Economics of Strategy

¶ … economic crisis -- bankers to blame?

Be it resolved that bankers in developed economies are responsible for the global economic downturn and have behaved without moral integrity.

To blame bankers for the global recession that has been steadily degridating assets values globally by the trillions of dollars from 2007 to 2009 (Corden, 2009) is to miss the broader and far more significant factors. The last series of scandals including Enron, Tyco and many other corporations had as their catalyst the complete lack of insight and compliance initiatives on the part of the U.S. Federal government. The same could be said of the world's governments as well. In reaction to the astounding lack of compliance with regard to financial institutions and the publicly-traded corporations they served, the U.S. Government in 2002 passed the Sarbanes-Oxley Act (Gerrish, 2002). Other nations followed this trend, enacting into law compliance initiatives that had been severely limited in the past. These compliance initiatives did little however to solve the more fundamentally broken areas of global economies when it came to ethics and reporting.

As a result the Sarbanes-Oxley Act did nothing to provide the U.S. Securities and Exchange (SEC) Commission with any insights into how the innate financial system reporting and transaction inaccuracies could be so easily manipulated by corporations and by government leaders as well. In addition, by ignoring these dynamics, economists in the larger western nations could continue to use interest rates to manipulate and re-define the value of their currencies to ensure a continued growth of Gross Domestic Product (GDP).

These two factors of a global financial system increasingly capable of being manipulated not by bankers, but by entire governments to alleviate any costly fluctuations in their currency, as China and the U.S. both did extensively during this time, and the deflation of interest rates drove down the cost of capital to levels never seen before. As a result, with many of the world's western nations flush with cash and interest rates at exceptionally low levels as a result, housing re-financing became the new Automated Teller Machines (ATM) for millions of homeowners globally. In addition, low interest rates made it possible for sub-prime lenders to create highly profitable business models that extended homeowner's mortgages with interest rate escalations that would initially have very low interest rate-based payments a typical working class family could afford, only to settle at three or four times the original amount in the majority of cases (Gerrish, 2002). This forced nearly all of these middle class families with sub-prime mortgages to default and eventually see their homes foreclosed upon.

On a more aggregate level the subprime loans were then bundled together into investment packages and re-sold, with bankers not having any visibility into the quality of the loans purchased in the bundles. Today there is still confusion over these loan investment bundles.

From this analysis it is clear that the U.S. government and its reliance on interest rate reductions as a means to spur economic development actually fueled the economic crisis, and that the efforts at compliance failed. There is also the factor of how mortgage providers quickly capitalized on completely lack of compliance in these areas, and quickly took advantage of the low interest rates to create predatory lending practices.

Please argue for the above topic

The fiscal responsibility of any leader of a financial institution is to alleviate risks through intensive due diligence while seeking to attain a reasonable level of return on clients' invested funds. Bankers prior to and during this global economic recession are the primary catalysts of the global economic meltdown due to their mindset that exceptional returns for investors require exceptional risks that can be evenly distributed across investors. This mindset was made possible by their intensive investments in new technologies that made transactions inherently unauditable and untraceable by the Securities and Exchange Commission and other governance entities. Given the automation of these complex trading workflows and the inability of governance bodies to keep pace with technological advances, coupled with banker's unwillingness to assist governments in tracking increasingly intricate transactions, the bankers could literally make their own rules up as they went along. What has differentiated this global economic downturn from others is how pervasive this attitude has become of offloading risk by aggregating toxic and bad loans together, using technologies to increase speed of transactions while alleviating accountability (Corden, 2009).