The global financial crisis is fathomed by many analysts as the broken backbone of the global economic backbone. The reason it is referred to as a backbone is due to the fact that the economies that have suffered the breaking have stayed immobile for a long period of time. With the breaking of the economic backbone, governments sought to bail out on banks and other financial institutions in order to reflect the negative effects of the crisis by creating stimulus packages. Given the fact that banks are considered options of quick recovery at times of financial crisis, many financial institutions expected to bail themselves from the situation by utilizing the banks as their options to evade the situation. The banks on the other hand could not rescue the situation given that the governments had bailed on them. Fingers were pointing at Wall Street while hope was expected to come from the same Wall Street.
Given the break of the economic backbone that was experienced, the U.S. housing bubble collapsed, bank solvency was considered, credit availability declined, and investor confidence was damaged. The effect of the above predicament stained the economy with almost crippling force that the situation kept worsening with time. As a move to rescue the economy, the governments considered fiscal stimulus packages, monetary policy expansions, and institutional bailouts as the means of healing the broken backbone.
It is argued that the cause of the financial crisis was brought by the fact that investors, regulators, and credit rating agencies’ poor planning. Despite the fact that the situation had raised a red flag before it worsened, politicians and law makers still believed that the 1933 Glass–Steagall Act was responsible. By repealing this act, the situation was expected to change course and work for the best interest of the economy. However, what the government did not understand was that this repeal was a matter of too little too late. The earlier fractures on the backbone allowed the whole backbone to break.
Capitalism is an economic system that defines means of production as privately owned and investment made for profit operation in competitive markets. The financial crisis could have been avoided if compassionate capitalism was practiced. On the other hand, analysts argue that the same could even be made better if a freer form of capitalism was practiced. Compassionate capitalism would be achieved if investors and big organization practiced fair trade by observing regulatory laws. On the other hand, freer capitalism would be achieved if all organizations and investors were left to compete within the competitive market by applying minimal regulation to them. With this, the morals of fair trade and competition would not be applicable and the possible negative effects of the practice would befall on the society.
The Global Financial Crisis
As an individual trying to survive in the economy, it is hard for one to cope with the situation especially if one belongs to the minority group. Minority group in the economy is comprised of the players, investors, and parties that have the least power of controlling or even changing the economic trends. These include small investors, employees, insurance companies, the local governments, and the general members of the economy(Feldstein, 1991).
The financial crisis is thought by many people and parties as the problem for the banks and the controllers of the economy. However, it is a problem to everyone caught by the situation. Collapsing of large financial institutions in the likes of building societies, credit unions, trust companies, mortgage loan companies, insurance companies, pension funds, brokers, underwriters, and investment funds is associated with unstable economy. Although banks belong to the same category as the above named institutions, they have added advantage over the other kind and types of institutions. This because they can be bailed out by the government and they can pay back with loan returns from institutions they may lend money.
The connection between individuals in the society and the financial institutions is on the level of dependency of either to the other. The society mostly uses the financial institutions to secure their futures, to earn a living, to support their health, and to get investment funds. With the collapsing of these institutions, an individual or a majority of the people making up the society lose all these benefits (Shiller, 2008).
Inscribing the financial crisis on the role of the government and the legal obligation it has, it can be observed that the government, through congress has ignored its duties to protect its people. The enactment of laws unfavorable to the economy and use of public funds on project that are not of economic value has led to this. On the other hand, politicians have played a major unethical role in furthering the problem (Tubner, G. & Febbrajo, et al., 2011). Given that analysts and economist have pointed fingers at the problems, law maker turned a blind eye on them in order to benefit themselves first. In the government, the ministry of finance is not responsible for allocating specific funds to state projects but once the funds are collectively allocated for the states, the representing governors take on that responsibility (Oriero, 2011).
Downturns on the stock market and the general collapse of the housing market are forms of aftershocks or results of the above situation. It is through poor strategic planning that local governments have lost the grip of the situation. Directing funds to less pressing issues while more grave issues pend has been an act of negligence by the government. Ethics of justice in financial planning have led to this fall. With less funds directed to beneficial projects, the financial returns per state has gone down. With this in mind, the stock market is generally affected by the accumulated financial down fall of state returns. In the same case, more people keep losing their jobs due to the unfavorable trading conditions investors find themselves in. Failure by local governments and the contribution by the politicians through poor planning and negligence in matters of individual contribution have created further secondary problems (Kolb, 2010).
The End of the Financial Shortfall
Prior to the period between 2008 and 2009, the financial crisis had affected almost every sector of the economy. The mortgage institutions did a research on the economy to determine the chances that people who applied for loans would be able to pay them back. Though most of the people were not badly off in terms of finance, the financial crisis had risen so suddenly that the same people would buy houses in almost double price. Through this, their pay that did not change with the changing economic times would not allow them to purchase the houses that their mortgage funds would afford. To survive the crunch, these people had to borrow more in order to match the demand real estate agents and organizations were demanding. The research done by the mortgage institutions showed that 43% of the employed population of the people who needed mortgage loans had the probability of not paying the loans in time or at all. To escape the danger of incurring loss by lending these people, the mortgage institutions applied a criterion that would make the property bought theirs until these mortgages were fully paid (Steil, 2009).
The effect of the financial crunch fell hard on the people who sought mortgage loans from these institutions. Most of the people during this period were denied the loans due to unclear reasons with others denied under the excuse of insufficiency of liquidized funds. Those of who had the loans long before the financial crisis had to give their dreams of owning houses. They were evicted and most of them were denied compensation by the mortgage institutions that acquired those homes for binding. The ethical obligation that these mortgage institutions would have exercised was considered void. It was a way of surviving the financial crisis by employing unethical terms and conditions of lending (Posner & Friedman, 2010).
On the matter of bank solvency, the financial crunch made it for the banks to take caution. Given the situation with the mortgage institutions, banks were not left behind in taking measures against the unfavorable economic conditions. With the value of the dollar dropping against other worldwide currencies, banks exercised caution under the pretext of taking care of the future. The fact that the banks did not want to owe or be owed was because there was the obvious chance that anything can go against their strategic planning. If the value of the dollar rose above the value that it was lent to someone with, this would mean the rate or appreciation would be considered when settlement is done. On the other hand, if the banks owed either the government or some international bodies they would be forced to pay back more than the agreed amount in the case of appreciation of the dollar value (Joseph, 2008).
As individuals in this economy, the ethical meaning of the situation is that the mistakes of one party are distributed among all parties that are involved. In the long run, the culprits and the individuals that are supposed to take responsibility of the situation are helped to carry their burdens. Considering bank solvency and the mortgage institution plans, it is likely that the immediate society does not have faith with the economy. The society would not just involve employees and the local communities; the larger picture includes investors who would not find the situation unfavorable. This means that the society was affected even further by the fact that investor confidence was damaged and the secondary benefits that they would have accrued from such investments never get home (Jackson, 2010).
The end of the situation was predicted to come to fruition if, and only if, there was an expansion of the monetary policy, monetary stimulus, and institutional bailout. To the planners and the involved parties, it seems that the situation is grave due to lack of enough money in the circulation. The effect of banks embarking on solvency is seen as the reason why the situation got has it did. All fingers would point to Wall Street and hope that the situation would be solved by putting money in circulation. The monetary policies and their impacts on the economy are the variables to go by.
Cause of the financial Crisis
The cause of the financial crisis is alleged to have caused by conflict of interests and investing on high risk complex financial products. The conflict of interest existed between the investors and the regulators. The regulators were in the look out for free and compassionate capitalism that the investors and large organization were not embracing. On the side of the investors; they were more interested in launching into capitalism requiring the regulators to loosen their intervention on the practices of doing business. The resulting financial crisis was fueled by the fact that regulators failed while the mode of capitalisms was unethical concerning the business practices (Davis, 2010).
The financial crisis was caused by the ignorance parties that were responsible for preventing it. Economists and analysts predicted the financial crisis long before it happened. Many questions have been asked as to who the blame should go to but with records of the involvement of regulators, investors, roles of the banks and mortgage institutions it can be considered a result of collective irresponsibility.