Organizational responses to the global financial crisis and recession

Organization Behavior

Global Financial Crisis

The most recent financial crisis has badly affected the Global economy. Individuals, businesses, and Governments; every entity has taken its impacts in one way or another (Burger, Coelho, Karpowicz, & Tyson 2009). Since its arrival, financial crisis has posed big threats to the world markets. The countries are trying to overcome the bad impacts of this crisis but have failed to recover their positions due to severe recession and worsening economic conditions (U.S. Department of the Treasury 2012). Economists and Financial Analysts have discussed various reasons for this Global financial crisis; a big downturn in the financial and housing mortgage sector is said to be the biggest reason of all (Donath & Cismas 2009). The Global financial crisis has hit almost all the sectors of the economy which have not only hampered the industrial growth in the countries, but also caused serious challenges and issues for the Governments and regulatory bodies (Independent Evaluation Group 2012).

This paper gives a comprehensive review of the recent Global financial crisis which has badly shaken the world economy in a quite short period of time and made the businesses and Governments helpless in this Recession period. It starts with a brief history of the financial crisis; what caused the financial crisis, where was it originated, and what economists believe about it. The later sections discuss the different aspects of the global financial crisis; including its major impacts on the different sectors of the economy, what strategies businesses and governments have been adopting to overcome its consequences and bad impacts, and what are the potential impacts which this financial crisis can bring in the near future as well as in the long run.

HISTORY OF THE FINANCIAL CRISIS

The most recent financial crisis started in late 2006 in the United States when its largest banks, insurance companies, and other financial institutions noticed a big decline in their sales and profitability (Magdoff & Foster 2009). This downturn in the financial performance was quite minor in the beginning, but suddenly increased up to such a large extent that these banks, insurance companies, and financial institutions could not survive in their industry and went bankrupt due to huge unpaid obligations. The financial crisis started in the financial sector of the United States, but spread to the whole world markets in a very short period of time (Corker 2012).

Housing Finance and Mortgage:

Economists and financial analysts are of the view that the Global Financial Crisis was mainly due to the over-investment of the general public in housing finance and mortgage contracts. Before this financial crisis hit the United States market, the housing mortgage and finance market was dominated by a few large commercial banks (Donath & Cismas 2009). They were in a stiff competition with the local and international banks and financial institutions that offer these facilities at comparatively lower interest rates than banking institutions (United Nations Organization 2009). In order to beat these competitors, the local banks in the United States decreased their interest rates and made their terms to avail the housing and mortgage facilities more flexible and relaxed (Burger, Coelho, Karpowicz, & Tyson 2009).

Competition among Banks and Financial Institutions:

Keeping in view an attractive market in the United States, more new international banks entered its markets and started offering housing finance at even cheaper rates. This competitive environment took the shape of a price war among the local and international banking institutions and finance companies (Independent Evaluation Group 2012). Due to this price war, the customers got attracted towards these facilities and started availing them without looking at their re-paying ability. The result of this over-selling was seen in the form of a big disaster to the United States' banking industry (United Nations Organization 2009). A significant percentage of borrowers was unable pay its liabilities to the respective banks and financial institutions due to limited income and extra expenditures of monthly interest payments (World Bank 2012).

Bankruptcy of the Largest Banks:

This was the start of the financial crisis in the United States market. The banking companies and financial institutions had to sale out their short-term and long-term securities in order to pay for the loans. It resulted in a significant decline in the volume of their deposits and long-term assets (Magdoff & Foster 2009). When they found no other means of funding those loans, they have to knock the door of the Government for bail out (Corker 2012). This financial crisis badly shocked the world economies when few of the largest commercial banks of the United States went bankrupt. Lehman Brothers, Morgan Stanley, Goldman Sachs were among the most successful banking companies of the country, but took the bad impacts of this financial crisis and went bankrupt due to non-payment of their liabilities to the housing sector (Barth 2009).

PRESENT CONDITION OF THE FINANCIAL CRISIS

The financial crisis started from the financial sector of the United States but spread over the whole world economy in a quite short span of time (U.S. Department of the Treasury 2012). The world economy started experiencing its impacts when the investors from the United Arab Emirates and other rich economies also had to face the same bad debt issues as the financial sector of the United States had seen in its housing mortgage and finance facilities. At present, the world economy is in a great recession where economic performance of the financial institutions has significantly decreased, the industrial growth has slowed down, and international trade has got discouraged with the poor economic conditions of a large number of countries in the world (U.S. Senate Committee on Banking, Housing, and Urban Affairs 2012).

Government Policies:

The Governments of different countries are taking steps to recover the positions and economic situations of the financial and services sector from this crisis. For this purpose, they are recapitalizing the financial sector so that it becomes stable and retrieve its past performance. Moreover, this financial crisis has made a large number of governments to run their economies in fiscal deficits. They are unable to achieve the Balance of Trade and control their expenditures to match the revenues (U.S. Department of the Treasury 2012). The similar worse conditions are faced by business organizations in the international world markets.

Due to this financial crisis, the purchasing power parity of the customers has badly affected which has resulted in a decrease in the number of customers for each particular product manufactured by international business organizations (Donath & Cismas 2009). This thing has shrunk the growth and profitability of these organizations and forced them to keep their business operations limited to their local markets instead of expanding into new international markets (Burger, Coelho, Karpowicz, & Tyson 2009).

RISK ANALYSIS IN THE GLOBAL FINANCIAL CRISIS

In order to revive the world economy from the severe financial crisis, there are different strategies which the businesses and government have adopted in the recent past. The first and the foremost is the risk analysis of different factors which had caused the financial crisis and badly hampered the industrial growth and economic performance of different entities (Kaufman 2009). The risks involved in this process include further vulnerability of the financial sector, competition among the businesses, and political instability in different economies of the world.

As far as the political instability is concerned, the revival programs for the stable economies will not be affected due to non-serious behaviors of the governments. Reason being, all the governments have been taking initiatives to revive their financial sectors and industrial growth (U.S. Senate Committee on Banking, Housing, and Urban Affairs 2012). The second risk factor is the competition among businesses which can both impact the revival programs in a negative and positive way. The price war between different businesses can lead to greater competitiveness but it can lead to more relaxed terms and conditions as the world experienced before the recent global financial crisis (French, Baily, Campbell, & Cochrane 2010).

IMPACTS ON THE DIFFERENT SECTORS OF THE ECONOMY

The financial sector was not only the single industry which was affected by the global financial crisis; almost each and every industry took its impacts in one way or another. This section gives an overview of these impacts on different sectors in the light of some important economic measures. The overall impact of the financial crisis can be discussed by highlighting its impacts on the inflation rates, balance of trade, monetary policy measures, and economic reform programs taken by governments from time to time (Chorafas 2009). These factors are now discussed below in detail:

1. Impacts on the inflationary pressures:

The financial crisis badly affected the value of currency by putting high inflationary pressures on almost every currency of the world. The U.S. Dollar got back to its previous position when the financial crisis hit its economy. Similarly, the value of currencies in the Asian and European markets were also depreciated due to low production level, high trade deficits, and discouraged international trade (Donath & Cismas 2009). The terrorist activities also increased during the previous three to four years which also discouraged the tourism and travel industry around the Globe (UNCTAD 2009). The inflationary pressures also increased for the general consumers. It became harder for them to save money for their future needs due to day by day increasing prices of the consumer products. The businesses also experienced high costs of production since the global financial crisis entered their countries (Barth 2009).

2. Impacts on the Balance of Trade:

The global financial crisis discouraged the international trade by making it more expensive for businesses and individuals to import their required goods and services from international markets. The exporters were unable to sale their manufactured quantity of goods to the potential target markets due to decreased demand by the importers. The exporters also did not find any step by their governments to support their trade balances (U.S. Senate Committee on Banking, Housing, and Urban Affairs 2012). These things resulted in a decreased level of production by the manufacturers which means they had to run their plants under-capacity (International Monetary Fund 2012). It also increased their costs of productions and the level of unemployment in their countries. The governments had to take external funding to meet their trade deficits which increased their interest expenditures (French, Baily, Campbell, & Cochrane 2010).

3. Monetary Policy and Economic Reform Programs:

Although the steps taken by the governments of different countries for the revival of their economies are largely criticized by business analysts and researchers, but the changes in monetary policies and launch of economic reform programs are two appreciable steps which seem effective to beat the monster of global financial crisis (Chorafas 2009).

i. Monetary Policy:

The monetary policy measures are being implemented in order to control the flow of money in the economy. The governments are controlling the level of inflation in their countries through tight monetary policies. They have set the discount rates for baking companies higher in order to discourage their borrowings (Patterson 2010). Similarly, the inter-bank rate has also been set high in order to discourage the landing and borrowing transactions between the local banks. The economic reforms by the governments of different countries include encouragement of foreign direct investments in their countries, running industries on their full capacity, and supporting the micro-financing in the rural areas (Nanto 2009).

ii. Foreign Direct Investments:

The foreign direct investments are encouraged by attracting potential investors to come and do business in new international markets. Governments are attracting these investors by offering relaxed terms and conditions for setting up and operating their businesses. For example, the introduction of tax free zones, easy financing facilities and regulatory conditions are few steps to attract these investors.

iii. Revitalizing the Industrial Sector:

The industries are being revitalized by offering them easy financing facilities to increase their capacity and level of production. These steps also help in increasing the foreign direct investments. Donath and Cismas (2009) believe that the industrial growth is the strongest tool to beat the global financial crisis. An economy can only grow if its industries are running at their full capacity and contributing a big part to the Gross domestic product. The revitalization process of the industrial sector will also help the economies in decreasing the level of unemployment and improving the social status of the consumers (French, Baily, Campbell, & Cochrane 2010).

CONCLUSION

The global economic crisis started from the housing sector and spread to all the sectors of the world economy (Magdoff & Foster 2009). The over-investment by the general public in housing mortgage was the main reason for this crisis which led to severe economic conditions in the entire international business and economic environment (International Monetary Fund 2012). Economists believe that the financial crisis was mainly due to the price war between the banking companies which forced them charge a very low price for their services. The financial crisis soon entered the world markets and caused a deep recession which is still prevailing in the major part of the world (French, Baily, Campbell, & Cochrane 2010).

The expected outcomes of the global economic crisis are presented by the researchers and analysts in two opposite perspective; one of them believes it will become more severe in the future while the other argues that the maximum period for which this crisis is going to impact the world economy is one decade (U.S. Department of the Treasury 2012). In either case, the work markets will have to struggle hard to revive their previous positions. The governments of different countries have taken numerous steps to revitalize their economies (U.S. Senate Committee on Banking, Housing, and Urban Affairs 2012). The tightening of monetary policies, encouragement of foreign direct investments, and supporting the industrial sector are the most significant steps in this respect (Chorafas 2009).

From all the above discussion, it can be concluded that there is no single entity in the world which has not been affected by the recent global financial crisis (Independent Evaluation Group 2012). The inflationary pressures, unemployment, balance of trade, fiscal deficits, and poor financial performance of the major industries are some notable negative impacts of this crisis (Burger, Coelho, Karpowicz, & Tyson 2009).