Global Financial Crisis

Global Financial Crisis

Introduction

This Paper examines the recent global economic crises, first a brief history will be highlighted at the beginning, then the causes will be discussed starting from the earliest and working down their effects and which created sub causes, which will lead on to the steps and regulations which were introduced to slow down the effect and kick start the economy ranging from Fiscal and Monetary Policies. And then other solutions that were recommended by economists and academics and then finally a closing conclusion will be drawn to finalise.

History

The shift from manufacturing to the current finance/service based economy has shifted all traditional trends and beliefs, including work lives. There was more employee loyalty overall in manufacturing, and jobs were more secure, which has lead to the mobility of the workforce, which in turn lead to mobile pensions. The effect even got to the household, all shifts are interconnected. One of the major signs was that 2 of the 3 U.S major car companies went into bankruptcy. The collapse of Lehman brothers and fears of other big players collapsing, the likes of Merril Lynch and AIG has raised fears and concerns amongst the public, government and regulators fear that this was a start of a wave of more collapses eventually destroying the whole financial system.

Causes

Shareholder Value

The general shift from an industrial to a post industrial economy has lead to more focus on the shareholder value. Even companies mission statements incorporated the shareholder value thus insinuating that the core reason for their being is the shareholder. According to Davis, Gerald F. (2009) the shareholder value has played a significant role in the rise of finance. On the other side of the coin, it is argued that it serves the whole society and all stakeholders in the society as it creates jobs, boosts the economy and offer products and services for the consumers.

The result of the shareholder value is that companies are profit maximisers and do not serve society thus this entrenched the methods of lean production cutting waste, downsizing, and has boosted investments and growth in Technology. Other fierce methods of cut back used especially in the economic crises is the rise of unemployment due to outsourcing, automation and cut backs due to tight budget as big companies still thrived on huge profits and took no reference for corporate citizenship.

From this rose the issue of the principal agent problem of Economics, which depicts the conflicting interest of the shareholders (principals), and the the managers (agents) who sometimes manipulate financial data or only aim for short term profits to improve their image and profiles. This is why the stock options