Introduction:
“Deregulation of financial sector allowed development of tradable instruments through securitization. Securitization involves turning an asset, such as mortgages or credit card debt, into a financial instrument that can be traded. Households became both investors in (through pension plans) and issuers of securities. An enormously complex system of trading in various types of capital emerged. This system turned out to be unstable and its instability caused the current crisis.” (Gerald F. Davis (2009), pp. 27 - 44.)
Reasons:
1. Mortgage: (subprime mortgage)
People to buy house buy mortgages from Bank and pay collateral interest to won the house each month. Bank who actually owns the house so makes the deposit and turn those deposit into securities. Then bank sell collections of mortgage based securities to investment firms like in Wall St. Bank distributed mortgage to whom are not even qualified, anybody was approved. Some years later borrowers could not pay mortgage loan and house price way less which was suppose to rise. Mortgage price was higher than the house price. And there was enough people house to build and money stopped to flow in the market then the crisis started with Bears Stearns.
Bears had billions of subprime mortgages and acquired by JP Morgan Chase. Toxic mortgage eat away every firms in Wall Street which results trillion dollars of losses in the system. Freddie Mac & Fannie Mac, the largest mortgage lender fall in big trouble and the government took the company as nationalized. Lehman Brothers became Bankrupt. All these giant organization were connected deeply into the system that the market crashed and impact on rest of the organizations and economy. Banks stopped lending, credit market got froze. Government decision of not saving the Lehman Brothers affected the crisis seriously. AIG, world largest insurance company, invested trillions of dollars tied with housing market also fell in trouble as they sold unregulated credit default swap insurance policy based on the bet the Lehman would never go bankrupt, but Lehman was bankrupt. And government nationalized AIG (http://www.pbs.org/wgbh/pages/frontline/meltdown/view/, (accessed date: February 23, 2010)). The housing market crisis affected the whole world economy like country of Iceland who was benefiting from the housing market affect by worst, Bank of England bailed out, massive share prices fall in Paris, share price fall in UK too e.g. HBOS dropped by 30%, Barclays by 16%, RBS by 14%; Japan, India the global market impacted by the crisis (http://cue.cf.ac.uk/webapps/portal/frameset.jsp?tab_id=_2_1&url=%2fwebapps%2fblackboard%2fexecute%2flauncher%3ftype%3dCourse%26id%3d_122276_1%26url%3d, (accessed date: February 22, 2010))
2. Politics behind the crisis:
Even before the financial crisis hit, America was already deeply in debt and borrowings. Each year there was deficit and had over ten trillions of debt. Bush government was responsible for the debt. When Bush became U.S. president in 2001 they had surplus. Bush took the political decision of cutting tax of about 1.3 trillion dollars.
Tax cut was also done previously in 1981 by earlier president Ronald, since World War II, the largest tax cut at that period. This result deficit in the following years, therefore president signed the largest tax increase in that period of depression. Jorge Harvard Bush also cut tax when became president and within 2 years budget deficit grown. Then again signed increased tax to improve budget deficit.
When US was attacked in 9/11 and affected their economy at time as well. Bush government took the decision of war. But wars are expensive, yet they had gone for two wars in Afghanistan and Iraq. Bush government did not increase tax, rather two enormous tax cut was signed and also signed the prescription drug which was even expensive that Iraq war. Finally, Bush government left recession, deficit to the new president Obama (http://www.pbs.org/wgbh/pages/frontline/tentrillion/view/, (accessed date: February 22, 2010)).
3. Changing Labour Market:
The US economy has shifted from manufacturing to services over the decades. As example, in 1960 to 2009 top organizations changed from automakers like GM, Ford, U.S. Steel to Wal-Mart, UPS, Sears Holdings. The shift resulted trouble both for manufacturer and workers. In 2009 the biggest manufacturing collapse in US history was the bankruptcy of General Motors, which is basically after the crisis started in 2008. Since, nature of labour market changed thus manufacturing jobs went to off-shoring like textiles production from cheap location India, China, Vietnam etc. This results the change of employment relationship nature too which is shifting from Fordism to Post-Fordism. The new employment relationship includes the portable pension which is the biggest investment source of today's institutional investors. (Gerald F. Davis (2009), pp. 27 - 44.)
4. Growth of Institutional Investors:
The huge amounts of portable pension funds were managed by the various banks, insurance companies and mutual funds organisations. The mutual fund industry grew enormously during 80s to 90s. This fuel the emerged of new institutional investors. According to the Federal Reserve, “By 2001, 52% of the households owned stock-the highest proportion in U. S. history-and most did so directly or indirectly through mutual funds.” The big institutional investors became the major shareholders in many big companies like Fidelity was the largest shareholder of roughly 1 in 10 U.S. corporations. (Gerald F. Davis (2009), pp. 27 - 44.)
5. Securitization and the Changing Nature of Banking:
In the new model market are created through the securitization of mortgages. Thousand of mortgage bonds were turned into securities and traded in a complex system. For example, According to Gorge Bailey, the Banker of the movie ‘it's a Wonderful Life' explained, “thousands of mortgages were sold to Merrill Lynch, which divided into bonds that were bought by Cayman Islands LLC, which bundled them together with other mortgage-backed bonds into collateralized debt obligation that Citigroup sold to a Norwegian pension fund.”The securitization craze extended to credit cards, life insurance policies, music royalties, anything with an income stream. Even countries have started marketizing their assets, for example Tuvalu selling its domain name .tv The web of securities became so complex that no one understood how they were interconnected and the impact of weakness in one market on the entire securities network. (Gerald F. Davis (2009), pp. 27 - 44.)
6. Technological Advancement:
Technology has the side effect like individual had the access to financial system. ICT is making organisations more cost effective which result downsizing of employees and increase of unemployement.
Steps:
1. Monetary Policy: The financial crisis damaged the UK market as well by both credit supply and slumped demand. Therefore, a proper monetary policy should be implemented. Already, there were some policy and action taken like Bank Recapitalization Fund, Government's Credit Guarantee Scheme, Asset Protection Scheme, Asset-Backed Securities Guarantee Scheme, Asset Purchase Facilities, and Working Capital Scheme etc. Also Institution Specific Measures like merging HBO & Lloyds TSB which finally held in January 2009, nationalization of Bradford and Bingley. Likewise more policy should be taken for future sustainable economy. (OECD Economic Surveys (2009))
2. Central Bank Monitoring: Bank of England need to be cautious and regularly monitor over nation's banking.
3. Reduce Trade Deficit: Government should maintain as much surplus as possible and avoid trade deficit which indeed can pressurise in crisis.
4. Unemployment Policy: The current UK unemployment is 7.8%, which is higher by 1.4% and estimated to rise by the end of 2010 (http://www.hrmguide.co.uk/jobmarket/unemployment.htm, (accessed date: February 25, 2010)). Therefore, unemployment can harm the long-term economy of the country and thus need policies that will offer assistance.
5. Manage future human resource capital: Globalization, together with technology, is changing the nature of jobs and level of skills needed to do the jobs. Therefore, it is important for UK to educate the population higher than in the past. Although it has recorded that the education performance has increased on the basis of national examination result, but the measures was biased (Brook, 2008). According to international test PISA, young people of UK are performing below the best performing countries. (OECD Economic Surveys (2009))
With the industrial booming in US the bright graduates from Harvard Business School started to join in industry like automobile, oil, etc. instead in the past decades the graduates aimed to job at New York Stock Exchange (Drucker, 1949). Therefore, UK government should encourage the human resource such that best talent can come into economy. (Gerald F. Davis (2009), pp. 27 - 44.)
6. Economy should political free: Interest rate, tax is the manipulation of government political attempt like in Bush government. Therefore, for better economy of the country this type of politics should be avoided.
7. Credit Rating Agencies: Credit ratings were partly responsible for the financial crisis in US like S&P, Moody's Corporation who were the credit ratings provider in mortgage-backed securities. Likewise CreditChoices, Equifax, Experian are the credit rate giver in UK, therefore, government need to alert of these organizations services. To maintain the quality and reliability of ratings government should regulate legislations where these organizations comply with a set of rules and regulations.
8. Long-term Policies: While taking the steps to not getting into trouble of another crisis, there should also take care of long-term policies like giving assistance to young and low skilled workers and improving the performance of education sector. In particularly, disability benefit scheme, school system, infrastructure, transport, public sector services and land use need to be take care to ensure sustainable and strong medium-term growth. As example, the shortage of land for residential and commercial development was one reason for the fluctuation in the housing market in UK over past few decades. (OECD Economic Surveys (2009))
9. The less the borrowings of the country, the better condition will be.
10. Firms should maintain capital to collateral their borrowings.
11. Banks lending regulations should be monitored and avoid the similar situation which US banks did of lending money without background check of the payer.
12. Close monitor of Stock is also needed like sudden rise and fall of organizations stock value.
13. Emphasis more on manufacturing organizations that are currently have operations and give assistance to weak manufacturer.
References
Gerald F. Davis (2009), “The Rise and Fall of Finance and the End of the Society of Organizations”, Academy of Management Perspectives, Volume 23, Number 3, pp. 27 - 44.
http://cue.cf.ac.uk/webapps/portal/frameset.jsp?tab_id=_2_1&url=%2fwebapps%2fblackboard%2fexecute%2flauncher%3ftype%3dCourse%26id%3d_122276_1%26url%3d, (accessed date: February 22, 2010)
http://www.pbs.org/wgbh/pages/frontline/meltdown/view/, (accessed date: February 23, 2010)
http://www.pbs.org/wgbh/pages/frontline/tentrillion/view/, (accessed date: February 22, 2010)
OECD Economic Surveys (2009), “Policies to overcome the crisis”, Chapter 1
http://www.hrmguide.co.uk/jobmarket/unemployment.htm, (accessed date: February 25, 2010)
OECD Economic Surveys (2009), “Structural policies to promote sustainable long-term growth”, Chapter 5
