of
surviving even the largest crisis” (p. 193). Indeed, the students will be our
future leaders and it is the responsibility of the educators to teach them
ecological approach so that the students have developed critical thinking and
make wise decisions that could be beneficial to the society and help us avoid
another catastrophe. In addition to this, the ethical values should also be
taught in schools and Universities (Ghoshal, 2005). Many corporate collapses
had been the results of unethical behaviour of the senior leaders, so if the
future leaders are aware of the ethical behaviour, they can adapt ethical
approach toward solving business problems. They can be aware that the greed is
not good and it can ruin the business, society and their life. Thus, with
holistic education, the future leaders will develop their self-confidence, wit,
courage, and have sceptical mind that can demand change in the corporation
behaviour so that there is no exploitation of people and the environment.

 

Additionally,
I think there is a need for transformation of corporate culture to include
corporate social responsibilities. The senior management should not only focus
on shareholder value, but also consider stakeholder perspective. I understand the
changing corporate culture is a messy and challenging since there will be
resistance from some people. Thus, the management should communicate well with
all the level of the organisation so that everyone in the organisation can
realise and recognise the importance of new culture and they could be
cooperative. This way the corporation can profit and be beneficial to their
employees, community, and environment.

 

Furthermore,
the public awareness of global catastrophe required so that they can raise
their voice against any corruptions by the government or the corporations. The
media should inform and educate public about the awareness of the crisis and
any misdeeds by the corporation. The public can punish those corporations that
harm our society and environment by not associating with those corporations. In
addition, many people are the shareholders of the corporation so with their
voting rights, they can demand corporation to consider sustainable development
rather than just economic values. Furthermore, public as households should not
involve in the mortgage when there is a housing bubble because if the housing
bubble burst, the households could lose all their savings and property. It is better
to have savings in the form of precious gold metals rather than investing all
their money in the stock market. If the stock market crash, you will lose your
paper money, but gold is a safe haven asset.

 

Of
course, the tied regulation required on the corporate governance and
accountability so that we can make our world sustainable and avoid any further
global crisis. At present, the legislation and regulations do not have
sustainability development, but some corporations do voluntary sustainable reporting
which remains a cause for concern. Boehnert (2015), also mentioned that “in
2010 Sustainable Development Commission, the only independent environmental
watchdog and advisory body, was abolished” (p. 5). In addition, there should be
a tied monetary policy so that banks should not recklessly trade and increase
risk.

 

The
government should efficiently redistribute the income to reduce the debts of an
economy. The global financial crisis increased the income inequality where the
rich got richer and the poor became poorer. Thus, the government should
intervene and reduce the income gap through tax and benefits system. That is,
they should employ a progressive tax system where the high-income earners and
corporations should be taxed at higher rates and then redistribute the welfare
benefits to the lower income earners. In addition to this, the government
should have a good relationship with other nations and help those in need. They
should communicate with other nations and solve their difference, particularly the
U.S and North Korea.

 

 

 

Conclusion

The Global
Financial Crisis (GFC) has been the most severe international economic crisis
since the Great Depression. However, there were
many factors that cause the 2008 global financial crisis, but I have only
mentioned the major factors such as global imbalance, bad management theory,
greed, housing bubble, subprime loans, securitisation, and lax in government
regulation. Moreover, in my opinion, we can expect similar crisis soon
because the debts of nations are increasing rapidly, there is house bubble, lax
in monetary policies, speculation of war between America and North Korea,
scientific approach is given importance in education systems, and greed present
everywhere. Therefore, the whole system needs a paradigm shift. The sustainable
development is required and not maximise shareholder value. Together we can
make our world a better place to live.

 

 

 

 

 

 

Reference

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https://seekingalpha.com/article/4101095-planned-fed-rate-increases-impact-national-debt-deficits

 

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