FINANCIAL INDUSTRY AND 2008 ECONOMIC MELTDOWN
19th, January 2013
The financial crisis of 2008 was the worst to hit the United States, after the 1929 stock market crash. Different people have since come up with their own different possible causes and consequences of the 2008 financial crisis in America, which adversely affected other world countries. However, nearly all the reasons for this financial crisis point to the financial industry being responsible for the fueling of the financial crisis. In these articles, while Bogle agrees that the financial crisis was a result of unchecked market forces in the financial industry, Blankfein argues that most financial bodies did not cause the financial crisis directly. Instead, their poor risk management practices are to blame. He however, argues this from the perspective of his financial firm. From this discussion, it will be clear that apart from financial institutions, policy makers also contributed to the financial crisis.
It is true that the root cause of this problem was the decline of the housing market, as Bogle and Blankfein note. Bogle is right when he figures out that this problem has roots in the past events, and so its growth was gradual. The most important factor was the Glass-Steagall Act. When the major elements of this act were repealed, the negative consequences started to unfold. This law was enacted in 1933 as a solution to the collapsed banking institutions, after the 1929 financial breakdown. The main act of this law was to protect the deposits of bank customers from investment risks. Separation of investment banks and commercial depository banks during this period also had overwhelming results in the subsequent years. On the negative, this turned banks into financial institutions working for “agents.” Therefore, since the bank owners were not exposed to any risk, they exercised little caution in their management.
Although Blankfein does not directly put the blame on financial bodies for the 2008 financial crisis, he points out that some of their practices were responsible for the economic meltdown. For instance, some financial institutions engaged in too much lending, which in return cheapened credit. In the housing market, this resulted in its growth before plunging into decline. When lending exceeded the appropriate levels, the lending risks became more pronounced and complex. This complexity of instruments made it impossible for them to be sold or bought, hence increasing the effects of the meltdown. This to date remains the causal factor of the financial crisis, and the US government greatly influenced the housing market in a negative way.
Lack of transparency in financial reporting is essential for financial institutions. Most financial institutions did not report on the state of their derivatives, and most did not manage the risks involved in derivatives in the most appropriate manner. Lack of honesty and transparency in financial reporting gives a wrong impression or image of a company’s financial health. This does not allow for identification and correction of mistakes in the financial institutions as most flaws are deliberately covered. This falsified financial reporting hindered the redress of misdoings in the financial institutions.
For Blankfein, to avert future financial crisis, more attention must be given to the mortgage secularization market, especially in the context of risk management. I agree with Bogle too who proposes that, to prevent future financial crises, financial bodies, which are responsible for the safeguarding of other people’s financial assets, must exhibit honesty and ethics in handling their clients’ finances. They should operate in the interest of their owners, who they serve. It is true that ethics in an organization embraces good management as failure of an organization to meet its objectives affects their clients negatively, and this is unethical. Therefore, financial institutions must be committed and dedicated to good performance in order to save the world another economic meltdown.
In conclusion, the economic meltdown was lethal to the global economy, as even some of its effects are still experienced today. Different forces were behind the economic meltdown. However, the financial institutions made the most contribution in the financial crisis. This was mainly through their poor management practices, such as poor risk management, misplaced priorities, and overall operation of the institutions. There were signs to warn these financial institutions of the looming crisis, but no necessary steps were taken to ensure that the flaws in the financial institutions were corrected and leveled. However, the whole blame cannot be put on financial institutions only as the government and policy makers also influenced these.
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