The Big Short was a comedy-drama film that was conducted by Adam McKay and written by Charles Randolph and Adam McKay. The Big Short movie is based on a book from 2010 written by Michael Lewis. This film had a limited release starting December 11, 2015, and then fully released on December 23, 2015. The Big Short is a 2015 Oscar-winning film. The film explains the financial crisis that happened from 2007 to 2008. This financial crisis was a huge issue while everything was crashing down because of home mortgages with people purchasing homes just as an investment. The Big Short really focuses on the people who were predicting the crisis before anything really even happened. Watching this movie was very eye-opening for me and expanded my knowledge on home mortgages and what could go wrong in the future that is sometimes out of your hand you can’t control it.
Backstory:
The financial crisis started in February of 2007 when the housing industry asset “bubble burst” was caused by the subprime mortgage crisis. With years past the increase in home values and low mortgage rates, people were basically buying houses to buy them and not using the home as a place to live, but more as an investment. In March 2007 the stock markets rebounded. The Feds decided to ignore the “warning signs” and they were more worried about inflation. The home sales decreased from 6.48 million sold in 2006 to 6.18 million in 2007. Later on, in 2007 the Feds decided to lower rates to 4.75% and foreclosure rates doubled at the beginning of 2008 when the financial crisis began. The financial crisis that happened in 2007 through 2008 led to millions in the United State being unemployed and many without homes. This crisis spread to the worldwide financial and economic crisis as well. The main players in the movie The Big Short are individuals, mortgage lenders, big banks, collateralized debt obligations (CDOs), rating agencies, and investors. These main players were the main focus of the movie because it was a large part of the financial crisis that started in 2007.
Who is to blame?
Individuals, some people want to blame the homeowners for the financial crisis because people were buying homes not even to live just as an investment. Mortgage lenders get blamed for this because people are claiming someone had to know that this could possibly happen. Banks are also getting blamed for the financial crisis as well because they were accepting applications for second homes for investment when they could have not accepted so many applications and maybe the financial crisis wouldn’t have happened.
Mortgage Loan:
A mortgage is a loan that a bank or mortgage lender approves of the finance to assist you when you can purchase a house either a primary residence, a secondary residence, or an investment residence. A home mortgage is one of the many forms of debt and most mortgages have lower interest rates than other loans. A home mortgage can have a fixed or floating interest rate depending on what the individual would like.
A subprime mortgage is a mortgage loan made for an individual with a very low credit score and limited income to get a conventional mortgage loan. Commonly, subprime borrowers are likely to be unable to complete the payment on their mortgages. A mortgage-backed security (MBS) is a package of mortgages that are sold and traded similarly to a bond. How does the mortgage industry work? There are many steps in the process of the mortgage industry: a range of lenders, lead generation services, working together with a broker, loan application processing, competition, and assisting the borrower.
What are CDOs?
CDOs represent collateralized debt obligations and are a “financial tool that many banks use for individual loans into a product sold to investors on the aftermarket.” This consists of loans such as credit card debt, mortgages, auto loans, and corporate debt. Why are they called “collateralized because the repayments of the loans are collateral that gives the CDOs their own value.” There is also an alternate name that some people use known as Collateralized Loan Obligations (CLOs). A credit default swap is an insurance program that pays off if the CDO defaults. This is how The Big Short people “bet against the real estate market.”
Definitions:
What are regulators? A regulator is someone or something that regulates something. Banking is the business of accepting lending or investment, deposits of money from people repayable on demand or withdrawable. Banking is one of the most important things worldwide. Rating agencies are a company that provides investors with an estimate of an investment’s risk. A mortgage broker is an intermediary who gets mortgage borrowers and mortgage lenders together to meet and discuss further information. Homeowners are people that own a home or homes. Speculators can be a person who invests in stocks or property and possibly make a profit.
In 1977 Congress passed the Community Reinvestment Act (CRA) which “requires the federal banking regulators to encourage financial institutions to help meet the credit needs of many communities that are low and moderate income.” There are only three federal banking agencies that are accountable for CRA such as “The Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB), and Office of the Comptroller of the Currency (OCC).” The purpose of the Community Reinvestment Act (CRA) is to exemplify that the bank is working to meet the credit needs of different incomes and people.
Ethics and Law:
The concepts of ethics and law can be different in many ways. Law refers to a systematic body of rules that governs the entire society and the actions of its individual people. What is law? Law is a set of rules and regulations that people have to abide by and it is governed by the government. Law is established with the purpose to sustain social order and peace in the environment and supplying protection to citizens. Ethics is a branch of moral philosophy that explains to people basic human conduct. What is ethics? Ethics is a set of guidelines that have to be followed properly. With ethics, there is no punishment for violating the guidelines while violating the law there is punishment such as imprisonment and/or a fine. Ethics is made to assist people to make a decision about what is right and what is wrong. Law and Ethics are very different; one consists of what a person must do while the other one consists of what a person should do.
Conclusion:
The financial crisis started in 2007 throughout 2008 because people were purchasing homes as an investment while there were low mortgage rates. People were going insane purchasing secondary homes for investment and then the housing industry asset bubble burst. Unfortunately, the bubble burst and many financial organizations were left to deal with trillions of dollars of investments. The financial crisis affected the entire world leaving people without homes or jobs. Many of the people that purchased homes during this time found out that they owe more on their mortgages than their home was really worth. The federal reserves were getting warning signs and hints that the financial crash could potentially happen but they just kept ignoring the signals. In 2009, the economy was starting to get back to “normal”. This movie was very interesting. I enjoy watching movies that are educational and that can allow me to expand my knowledge of business topics. I can definitely say that I have learned a lot from watching this movie and researching other information as well.
A crisis can be defined as the perception of an abnormal situation that is beyond the capability of the business and its scope to deal with. Under these situations, the reputation, operation, and safety of the organization are threatened. A crisis can be caused by among other things, natural disasters (floods, fire, earthquakes, and other disasters), terrorism, industrial action, failure by a third party, or mismanagement of money. Most crises are usually very devastating especially when they happen so suddenly in a manner that everybody is caught unawares. When this happens, there should be a well-structured strategy or plan to effectively focus and deal with the crisis. (Birkland and Nath, 2000)
Dimensions of a crisis
Behavior and ethics
Victims and operations
Professional solutions and lessons to be learned
Trust and /or credibility of the organization to handle the crisis
This research study will investigate the current state of financial crisis management in the United Nations and how the authorities are dealing with the issue under the old and recently developed policies and frameworks. The financial crisis is a common phenomenon in today’s society and organizations. By utilizing the concept of public relations various strategies, frameworks, theories, and policies have been developed to contain and manage a financial crisis. (Birkland and Nath, 2000)
There are also risks associated with the emergence of a crisis depending on the type of crisis involved. The most significant ones are the development of chaos, nuisance, and financial bankruptcy, and also to some extent, it causes legal penalties and other manifestations which at times requires effective public relations administration.
A financial crisis can be described as a situation that occurs when money demand by the customers or the public rises beyond the relativity of money supply by the same organization such as a bank or any other financial institution. Research reveals that the causes of the United Nations financial crisis may have resulted through the following
Over-investment and borrowing.
Large current account deficits.
The larger magnitude of foreign debt.
Bursting of asset price bubble.
Corruption, mismanagement.
Liquidation of as company.
High cost and low cost financial economies.
Financial crisis at the UN
Due to a lack of commitment by member states to contribute funds to the United Nations, the international body has been experiencing a financial crisis since the beginning of the last decade. Countries such as the United States have been able to push through their agendas in terms of policies implementations in the UN with very minimal financial support. This has resulted in the overstretching of the Union’s budget over the last few years.
Poor relations between the US and EU have also impacted more force on the financial crisis at the international body. With increased cases of international crises and other conflicts such as the war in Israel, the financial crisis is expected to pose a challenge. However, there have been stringent measures to ensure that the financial crisis is contained and sorted out to have the organization processes continue smoothly (Werth, 1994).
At this global level, the UN has made new international public relations as well financial-enhancing transparency strategies to strengthen crisis management within international institutions. This has been done through the development of codes of conduct to practice economic systems and provide guidelines to manage crises. The UN through its development-oriented strategies has not been able to entirely deal with the financial problems it experienced especially in the last decade. Economic efficiency, in turn, and another financial liberalization has improved at the global body since the commitment of countries to settle their debts. However, with soar US-UN and UN-EU relations, the organization is finding it difficult to address the issue adequately.
Figure1. UN debts, expenditure, and deficits.
YEAR
Deficits (%)
Regular budget $million
Debts $million
Expenditures $million
1986
37
725
199
3200
1987
22
725
221
34
1988
19
878
200
35
1989
20
909
212
3590
1990
19
1005
242
3675
1991
15
1134
234
3708
1992
10
1234
222
4005
1993
12
1267
203
4678
1994
16
1344
219
5430
1995
17
1590
276
6622
1996
11
1621
209
6943
1997
9
1700
257
7034
UN being a global body, not a state has no official definition of crisis but utilizes its public relations strategies to define such occurrences as emergencies to be addressed and not real issues. The U.S laws, standards, etc for example are used by the institution to reference its operations. How the U.S responds to individual crises differs from what is usually done in any other country mainly because of its strategic approach to issues.
The UN, on the other hand, is not a free actor but its ability to solve its internal crisis in addition to other rising global crises depends on the ability of the member states to contribute financially, emotionally, and physically committed to the course of the entire crisis. Currency crises and banking crises are examples of crises that fall in this category not only in the UN but also in other states and organizations.
Crisis management process In the UN
Crisis management is usually taken as a normal operational management issue which is usually on the end of urgency. It also means that the organization should be able to use the already existing policies and structures within the organization to deal with the crisis. Early identification of the signs of a crisis helps a lot to trigger any countermeasures that will reduce the impacts of the crisis on the organization. A good framework for managing a financial crisis within an organization is to involve other organizations that are affected and improve the already existing communication channels to enable all stakeholders to understand and accept is normal and usually happens top any company at any given time (Hooghiemstra, 2000)
The proposed framework for UN crisis management is the adoption of the three processes commonly referred to as ‘STOP’ ;( strategic, tactical, and operational) which are considered to be purely public relation strategies. In the UK for example, the framework has been referred to as the ‘Gold, Silver and Bronze control framework’ and it has been used to solve issues of crisis such as the Iraq crisis in recent years. The frame entails the use of the model below when a crisis is recognized and noticed. The best framework for handling immediate financial crisis in the UN which are considered public relations strategies include the following; Investigations, Access restriction, Details confirmation, Issuing public statements via media, Considerations of options, tackling the crisis
There have been recent developments taken by the United Nations to address its internal crisis through public relations. In September 2004 the United Nations circulated an organizational draft that outlined some regulations that it will itself adopt to contain any financial crisis. It also needed its member states to adopt the same to build on their financial structures especially in developing countries. In the same year in November, the headquarters developed study lessons to allow its governing, authorities to learn to cope up with the number of increasing crises not only in the organization but also in other developing states.
The imitative dubbed, the ‘Contact Group’ included members from Russia. America, Britain, and Japan The initiative came up with recommendations such as; a clear definition of tasks and responsibilities for crisis management committees, preventive measures, pre-planning techniques, crisis outcomes which were regarded as public relations exercises since it was known by the member countries (Helter, 1992).
How it could have been managed
Crisis communication could have been utilized by the UN in solving its financial crisis; this concept entails the better part of crisis management. This is because it spells out the organization’s reputation to not only the stakeholders but also to the general public. The media can either attack or protect the image of the organization. During the occurrence of crisis media response and handling of the matter affects the ability of the organization to ultimately respond to the crisis.
Every move must be anticipated immediately to keep the organization’s crisis response quick. Compelling and crafting statements are possible ways of handling communication crises. The management can also pass drafted messages that outline the crisis. It will also help in identifying and cooperating with other parties that can assist in alleviating the crisis and this can only be done by using the following crisis management processes.
Strategic processes
The strategic process involves the involvement of all the stakeholders including the board of management, public relations office, and the crisis management team. The team will develop suitable strategies to analyze the crisis to contain it. To do this, a crisis management plan is to be put in place and should include the following tips; identifying the people involve and dedication of duties to them, drafting a process for decision making, ways of involving the management, developing a crisis center, and other levels of control in the authority limits.
Preparedness
Crisis management preparedness issues should be reported to the stakeholders to allow for scrutiny and performance evaluation. Crisis management issues should be made part and parcel of the usual strategic planning processes for the institution. The UN for example has drafted policies to curb any financial crisis in the giant institution. Because of its vulnerability to crises, the institution has had a crisis preparedness policy that will see any financial crisis sorted out before it explodes. The conflicts in Sudan, Iraq, and Somalia, etc are unplanned and have overstretched the resources of the institution. To resolve such conflicts, the UN needs to spend a lot of money making it susceptible to the financial crisis.
Response
The most important feature of crisis management is a good media campaign to iron out key information that the public needs to know about the public. Effective and theoretical media relations should be developed and implemented in place to tackle any expected and unexpected crisis in the organization. The main limitation with utilizing the media as a means of conveying key messages to its customers is that it can damage the image of the company through the spreading of rumors and propaganda about the real state of the crisis and the expected effect
Recovery
The activation of systems that manage and oversee crisis issues is triggered when good response systems are in place. These systems may include the utilization of recovery committees and recovery organizations. In most cases, the government or the necessary authorities are responsible for sorting out financial issues. For the UN, such organizations could be the Security Council members; the US, France, and England. The chip in financial assistance and also solicit funds from member states to contribute and pay their due that is being owed by the nation’s body.
At the recovery stage, the organization slowly returns to normality, especially if it has implemented the correct crisis management plan and an effective crisis control strategy. The UN, in the last few years, has been able to effectively contain its financial crisis and is slowly recovering mainly because of international commitment and improved cooperation in the world. Recovery systems involve the resolving of any issues that may include the settling of external debt by those concerned. This is achieved through mutual discussions and round table discussions especially if there are any conflicts involved.
Conclusion
The financial crisis in any institution such as the United Nations is common but through effective control mechanisms, it can easily be dealt with using the already existing legislation and frameworks. For every successful response to a financial crisis, there is a good management and response strategy behind it. These strategies are outlined through the formation of a crisis management team, crisis management planning, prevention and control processes, recovery process, and the eventual containing of the crisis. The most important factor that should be paid more attention is the public perception of the company situation.
Reference
Birkland, T and Nath R (2000) Business and public dimensions in disaster management Journal of Public Policy, 20 part 3 Pp 270-300.
Helter, M. (1992) Taming the beast: riding out a financial crisis Financial Marketing Quarterly, Vol.3 Issue 9, pp. 33 – 67.
Hooghiemstra, R (2000) corporate communication and impression management – new Perspectives why companies engage in corporate social reporting Journal, 27(1/2): 50-62.
Parker, G. (1995) Risk Management Problems and Solutions, McGraw – Hill, New York
Tyson, C. and Sherman, B. (1996) Crisis Management Manual, Tandem Press, New Zealand.
UN Finance. UN Finance Policy Framework. Web.
Werth, R. (1994). Protecting the needs of special event security: Security Management Journal, pp. 366.
The book Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis — and Themselves, written by Andrew Ross Sorkin, explores the events and consequences of the 2008 global financial crisis. To reveal how economic issues turned into the worldwide crisis, the author provides the inside stories of the large affected companies, such as Lehman Brothers and Merrill Lynch. The book represents economic events as the drama of wrong decisions, broken lives, and the business giants’ striving to maintain strong positions regardless of the consequences.
The financial crisis of 2008 led the United States to the severest economic decline since Great Depression. The most significant cause of the crash was the housing market bubble filled with high-risk loans, which led the banks to fail and ask for a governmental bailout (Merle). Merle (2018) states that “in the United States, the stock market plummeted, wiping out nearly $8 trillion in value between late 2007 and 2009”. The particular event that prompted Sorkin to write Too Big to Fail was the Lehman Brothers, an investment banking company, drowning in the credit crisis and the attempts to get support from the U.S. government.
The characters of Too Big to Fail are the affected companies’ executives and Henry Paulson, the Treasury Secretary who initiated the bankruptcy of Lehman Brothers. Paulson interacted with Lehman Brothers’ competitors and other enterprises like Freddie Mac or Fannie Mae, which could be at the highest risk caused by the housing boom (Sorkin 44). Sorkin provides the list of the characters, based on the companies affected, governors, and legislators. The book states that the actions from the government’s end were irresponsible, leading the financial structures to unnecessary risk-taking (Sorkin 160). Executives of the most influential U.S. businesses also appeared in the story as Sorkin included their stories and opinions to emphasize the severity of the crisis that was up to becoming global.
Key terms and definitions related to the economy featured in the book are liquidity, collateralized debt obligation (CDO), and derivatives. Liquidity is a firm’s ability to turn its assets into cash or sell them without price changes. CDOs addressed the payments to investors from the mortgages monthly, and they severely influenced the financial crisis (Sorkin 105). In economics, derivatives are the contracts like futures or swaps that derive an asset’s value for the involved parties.
The book’s characters highlighted several laws and regulations as the measures that affected the crisis’s downturn. For example, Dodd-Frank Wall Street Reform and Consumer Protection Act regulated the financial sector benefitting the consumers. Then, Emergency Economic Stabilization Act and its Troubled Asset Relief Program (TARP) were established to provide the affected enterprises with the proper support (Sorkin 436). The laws of TARP were instituted because of the financial meltdown and helped speed up the recession’s ending. The Dodd-Frank regulation is addressed as the most efficient because it identified the mortgage standards and risk evaluation approaches.
To summarize Sorkin’s Too Big to Fail, it is crucial to mention that the non-fiction book was released in 2009, right after the crisis and during the consequent recession. Hence, the story instead provides the timeline and highlights the turnaround events than any critical evaluation. Sorkin conducted more than two hundred interviews, and the 2008 financial crisis’s severity was described through characters’ interactions and people’s lives’ events.
The narrative began in 2008 when the arising market issues emerged the demand in creating a supportive program for the financial institution. Troubled Asset Relief Program appeared and was signed by the President in October 2008 but failed to eliminate the crashing bubble (Sorkin 383). The story goes around the “too big to fail” enterprises, such as Lehman Brothers, Barclays, Golden Sachs, and JP Morgan, the wellbeing of which is crucial for the national economy (Sorkin 57). By the end of the book, the many events seem to be avoidable, and the wrong decisions made by the right people make the reader understand the fragility of the U.S. economy.
The financial crisis of 2008 provided the economy, society, and politics with various lessons required to learn for further development. The continuing themes of Sorkin’s book are the lack of confidence in the enterprises’ power, the government’s inability to quickly address the problems, the mortgage crisis, and the investors’ refusal to take risks. All these events are the causes of the economic downfall and the further recession.
For example, it impacted the housing industry when “the market crashed as homeowners with subprime and other troublesome loans defaulted at record levels” (Merle 4). Based on Sorkin’s story about companies involved in mortgages, strict regulation is required to prevent risky loans from appearing and the bubble from expanding in the future. Moreover, Barack Obama promoted strong government regulations for the economy during the presidency. He established rules for the banks in the Dodd-Frank Wall Street Reform Act that regulated credits and mortgages.
Although the crisis based on the mistakes of the large enterprises might not cause the global financial crisis, the world has recently faced a COVID-19 pandemic that harmed the economy even worse. The United States is in an economic recession again, and the measures are similar to the 2008’s, but today there is strong support for small companies rather than for the largest ones. The effort to administrate the “too big to fail” enterprises was an economic stimulus package that cost $787 billion but led the economy’s recession to a quick end by June 2009 (Sorkin 507). The Bailout proceeded within the Emergency Economic Stabilization Act, which was not the best course of action but the quickest solution. Sorkin emphasized that the government measured the efficiency of their resolutions by the instant benefits rather than the ethical side and equality in support for “too big to fail” enterprises and other financial institutions.
Sorkin, Andrew Ross. Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis — and Themselves. 2009. Viking Press.
The global financial crisis threatened to lead to the total breakdown of the global economy. Despite originating from the US subprime market, the global financial crisis affected all sectors of the economy. The sectors affected by the global financial crisis ranged from banking, insurance to tourism.
The global financial crisis had an adverse effect on the healthcare industry. The global financial crisis reduced the funding of that the healthcare facilities received from the government. Lack of funding made hospitals suspend their expansion plans. The global financial crisis reduced people’s income. This reduced the ability of people to access quality healthcare. This is because they could not afford quality healthcare, which is expensive.
The global financial crisis reduced investments in the healthcare industry. Many hospitals delayed their expansion plans during the financial crisis due to lack of funds. Some of the worst affected projects included the expansion of wards and purchase of new diagnostic equipment. The hospitals put on hold projects that would have improved the quality of healthcare. In addition, there was a hiring freeze in most hospitals during the global financial crisis. Therefore, the global financial crisis had a negative effect on the quality of healthcare.
During the financial crisis, there was a significant decline in the number of patients of were admitted in various hospitals. This is because the patients did not have enough funds to seek medical treatment. Patients postponed seeking medical treatment for non-fatal ailments or resorted to cheaper healthcare alternatives.
This reduced the income of healthcare facilities that focused on treatment of non-fatal ailments. During the financial crisis, most hospitals experienced a sharp hike in bad debts. This is because patients could not afford to pay hospital bills despite the fact that they required medical care. Medical facilities have investment portfolios that complement their income. During the global financial income, the financial markets were performing poorly. Therefore, this reduced the income of the healthcare facilities.
The government, individuals, and employers are the principal financiers of healthcare. Most countries have various government-funded medical schemes that finance healthcare. Lack of funds during the global financial crisis necessitated the government to introduce budget cuts. Budget cuts had a negative impact on government-funded healthcare schemes. Companies depend on the availability of revenue to finance employee healthcare schemes.
The global financial crisis reduced the revenue of most employers. This reduced the ability of employers to fund various healthcare schemes. Individuals also have private healthcare insurance schemes. However, the global financial crisis led to a significant reduction in the income of various people. This made it difficult for individuals to purchase healthcare insurance policies.
The global financial crisis had a negative effect on the individual health of various people. People postponed seeking healthcare services for non-fatal conditions. People depended on the public healthcare system. This increased the pressure that the public healthcare system faced. This is despite the fact that the global financial crisis reduced the availability of funds to finance various public healthcare schemes. In addition, the global financial crisis reduced the health status of individuals.
Home foreclosures and other financial problems had a negative effect on the mental and psychological health of various people. The importance of healthcare in a nation’s well-being necessitated most governments to limit budget cuts on healthcare provision. Most governments strived to ensure that lack of funds during the financial crisis does not lead to deterioration of the health status of people.
The recent COVID-19 pandemic had a severe impact on the worldview of most people. It is difficult to find a person who did not feel the adverse consequences of the epidemic, lockdown, social distancing, and overall financial crisis (Evans, Grattan 21). No need to say that prolonged stress leads to the spread of depression and substance abuse problems among different categories of people. It is possible to state that social distancing and the financial crisis severely impacted mental health and substance abuse.
The pandemic of COVID-19 created barriers to receiving medical assistance, especially in the mental health sphere. The lockdown leads to the inability of people to go to the hospital for mental health consultation and treatment due to the anti-COVID measures (Kearney et al.). At the same time, the number of problems that were the significant stressing factors for most individuals increased during this period (Kearney et al.). Among them were illnesses, contact with the virus, loss of income sources, and loss of beloved people because of the epidemic (Kearney et al.). No need to say that most people could not cope with these issues themselves, which led to increased substance abuse in the United States (Kearney et al.). Therefore, substance abuse was the side effect of depression, anxiety, and the inability of individuals to cope with the psychological pressure during the pandemic.
The peculiar detail is the demographic factor in the spread of mental health problems and substance abuse among Americans. According to the estimates, mothers and young people were among the most vulnerable individuals in this case (Kearney et al.). It is possible to explain this situation with the increased responsibilities that mothers faced during the lockdown and the pandemic. For example, when all family members work from home and children do not attend school, mothers have more responsibilities, leading to physical and emotional exhaustion (Kearney et al.). Young people, in turn, usually have comparatively low financial stability (Kearney et al.). As a result, the loss of income and the deprivation of communication lead to a mental crisis with subsequent substance abuse (Kearney et al.). It is possible to talk about the spread of mental health problems and substance abuse among vulnerable people.
The economic recession in the United States during the pandemic is proven. As a result, it is not strange that four people out of 10 stated signs of depression and related mental health problems during this period (Panchal et al.). Almost 12% of the respondents report the aggravation of their substance abuse habit (Panchal et al.). The peculiar detail is that 56% of young people state that they were diagnosed with depression during this time, which resulted from their financial problems and need to preserve social distancing (Panchal et al.). The results of the surveys conducted by Panchal et al. and Kearney et al. coincide, and social distancing combined with financial burden leads to adverse consequences for the mental state of many Americans.
This information states that economic difficulties and the inability to communicate with people in real life significantly increase the substance abuse rate and the spread of mental health problems. In other words, most individuals have to cope with many issues leading to emotional breakdowns. They felt the anxiety from the virus spread, experienced constant fear for their lives and the health of their families, managed emotional problems with a lack of real-life communication and tried to find money to support their own lives.
Works Cited
Evans, Mark, and Grattan, Michelle. “Health Expertise and Covid-19: Managing the Fear Factor.” AQ: Australian Quarterly, vol. 92, no. 2, 2021, pp. 20–28.
Credit crisis is a term that has been coined to describe the situation whereby accessibility of loans or credit finance becomes limited due to their unavailability. It is a trend that results to financial institutions reducing the amount of loans that they can disburse to clients irrespective of increased interest rates that they can charge on such loans (Turner).
Credit crisis is said to occur when the relationship between interest rates and credit loans being disbursed are heavily skewed, or when there is a general reduction of loans available in spite of increased demands. Ideally the relationship between interest rates and available financial credit is such that increased interest rate in the market means that financial institutions are willing to increase lending in order to increase profits.
Foster and Magdoff Perspective of 2008 Financial Crisis
Foster and Magdoff theory that attempts to explain the 2008 financial crisis attributes it to broader factors of monopoly finance capitalism which is a function of a phenomenon that they refer as stagnation which is a characteristic of mature capitalist systems. Generally credit crisis can be triggered by any of the various factors in the financial sector or combination of several such factors.
There are mainly five reasons that directly affect financial institutions loans and which in extension can trigger a credit crisis. One of the reasons is anticipated fall in value of collateral assets that are used by creditors to obtain loans from banks (Graham 2008). In this case the financial institutions become reluctant and unwilling to give out loans that are secured by such assets where all indications points to their market values plummeting.
Other reasons could be sudden exogenous adjustment in regulation by central bank that touches on lending requirements by banks or which elevates reserve requirements (Graham). The central bank might also trigger credit crunch through regulations that intend to tightly control financial institutions lending.
In such instances the banks usually respond by enacting measures that prevent their loss or transfer their operating risks to the creditors usually through increased interest rates of loans or reduction in lending. However these factors alone cannot by their own trigger credit crunch, more often credit crisis is caused by an array of factors that combine together over a long duration of time.
While Foster and Magdoff recognize these as causal factors that contributed to the 2008 financial crisis, they argue that by and large the major reason that greatly contributed to the financial meltdown was the stagnant nature of the current capitalist system. Foster and Magdoff describe mature capitalist system as “stagnant” because of its monopolistic nature that is caused by few corporations that dominates and control most of the available capital flow (Fostor and Magdoff).
When this happens as it has been taking place since the 1980s less capital becomes available for investment in economic sectors that are most in need while the real capital becomes restricted and unavailable, this outcome is what Foster and Magdoff also attributed to the occurrence of financialization.
The implication of this unbalanced excessive capital availability to particular players creates demands for investment opportunities that offer high returns; this is where the evils of monopoly-finance capital begin. The resulting scenario is massive injection of liquid capital in very questionable investment initiatives which Foster and Magdoff says includes bankrolling of wars abroad as a way of investment at the expense of other sectors which are integral in economic growth.
This form of capitalism is undesirable and dangerous according to Foster and Magdoff since it is unsustainable in the long run mainly because it ceases to become a “freely competitive system” which is an underlying feature of all “young capitalism” systems as described by Marx’s theory (Foster and Magdoff).
Because all forms of mature economies eventually leads to stagnations which ultimately causes credit crisis, the system that mature capitalism has created is reliance on various financial bubbles that are designed to counter the problem of credit crunch but which ends up crumbling and therefore exposing the inherent weaknesses of this system.
These financial bubbles are the final stages in a chain reaction process that is rooted in the monopolistic capitalist system that Foster and Magdoff attribute to the “casino economy” because of the resulting effects that saw working class families loose trillions of US dollars in the aftermath of the financial crisis.
Causes of Financial Explosion
The hallmarks of a credit crunch usually include extensive sustained losses by lenders caused by sloppy and hasty lending policies over given period of time. Sometimes it is due to plummeting of collateral assets that were used to secure loans which substantially lose value overnight as it happened to the United States housing industry.
When this happens the bank sustains huge losses caused by loss in value of the assets. The implications that follow are two parts: the bank has no adequate loan reserve that they can continue disbursing to future consumers, and two despite the availability of loans the banks becomes timid and cautious towards future lending.
This becomes the early stages of a credit crisis since availability of loans get scarce and associated interest rates shoots up through the roof. The next phase of credit crisis is limited lending and inaccessibility of the loans by consumers and lack of funds in general that virtually affect every other sector of the economy triggering what is then referred as economic recession (Turner).
However the effect of a credit crisis last for sometime only depending on the extent of loans that were disbursed by the banking industry and the extent in which the losses can be absorbed assuming the banks affected were not many.
The global credit crisis that is just ebbing away has its roots in United States banking system, more specifically as a result of lending towards mortgage housing and credit lending in general. The credit crisis did not only result to worldwide financial crisis but also caused slowed economic growth of the world’s largest and leading economy that eventually triggered global recession that started around as early as 2006 (Turner).
In 2005 the United States housing industry flourished and reached its peak in terms of value and business bustle, by then the banking industry had aligned their lending funds towards this end as a result of the positive and sustained growth in the housing industry.
By the time in what is now referred as housing bubble busted most banking institutions have invested significant amounts in the housing industry that had accumulated over time in a sort of loose credit lending. The aftermath was increased mortgage payment defaults and foreclosures on existing loan repayment that was taking place on large scale.
The other cause is the amount of mortgage that borrowers had obtained that were purely for speculative purposes and therefore for investment only. By 2006 the number of mortgage and houses that had been secured as investment options were approximately 40% of all the total houses in the market (Turner).
This was the main factor that greatly contributed to the housing surplus that made their price fall. Another cause was the securitization, a term that is used to describe a practice where bank can transfer the value of the mortgage to their investors and therefore continue to obtain further funds to lend to borrowers (Turner). Ideally the bank is supposed to hold on the mortgage as security until it is paid in full or forfeited, this way additional funds cannot be secured until such time when any of the two outcomes occur.
However securitization system allowed banks to continue pumping funds to an already saturated sector while hoodwinking investors to believe housing industry to be thriving by transferring mortgage agreements to them. In the process the banks were able to ease the lending terms and lower rates due to availability of funds in a bid to disperse as much funds as possible and therefore make profits.
The lending conditions to borrowers were even questionable verging on illegal practices, figures released by Federal Reserve indicates that 47% of borrowers did not make any down payment of the mortgages as required by law (Turner). Over time borrowers were not required to provide evidence of income nor employment as should usually be the case, instead banks focus was on credit score which depended mainly on the amount that a borrower had in the bank beside other factors.
Limitation of Foster and Magdoff Analysis of Global Crisis
The analysis of the 2008 financial crisis in the book The Great Financial Crisis offers great comprehensive and in depth insight of the nature of the present monopoly capitalist system.
To achieve this, the authors provide detailed analysis of various financial figures such as GDP, unemployment rates, income levels and so on that are very convincing. However what this analysis lacks is a global perspective since almost the entire analysis is based on US economy; despite the fact that financial crisis originated from US economy a more broad analysis would have generalized this findings and explained the origin of financial crisis beyond the US perspective.
Works Cited
Foster, J. & Magdoff, F. The Great Financial Crisis: Causes and Consequences. New York: Monthly Review Press. 2008. Print
Turner, Graham, Turner. The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis. London, UK: Pluto Press. 2008. Print.
The US led global financial crisis that struck in 2007 and persisted through 08 and 09 adversely affected the stability of the global economy. The impact of the crisis escalated far beyond its point of origin (US) and affected the countries around the world while spilling over from the financial system into the real economy.
The implications of the crisis were wide ranging and still difficult to conceptualize. This has led to extensive analysis of the financial crisis by policy makers and financial analyst in a bid to develop and formulate measures that would avert future crises and stabilize the global economy.
While numerous claims have been put forth to explain the causes of the 2007-2009 financial crisis, there is almost a universal agreement that the major causes of the financial crisis was the combination of a credit boom and a housing bubble that took place in the United States. The post 2007 crisis consequently features the establishment of numerous regulatory initiatives offering diagnoses and presenting recommendations for financial stabilization.
Through literature review, the research paper analyses the varying causes that the crisis has been attributed to, the policies which various major governments sought to implement in response to the crisis, the effectiveness and failures of such policies. The research paper further proposes the alternative areas of focus that may serve to avert future crisis in order to achieve consistent financial stability.
Reasons for the 2007-09 global financial crises
The decline in the US housing market resulting from the failure of sub prime mortgages and mortgage backed securities coupled with an ensuing credit boom marked the beginning of the financial crisis (Canster Cannex 2011). The housing market suffered a major blow as the majority homeowners defaulted on the (sub prime) loans.
As a consequence of borrowers defaulting on loans, the financial institutions faced a major challenge as they repossessed the property at a loss which led to a liquidity crisis in banks and their lending capacity was consequently diminished (Obersteiner 2011). In addition, there was lack of confidence by US investors which led to emergence of a credit crunch.
The consumer confidence was limited due to widespread uncertainties in the economy. While the housing bubble and the credit crunch in United States has been widely attributed as the major cause of the 2007 financial crisis, a valid argument still stands that the crisis resulted from poorly regulated lending by financial institutions.
The collapse of major financial institutions led to widespread panic as governments across the globe struggled to rescue the major financial institutions in their regions from collapsing. The Australian government launched the stimulus packages which were aimed at rescuing the collapsing economy while the government of United States proposed a $700 billion rescue plan (Obersteiner 2011).
This was met with substantial opposition by congressmen who felt that such spending of taxpayers’ money to rescue Wall Street investment bankers was not justified.
Metodi Lazarov (2009) argued that if liquidity was the actual cause of the global financial crisis, then providing more liquidity through reduced interest rates that made borrowing easier would have been appropriate in solving the situation. He cites the ignorance of major financial institutions on their own business models of secularization as the major cause of persistent financial crisis. He further attributes the crisis to globalization, financial innovation and asymmetry of information (Lazarov 2009).
Lazarov suggests that the presence of liquidity effects increases the chances of systemic breakdown of any given connectivity between financial institutions which may have caused the crisis. While he agrees that the financial system contained the effects from the housing bubble, he emphasizes on the need for a new and advanced regulatory framework which will shape the financial systems in the future.
Fiscal measures are also among the main reasons why investors ran into large risky market such as sub prime which has been cited as a major cause of the 2007 financial crisis. The US government’s move to issue mortgage backed securities coupled with the relative decline in prime mortgage set the stage for the onset of the financial crisis (Lazarov 2009).
This saw a significant increase in sub prime mortgage lending which was not in adherence to the government and financial regulations. Further, nationalization of the Fannie Mae and Freddie Mac led to increased investor confidence which led to over reliance of market participants on government guarantees (Lazarov 2009).
Responses of Major Economies to the Global Financial Crisis
Australia
In Australia, the financial crisis struck at a time when the local economy was suffering from massive inflation. In response to these challenges, the Australian government announced its stimulus packages worth $ 10.4b and the government further sought to guarantee the bank deposits (Canster Cannex 2011).
The economic stimulus played a major role in improving the economy which was suffering from recession and incorporated government transfer payment to consumers which in turn increased sales especially over 2008 Christmas period. The government also provided assistance to various sectors in the economy such as the automotive industry since lenders had lost confidence in the market leaving banks as the only credit providers.
As the condition of the economy continued to worsen in the beginning of 2009, the government announced a second stimulus package where the government injected $ 47 billion to boost the economy which was then allocated to ailing sectors such as education, housing, infrastructure, small businesses, as well as provision of cash bonuses (Canster Cannex 2011).
Consequently, the country suffered less impact of the global financial crisis relative to other major economies of the world. Financial experts argued that the county’s economy was more insulated but evidence of general slowdown in the housing market, and unemployment was still evident in the Australian economy and some questioned the massive government packages claiming that they would haunt the country’s economy in the future as they seek to repay debt.
United States
In the United States, the financial crisis stimulated substantial debate regarding the governance of global financial markets with the policy makers calling for the creation of a global financial regulator to monitor both domestic financial markets and ensure that other countries implement adequate prudential regulations (Zimmermann 2010). The 2007 financial crisis which set off as the US housing market collapsed offered no guarantee of US leadership in the creation and modification of suitable global financial standards.
In deed, the US regulators faced major challenges in trying to focus on the international economy while its internal economy was falling apart. The early stages of the crises were therefore characterized by deep cuts in the US federal funds interest rates nationalization of Northern Bank UK, introduction of the term auction facility at the Federal Reserve, the take over of a major investment bank, Bear Stearns, among other measures (Obersteiner 2011).
However, some of the interventions put forth only served to prolong the crisis rather than providing a solution to the situation. In December of 2007, the US government introduced the term auction facility which made it easier for banks to borrow from federal reserves (Taylor 2008).
The measure was aimed at increasing the flow of credit in the money market through the reduction of interest rates. This saw a substantial reduction of spreads in the money market during the initial periods of its implementation but this trend only lasted for a short period of time.
The government’s temporary cash infusions implemented under the stimulus Act of 2008 which aimed at sending financial support amounting to over $ 100 billion to individuals and families in the United States was not successful either. Just like the liquidity facilities, the temporary cash infusions were not focused on dealing with the underlying causes of the financial crisis and since the rebate was financed through borrowing rather than money creation, the policy only served to intensify national debt (Taylor 2008).
The failure of this policy was further intensified by consumer’s failure to spend as predicted by the permanent income theory of consumption. Consumer spending remained limited due to widespread uncertainties and the consumption was not jumpstarted according to the policy maker’s expectations which consequently increased income rather than consumption.
The initial cuts in interest rates in 2008 which saw the federal funds rate target decrease to 2% presented a major challenge to an economy that was already struggling with a credit crunch. Slight reduction in interest rates would perhaps have been effective in rectifying the situation.
However, this was only achievable if the interest rates cuts were much less aggressive. The sharp cuts in the federal funds rates led to the depreciation of the dollar which in turn resulted in plummeting of world oil prices evidenced by the doubling of prices from $ 70 per barrel to $ 140 in a period of one year (Taylor 2008).
United Kingdom
The United States credit crisis appeared as a foreign concern for United Kingdom in the early 2007 (Tindall 2007). However, in mid 2007, when BNP Paribas announced that it would be unable to withdraw funds from its hedge funds and Northern Rock requested for emergency financial support from the Bank of England, the effect of the financial crisis became a reality in the region.
In response to the crisis, the Prime Minister Gordon Brown, Chancellor of the Exchequer Alistair Darling, and the Bank of England governor Mervin King sought to implement policies which were aimed at managing the global financial crisis that had hit the region’s economy. The measures included the nationalization of financial institutions and purchase of risky assets (Tindall 2009).
The financial regulators in UK ensured that the value added tax was reduced from 17.5% to 15%, the pension for the aged was raised while the government introduced new tax breaks (Tindall 2009). A total of £ 300 billion was injected into the economy in an attempt to salvage the situation while the bank interest rates were slashed to a historic 0.5 in March 2009 after the 50 billion pound rescue package failed to take effect in the preceding months (Obersteiner 2011).
Effectiveness of International Regulation in Dealing with the Crisis
The severity of the global financial crisis revealed major weaknesses in the international architecture for prudential financial regulation that has been constructed since the mid 1970s (Zimmerman 2010).
While policy makers responded to the crisis through a flurry of ambitious initiatives to reform international standards and strengthen the international regulatory regimes, the questions remain as to whether the regulation of global finance will safeguard the global economy against such crisis in the future and to what extent the financial regulation system should be changed in response to the crisis.
This would only be effective if applied on a global scale since the regulations may impose a greater cost on domestic firms than foreign markets resulting in disequilibrium.
It is evident from the severity of the global financial crisis that there are substantial weaknesses in the international financial regulation mechanism. Consequently, the aftermath of the crisis saw the formulation of numerous reports and regulatory initiatives which were published by national regulatory agencies, financial industry associations and international standards setting bodies.
The financial stability forum further integrated these initiatives into a unified international coordinated response which was released in 2008 and incorporated over sixty recommendations to the crisis.
While the policy presented through the financial stability forums were quickly endorsed by the G7 among other major international bodies, the effectiveness of the recommendations in the long run remained in question.
Since the international financial regulation has emerged in response to the power and interest of the world’s major economies, most of these policies favoured the sectors where leading states could reap benefits while the areas where they would incur greater costs were narrowed in scope. Consequently, the measures proposed served to benefit the major world economies and continued to economically oppress the developing economies.
In the analysis of the 2007 global financial crisis, the lasting power of US and Britain economies global financial regulation should be critically analyzed. This is because the domination of these countries in the global market has adversely affected the global economy due to the fragmented, weak, and exclusive institutional context that has emerged in the recent past.
Indeed, David Singer agrees that the central role played by United States in the global economy requires able leadership and ambitious regulatory regimes in absence of which results in increasingly vague principles and guidelines which puts the future of the economy at risk (Zimmermann 2010). Elliot Posner further observed that the European Union was very eager to use their economic influence to export EU models to the international level during the crisis (Zimmermann 2010).
The fact that the financial crisis hit at a time when the European Union had increased its capacity to influence international regulatory outcomes due to intensified regional integration and its increasing financial market size further raises a lot of concerns regarding the effectiveness of these economies in international financial regulation.
Governments and policy makers should therefore aim at ensuring the shift of power from major economies by diminishing the role of US and British financial markets and major firms in international regulation and putting less emphasis on their financial power which stems from the reputation of New York and London financial centres (Zimmermann 2010).
Although the East Asia and other emerging powers are not ready to take on the leadership role in international regulation politics, their active contribution to international regulation seeks to challenge the status quo and are more critical of the existing international standards in banking regulations which may lead to reforms necessary to ensure future stability of the global economy (Zimmermann 2010).
Domestic Policies and the Financial Crisis
Past literature has revealed that when the domestic societal actors are engaged in debates about international financial regulation, the scope is often narrow relative to other economic areas such as trade politics (Zimmermann 2010). This is primarily due to the complexity of issues involved, the consequences, and an institutional context that in most advanced countries gives financial analysts and regulators considerable autonomy from domestic interests and legislative assemblies.
Societal actors who take active interests in constructive international financial debates are financial market participants who are directly affected by international regulations. These actors are mostly concerned with adjustment costs of new standards and view international regulation coordination as a means to gain access to a greater market share. Consequently, they often oppose intrusive regulatory measures and support market driven solutions which limits the efficiency of measures presented to solve the financial crisis.
Domestic politics have indeed played a major role in the financial crisis with the large scale use of the tax payers’ money to rescue financial institutions being used as a tool for politicizing financial regulations especially in the United States and Britain. Consequently, domestic politics unleashed pressure in favour of stronger regulation policies and increased the involvement of legislative bodies in financial regulation (Zimmermann 2010).
Consequently, the severity of the 2007 financial crisis demanded the generation of new kinds of regulations for defensive reasons at a time of weakened political legitimacy and for improvement of industries, confidence restoration, and increasing market share. However, the politicization of financial regulation in Europe had an effect of weakening the association between European Union policy entrepreneurs and multinational financial firms which hindered the effectiveness of such policies in solving the financial crisis.
Conclusion and Recommendations
The global financial crisis of 2007 adversely affected the global economy leading to a recession. While many causes have been put forth to explain the reasons for its occurrence, the housing bubble and the credit crisis in the US have been cited as the major causes of the crisis. In order to reduce the likelihood of such crisis from occurring in the future, much emphasis has been put on increased international financial regulation.
However, the appropriate policy response to the crisis extends beyond tougher international regulations to smarter requirements combined with effective political and financial leadership (IMF 2009). This is because as evidenced in the crisis, the banking sector which is already highly regulated proved vulnerable to the systemic shock which has been attributed to lack of coordination and adequate communication in the sector.
Consequently the government and financial regulators should aim at restoring the market disciplines, address the fiscal risks posed by systemic institutions, and restoring the level and quality of bank capital in order to avoid such crisis from occurring in the future (IMF 2009). In addition, the role of international financial regulation should be delegated to both major and developing economies in order to promote efficiency and avoid conflict of interests.
Obersteiner, T. Schemes To Asset Relief Measures and Restructuring Plans: EU State Aid Policy And Banking Institutes During The Financial Crisis. Germany, GRIN Verlag.
It is without doubt that the global financial crisis rattled the financial positions of most firms all over the world. This report studies the effects of the global financial crisis on Westfarmers Ltd, a listed Australian company. Using a pre and post GFC approach, a critical analysis of the company’s financial ratios between the years 2007 to 2010 sheds more light on the effect the GFC had on this particular firm (Maslow, 2000).
The company’s financial statements over the years also provide more insight of the financial health of the firm. The global financial crisis hit the world in 2008 and consequently posed many questions over the viability of corporations across the world.
A lot of strategizing and realignments have taken place after the crisis and Westfarmers is not an exception. A trend analysis shall provide us with information over whether Westfarmers is on its road to recovery or not. The directors’ salaries are also scrutinized to determine whether they need to be reviewed as part of the recovery program.
Trend Analysis
In order to put into perspective the effect of the GFC, we shall study the profitability of the firm from 2007 to 2010. Ratios computed from the firm’s financial statement shall provide us with an overall direction (Helfert, 2007).
As is the case for many firms, the net profit margin of Westfarmers decreased from 0.114 in 2007 to 0.039 in 2009. This may be attributed to the fact that the level of disposable income of consumers during the GFC decreased tremendously. However, a slight increase to 0.043 in 2009 may be an indicator that business has started to look up for Westfarmers. Decrease in disposable income is an external factor that Westfarmers has very little control on whatsoever. Dwindling sales is therefore not of Westfarmers making.
A decrease in the asset turnover in 2008 is also proof that business was low for the firm. We however notice a gradual rise from 2009 onwards, which may be an indicator that this company is on the path to recovery. The increase in the weighted average ordinary shares can explain the gradual drops in the debt to equity ratio and the leverage ratio. The company is using more equity than debt to finance its operations. This move should be highly lauded, as it would be catastrophic for the firm to continue accumulating debt.
Increase in equity finance as opposed to debt finance also boosts investor confidence and speaks volumes of the company’s credit ratings. Despite the persistent drop in EPS from 1.9 in 2007 to 1.3 in 2010, it would be wrong to conclude that the firm has been posting poor results. Increase in the weighted average ordinary shares is the main reason why shareholders earnings have been on the decline and not profitability. Due to this, the debt to assets ratio has decreased tremendously from 0.7 in 2008 to 0.3 in 2010 (Friedlob, 2010).
The steady rise in the current ratio from 0.5 in 2007 to 1.3 in 2009 allays any fears of incapability to meet maturing obligations. Due to the use of more equity capital, GFC has strengthened its current ratio thus a clear indicator that the firm is not under any kind of financial crisis.
The balance sheet also provides evidence of the company’s liquidity as can be noted from the increase in cash and its equivalents over the years. The company did not invest any funds in associate companies in 2009 and this was a good move since this was the post GFC era and it was important to direct all energy and resources towards survival and not growth.
Scrutiny of Directors’ Remuneration
Reducing salaries is one of the most effective ways of bringing down the cost of production. The salaries of directors however always tend to be sticky despite the prevailing financial conditions. The remuneration of Westfarmers directors must be scrutinized to establish whether there is need for review or not.
According to the director’s report concerning remuneration, the salaries of Westfarmers senior executives are based on the market rates of the top 25 listed Australian companies. The wage rate is also pegged to the performance of the directors. There is a remuneration committee charged with the duty of structuring the salaries of directors. The work of this committee is not final, as it has to be approved by the board of governance. This provides sufficient checks and balances to ensure that the company’s senior management does not award them excessively.
From the report provided, it is quite clear that the directors have no influence whatsoever on their remuneration. Salaries are structured by an independent committee and vetted by the board in accordance to company law concerning remuneration. Remuneration structures and clearly laid out payment plans ensure that the salaries paid to the directors is not arbitrary. Everything is done according to a well laid out legal framework hence we can conclude that the amounts paid are fair.
Conclusion
The objective of this report is to establish whether Westfarmers ltd is a viable investment or not. From the trend analysis of the company’s financial ratios, we can deduce that Westfarmers is on its path to recovery from the global financial crisis. Profitability ratios such as the net profit margin and the asset turnover ratio indicate some slight fall in performance in the year 2008. However, the same ratios show tremendous improvement in the post GFC years of 2009 and 2010.
On the other hand, liquidity ratios such as the current ratio continue to strengthen in the years 2009 and 2010 indicating that the company’s is not in any danger of going into receivership. The company has enough financial resources to cater for its maturing obligations.
Increase in equity financing as opposed to debt financing is a good move and will go a long way towards helping Westfarmers recover from the GFC. It can also be seen from the financial statements that in the post GFC era, focus shifted from investments as no associates were acquired, this is good for stabilization of the firm. This was well informed as acquiring more associates might have drained the company’s resources and caused more problems in the short run.
Being a company with associates there is diversity of risk as losses in the parent company can be offset by gains in its subsidiary and vice versa. This is evident in the income statements of 2008 and 2009. Despite there being a decrease in sales In the parent company, there was a general increase in the consolidated sales. Such kind of buffering secures Westfarmers from any sudden changes in economic conditions as was witnessed during the global financial crisis.
Recommendation
From the financial statement, it can be seen that during the post GFC era, the company preferred equity financing to debt financing. Although this is good for survival and stabilization of the firm in the short run, it could be expensive in the long run. Equity capital is more costly due to the floatation costs and other costs involved in acquiring equity finance (White, 2004). These costs inflate the expenses in the income statement and consequently eat into the company’s profits.
References
Friedlob, G. (2010). Essentials of Financial Analysis. New Jersey: John Wiley & Son,Inc.
Helfert, E. A. (2007). Techniques of Financial Analysis. Chicago: Mc Graw Hill.
Maslow, A. H. (2000). Maslow on Management. London: Wiley.
White, R. (2004). Analysis for Financial Management. New York: Mc Graw Hill.
Financial crisis is a term used to refer to a situation in which the value for money goes up hence attracting high demand. This in return increases its supply. It entails unstable financial markets in which the currency flow is limited and hence affects households and businesses. In other words, the demand and supply of goods and services is disrupted. Many economists have developed theories on causes of financial crisis and how it can be avoided.
Causes
Mortgage lending is one factor associated with financial crisis. This is because earlier on the institutions dealing with the mortgages did so at low interest rates for high priced houses. In addition, the conditions involved were favorable to many people. This led to many people taking this mortgage loans yet they could not afford.
A financial system shock disrupted the situation and the prices of the houses fell and many people could not pay their loans. The institutions therefore experienced liquidity issues. This caused such business to be risky and not many people could invest in them.
There are those factors that are not related to subprime mortgage market but have contributed immensely on the financial crisis. They include small banks, agents providing loan security, investment procedures by the government and other financial institutions lending and proving securities for the same.
Effects
Financial crisis has led to collapse of many businesses, high rate of unemployment hence poverty as well as reduction in government revenues. Moreover, slow economic growth characterized by decreasing stock market and weak currency. Most of the economies have continued to decline and financial institutions have continued to suffer. For this reason, there is limitation on the circulation of currency. Moreover, the interest rate on the loans from the banks has increased.
It has also resulted to many economies especially those that are developing to seek help from financial institutions such as World Bank and International Monetary Fund (IMF). In addition, their policies and conditions put in place by these institutions are harsh and thus continue to weaken these economies.
Financial crisis has an impact on the business in that it hinders export of goods and services hence increasing the demand for them. The high demand and low supply on the other hand affects trade because it decreases purchasing power for many people.
Recommendations
Financial crisis can be averted using various tools. For example the governments should control such a situation by decreasing interest rates. This can be achieved by directing the currency back into the banking system. This would ensure that market liquidity is supported and at the same time encourage currency flow.
Mitigation measures should also include reviewing policies in order to reduce the negative impacts on the economies. Favorable policies should be implemented so as to correct the situation. For example trade policies ought to change and regulations be revisited. The policy and the regulations should be based on the accurate information about market. In addition, financial institutions should be funded in order to act as security during crisis.
Conclusion
Financial crisis is characterized by unstable markets. It can occur in any economy and when it does, numerous effects are felt. Financial crisis can be caused by various activities in the economy. Many economies therefore try at all cost to prevent it. They do so by regulating the interest rates on the loans and increasing the purchasing power of the people. The demand and supply of goods and services is also controlled.
International finance is a study that entails the workings of the global financial system, exchange rates and foreign investment and how they impact international trade. International finance is a vital ingredient in the decision making process of many firms.
Every entity is faced with the inevitable reality of making financial decisions in the following departments; investment for instance where to open shop, dividends for example whether or not to pay and when, working capital management such as the amount of liquid cash to hold and in what currency and financing for instance the nature of the capital structure and where to source the money from. (Fender & Gyntelberg 2008 149).
The global financial crisis that was witnessed all over the world was the worst to be experienced. It resulted to the tumbling of large financial institutions, collapsing of stock markets and general decline in the wealth of consumers. This came about as a result of shortage of cash in the United States banking system hence eroding consumer confidence in its wake. All the economies worldwide were adversely affected as a result of decrease in the availability of credit and reduction in international trade (Jesse & Powers 2009 76).
Central Bank usually purchases foreign currency when it wants to increase the supply of its local currency. This is done to stem the shortage of local currency in the economy. During periods of inflation, Central Bank buys the local currency and sells foreign currency and in effect the money supply in the economy is reduced. (International Monetary Fund 2009 a 85)
The United States Federal Reserve together with Central Banks in the whole world were forced to increase money supplies in the economy to guard against aggravating an already awry situation. The United States Federal Reserve, the European Central bank, Bank of England and Bank of China had to act with unprecedented urgency to rescue their respective economies and that of the world at large.
They had to buy $2.5 trillion of government’s debt and struggling private assets from banks. The governments of the European countries and the United States raised the capital of their banking systems by $1.5 trillion through the buying of preferred stock in all their major banks (Levchenko et al. 2009 141).
The great recession that began in 2007 came to an end in June 2009. The financial crisis also came to an end almost at the same time. The president of the United States was quoted saying that the markets had become stable and that most of the money spent on the banks had been recouped.
In China, United States, England and most of European countries had their economies recover after the financial crisis validating the efforts that their governments had put towards guarding against the recession. There are exceptions nonetheless; countries such as Greece and Spain were not so lucky hence they had to be bailed out for the second time or their economies risked being battered to oblivion. (International Monetary Fund 2009b 48)
In grappling with issues to do with financial crisis like how much money to inject into their economies, the Central Banks had to contend with the issue of not injecting too much money into the economy resulting to inflation.
The United States Federal Reserve did not agree on this view and they injected more money into their economy than any other Central Bank. Central Banks were justified to have done what they did. This is because the financial crisis was self-inflicted hence it needed such extreme measures to alleviate it and thus what they did was approved.
References
Fender, I. & Gyntelberg, J., 2008. Overview: Global Financial Crisis Spurs Unprecedented Policy Actions. BIS Quarterly Review. Vol 6: 1–24.
International Monetary Fund., 2009. Review of Recent Crisis Programs. Washington, DC: IMF
International Monetary Fund., 2009. World Economic Outlook: Washington, DC: IMF.
Jesse,M. & Powers W., 2009. Did Trade Credit Problems Deepen the Great Trade Collapse? In The Great Trade Collapse: Causes, Consequences and Prospects. New York, NY: VoxEU.org Ebook.
Levchenko, A. et al., 2009. “The Collapse of International Trade During the 2008–2009 Crisis: In Search of the Smoking Gun.” Research Seminar in International Economics Discussion Paper. Vol 592.