Dissertation Manuscript
By
Sedric K. Morgan
Geopolitical Awareness and Understanding of the Current Monetary Policies: A Quantitative Study
© Northcentral University, 2019 Comment by Author: Sedric – NOTE: take a look at the Turnitin Analysis report. Consider the areas that are closely related to student paper(s) from University of Maryland. I highly suspect this is a matter of improper paraphrasing (by you as well as these other student(s)). The areas are sourced and the similarity may be more likely from the direct source.
Geopolitical Awareness and Understanding of the Current Monetary Policies: A Quantitative Study
Dissertation Manuscript
Submitted to Northcentral University
School of Business Administration
in Partial Fulfillment of the
Requirements for the Degree of
DOCTOR OF BUSINESS ADMINISTRATION
by
SEDRIC KARL MORGAN
San Diego, California Comment by Author: location of the university has changed since the 2018 DP/DM template. Please update the location to La Jolla, California for the Dissertation Proposal final. Thanks, Sharon.
September2020
Abstract Comment by Author: Meets AR checklist. The abstract contains the problem, purpose, findings, and recommendations. Comment by Author: Sedric – format for the abstract section is one full paragraph. For content and format requirements of this section; please see the NCU DP/DM template, page iii, feedback comments.
Understanding how knowledge of debt, monetary policy and geopolitical risks impact confidence in the international banking community could be a way for stakeholders to better manage their investments. The purpose of this study was to determine if the international banking community feels confident that it can sustain another global economic crisis, and specifically whether geopolitical awareness impacts that confidence level. Rational choice theory is used for this study’s theoretical framework and is combined with the principles of mission command to explain how members of the international banking community perceive and execute their role in the industry in the face of mounting risks. The research questions were: 1) Is the international banking community confident in its ability to handle another global economic crisis like the one experienced from 2007-2008? 2) Does geopolitical awareness have an impact on the confidence of the members of the international banking community regarding the sector\\\\\\\'s ability to handle another global economic crisis like the one experienced from 2007-2008? 3) Do changes in central bank monetary policy (i.e., going from quantitative easing to quantitative tightening) and the awareness of the rising debt levels around the world affect the confidence levels of the members of the international banking community on the sectors ability to handle another global economic crisis like the one seen from 2007-2008? The findings showed that the international banking community is confident in its ability to handle another economic crisis and that neither geopolitical awareness nor changes in central bank monetary policy or awareness of debt levels were significant factors in impacting confidence. More research is thus needed to understand what affects the industry’s confidence, as future research should focus on the role that central banks play in affecting confidence levels.
Table of Contents
Chapter 1: Introduction 1
Statement of the Problem 2
Purpose of the Study 3
Theoretical Framework 4
Nature of the Study 5
Research Questions 6
Significance of the Study 7
Definitions of Key Terms 7
Summary 8
Chapter 2: Literature Review 10
Theoretical Framework 11
Literature Review 16
Pea Ridge 16
Rational Choice and Principles of Mission Command Apply to International Banking 19
2007-2008 Global Financial Crisis and Today 23
Subprime 23
Lehman 24
Goldman Sachs 27
Where Things Stand 31
Risk and the Banking Community 34
Geopolitical Risk Effect on Liquidity 39
Over-Leveraged Institutions and Firms 41
Social Capital as Context 46
Significant Contribution to Behavioral Economic 50
Suggestions and Critiques 50
Social Capital and Social Change 52
A Comparison of Outcomes 56
China 60
How Relations between Great Countries Affect Other Countries 64
America and China Relations 65
Japan and the United Arab Emirates 67
How the US-China Relationship Impacts Japan and UAE 68
Summary 72
Chapter 3: Research Method 74
Research Methodology and Design 76
Population and Sample 77
Materials or Instrumentation 79
Operational Definitions of Variables 80
Data Collection and Analysis 85
Assumptions 85
Limitations 85
Delimitations 86
Ethical Assurances 86
Summary 87
Chapter 4: Findings 88
Validity and Reliability of the Data 89
Transferability 91
Dependability 91
Confirmability 93
Results 93
Research Question 1 95
Research Question 2 98
Research Question 3 100
Evaluation of the Findings 104
Research Question 1 104
Research Question 2 105
Research Question 3 106
What the Findings Mean 107
Summary 110
Chapter 5: Implications, Recommendations and Conclusions 112
Implications 113
Recommendations for Practice 121
Conclusions 123
References 125
Appendix A: Scatterplot of Dependent Variable - Confidence 133
Appendix B: Scatterplot: Dependent Variable - Confidence 134
List of Tables
Table 1 Demographics of Respondents 83
Table 2 Demographics of Respondents 95
Table 3 Confidence Levels of the Banking Community 96
Table 4 The Impact of Geopolitical Awareness on Confidence Levels 99
Table 5 The Effect of Central Bank Monetary Policy and Awareness of Increasing Debt Levels on Confidence Levels 103
List of Figures
Figure 1 The conceptual framework of rational choice and the principles of mission command 24
Figure 2 The principles of mission command meet factors affecting rational choice 25
ii
Chapter 1: Introduction
The 2008 global financial crisis showed that banks need to be prepared for the unexpected. As firms rushed to sell investments losing value, the market was overwhelmed and economies crashed. The Federal Reserve intervened with a new form of monetary policy known as quantitative easing (QE). QE enabled the Federal Reserve to rescue markets by serving as the buyer of last resort (Adrian & Shin, 2010; Heller, 2017). A decade later, markets were making new highs and the global economy appeared to have sufficient capital adequacy in case of any new financial emergency (Lupton, 2018). At the same time, fears of COVID-19, trade war fallout, and depression are evident in news media all over the world. These fears suggest that international banks should be prepared for uncertainty in the foreseeable future. Are they confident in their preparedness?
This is an important question to ask, as sovereign and corporate debt is climbing and as the Federal Reserve has indicated that it may not engage in QE every time a market crash or correction occurs (Dimon, 2017; Lupton, 2018). In other words, the banking sector should not get used to depending upon the central bank for support in every emergency.
Lupton (2018) has noted the risk banks face by stating that “since 2007, the global sovereign debt has ballooned by 26 percentage points of GDP” (p. 1). Dimon (2017) has also pointed out additional risk by noting that the Federal Reserve moving away from QE could be potentially disastrous for banks: \\\\\\\"The effects of its reversal cannot be well known since no QE has ever been done on this scale and no one would completely know the myriad of effects that this would have on asset prices, capital expenditures, confidence, and other factors\\\\\\\" (p. 1) Thus, it is important for the banking sector to know whether it can withstand another crisis were one to emerge.
It is vital that we have a study that is geared towards addressing this problem (Mauldin, 2018). To determine if there is any need for precautions to be taken now, the positioning and confidence of the international banks should be well understood. This will assist in developing a sense of whether a default in one part of the world—such as China, Italy, or the U.S.—will affect the entire industry (Bouvatier&Delatte, 2015). In the aftermath of the 2008 crisis, the banking sector was in need of support from central banks around the world (Bruno & Shin, 2015). Today, it is unknown whether these same banks are any more or less confident in confronting a crisis of similar magnitude. While the Federal Reserve does conduct stress tests to see if capital adequacy will be an issue for banks, these tests do not reveal the full extent of risk. The crisis in the REPO markets at the end of 2019 showed as much.
Furthermore, in 2010, the Dodd Frank Act leveraged stricter financial regulations on the banking community. Deregulation in the U.S. under the Trump Administration, had an adverse effect, as Reuters (2018) reported that regulated banks were increasingly underwriting leveraged buyout company loans following relaxing of tax guidelines by the Republicans focused on risk reduction. In short, there is plenty of reason for investors to worry.
Statement of the Problem Comment by Author: Meets Academic Reader checklist for this section: Research problem is specified and supported in the literature. The problem is aligned with the student\\\\\\\'s degree and is feasible. Comment by Author: Sedric – consider beginning this section by clearly identifying the problem and then provide evidence and support that the problem is current and worthy of a dissertation research study. For content and format requirements of this section; please see the NCU DP/DM template, p. 1, first checkbox for this section.
Salhin et al. (2016) showed managerial confidence hasve an impact on return on investment (ROI). More examination was needed on how confidence among members of the finance industry affects investment between sectors (Salhin et al., 2016). Pikulina et al. (2017) found overconfidence among professional investors can lead to high risk situations leading to adverse effects on investment. Overconfidence is linked with financial crisis as investments become so over-leveraged that the slightest disruption bring disaster (Ho et al., 2016). Understanding the connection between confidence and investment in banking is needed (Lee et al., 2019). Do middle managers and regular employees impact industries’ sustainability (Buyl et al., 2019)? It is not known what effect regular banking employees’ attitudes have on industry sustainability, further research is needed (Buyl et al., 2019). Lupton (2019) asserted with rapid debt growth worldwide it is unclear whether the industry can sustain this growth without undue risk taking. Midlevel banking workers are vital to a bank’s success (Buyl et al., 2019). The world may face another disaster following the collapse of sub-prime in the United States coupled with the tidal wave of leveraged loans defaulting across the global banking sector where relief was found through central banking intervention (Haitsma et al., 2016; Heller, 2017). Comment by Author: Edit this sentence for clarity and to facilitate the Readers’ understandings. Thanks, Sharon.
The study problem is one of sustainability in the industry. Lupton (2019), Dimon (2018) and Buyl et al. (2019) questioned the sustainability of today’s banking industry. Confidence may play a part in determining whether the industry is sustainable (Buyl et al., 2019). However, it is unclear how confidence can be defined—emotion metaphors may be an indication of the type of confidence that workers in the banking industry have (Ho & Cheng, 2016). Confidence is vital since it determines how money is invested, what markets will do, and where it is placed (Heller, 2017). Bankers’ confidence is important to assess because it impacts how investors invest (Giles, 2017). Thus, this study addresses the problem of knowing to what extent bankers have confidence in their sector as the sector faces one of the biggest crises in history with the COVID-19 lockdowns of 2020.
Purpose of the Study Comment by Author: Meets Academic Reader checklist for this section: Purpose statement is aligned with problem statement. Purpose contains method, design, and geographic location of the study. Purpose includes a description of the sample population for the study.
The purpose of this quantitative descriptive study was to determine whether there is confidence among bankers around the world with respect to the sector’s ability to face a worldwide financial crisis. The relationship between geopolitical awareness and confidence was determined by using a structured survey tool. Survey participants represented four international banks—HSBC, J. P. Morgan-Chase, Deutsche Bank and Bank of China. Participants remained anonymous by accessing the survey through SurveyMonkey.
Geopolitical awareness is knowledge of geopolitical current events. Geopolitical risks represent risks linked with wars, terrorism, and tension between states (Caldara &Iacoviello, 2018). The model for measuring risk developed by Caldara and Iacoviello was used to measure geopolitical tensions. In the survey, the participants were asked if they see geopolitical risk in the world. Their responses were then measured against the model showing how much geopolitical risk is present. The scope of the data collection was limited to bankers with profiles on LinkedIn.
Economic and financial challenges lie ahead. Investors want to know how confident their bankers are (Giles, 2017). This study evaluated the extent to which bankers from around the world have confidence in their sector’s ability to manage the coming challenges.
Theoretical Framework
Rational choice theory is based on the idea that actors use reason to determine whether a particular decision will be beneficial or costly. The assumption is that an individual has to know what risks lie ahead in order to make an effective decision about how to move forward. It requires substantial powers of critical thought an analysis, i.e., the ability to pose questions, collect data, analyze the most relevant information, and make a decision accordingly.
This research was conducted from the standpoint of rational choice theory. The idea that investors, like bankers, concern themselves with issues such as benefit vs. cost seemed appropriate considering that most investments are placed into risk-on assets, such as equities in any given portfolio. But what happens if risks are inappropriately assessed? What happens if confidence is misplaced or insufficient? By looking at the banking sector from the standpoint of rational choice, one is faced with such questions. Thus, the questions used to guide this research arose as a natural response to the application of this theoretical perspective.
Mark Carney, former head of the Bank of England, observed that worldwide financial, political, social and economic challenges \\\\\\\"have made it more difficult for central banks to set policy in order to achieve their objectives\\\\\\\" (Giles, 2017). What this suggests is that banks are in the unenviable position of facing a world of uncertainty. Markets tend to shrink from uncertainty. Moreover, as Van Lerven (2016) noted on the topic of relying on central bank intervention, \\\\\\\"After more than a year since its initial inception, a review of the program’s impact reveals that policy makers should think twice before further expanding the program-and could benefit from considering more direct ways of increasing spending in the real economy\\\\\\\" (p. 237). In short, there are even costs to be considered with respect to trusting that the Federal Reserve can and will support markets indefinitely. That understanding alone is enough to justify this study’s inquiry.
Nature of the Study
This study is quantitative in nature. 1000 bankers from four different international banks were surveyed. Their demographics were considered and focus was given to understanding the variables that affected their confidence. The main theoretical implication of this research is that it could provide insight into how bank managers manage employees’ confidence in the face of growing financial risks at the macro and micro levels.
The methodology for this study is presented in Chapter 3. What was measured and why is described in detail so as to ensure generalizability (Lincoln & Guba, 1985; Seale, 1999). Providing a detailed statement of the methods used herein also allows other researchers to reconstruct the study for the purpose of ensuring reliability (Golfshani, 2003).
Research Questions
The main purpose of these research questions was to assess bankers’ confidence in terms of facing a coming economic or financial crisis. The second purpose of these questions was to see what variables or factors impact bankers’ confidence. The research questions for this study were: Comment by Author: Meets Academic Reader checklist for this section: Research questions are aligned with the problem and purpose. Research questions are measurable, answerable, and well formatted.
RQ1. Is the international banking community in the West more confident in its ability to handle another global economic crisis like the one experienced from 2007-2008 than the community in the East?
H0. There is no significant relationship between working in the banking community in the West/East and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between working in the banking community in the West/East and confidence that the industry can handle another economic crisis.
RQ2. Does geopolitical awareness have an impact on the confidence of the members of the international banking community regarding the sector\\\\\\\'s ability to handle another global economic crisis like the one experienced from 2007-2008?
H0. There is no significant relationship between geopolitical awareness and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between geopolitical awareness and confidence that the industry can handle another economic crisis.
RQ3. Do alterations in monetary policy and the awareness of the rising debt levels around the world affect the confidence levels of the members of the international banking community on the sectors ability to handle another global economic crisis like the one seen from 2007-2008?
H0. There is no significant relationship between awareness of monetary policy and debt levels and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between awareness of monetary policy and debt levels and confidence that the industry can handle another economic crisis.
Significance of the Study
The significance of this research is rooted in the focus it brings to the issue of confidence and what it means to markets. Confidence has an impact on everything from precious metals to equities to bonds and even blockchain (Haitsma et al, 2016). It is vital that bank managers understand how confidence can impact their businesses. Therefore, the timeliness of this study cannot be overstated considering that the COVID-19 crisis erupted as this study was getting underway. Thus, this study has aimed to address a very real and significant concern. If managers can see what confidence levels are like, they may be able to adjust strategies or engage in self-assessment analysis beyond the Federal Reserve’s stress tests.
This study’s results have advanced the guiding framework by showing what factors impact confidence and how confidence may impact decision making. By addressing this issue, stakeholders can be better positioned to engage the critical thought process. In the end, this research facilitates managers’ critical thinking by giving them another data point that can be used to prepare their firms or the industry overall for a coming crisis of confidence.
Definitions of Key Terms Comment by Author: Nice work on the terms Sedric. Format/typo – indent the term headings – as you did for the term Confidence.
Confidence. Confidence is an integral part of the banking and investment process: as Ordonez (2018) states, “securitization relies on confidence” (p. 1). Confidence is trust in one’s abilities; it is the sense that one can rise to the challenge. Confidence in banking suggests that one has awareness of risks and is adequately positioned to respond to them (Ordonez, 2018).
Debt Awareness. Debt awareness refers to the awareness of one to debts that can impact one’s future ability to invest (Lupton, 2018).
Geopolitical Awareness. In this study, geopolitical awareness is an awareness of geopolitical forces and maneuverings. It includes awareness of unresolved issues in the geopolitical realm, and what factors might increase tension between nations or trigger crises in the global socio-political and economic order (Dijink, 2002).
Global Economic Crisis. The 2008 economic crisis is the standard example of a global economic crisis, but this can be any type of event that triggers a financial crisis or economic hardship resulting in stress on financial institutions (Bennett &Segerberg, 2011).
Quantitative Easing. Quantitative easing (QE) describes the new form of monetary policy initiated by the Federal Reserve and other central banks around the world in response to (Heller, 20l7). It involves the large-scale purchasing of securities and bonds by the bank for the purposes of providing liquidity for markets. Essentially, it is the central bank acting as the buyer of last resort.
Quantitative Tightening. Quantitative tightening (QT) is the opposite of QE and describes the policy of unwinding the central bank’s balance sheet after a period of QE. Whereas QE provides liquidity for a market, QT drains liquidity (Armas et al., 2014).
Summary
The purpose of this quantitative study is to measure the extent to which bankers in the international banking sector are confident that they can face the challenges of an economic crisis like that of 2008 or like that currently being experienced around the world as a result of COVID-19 lockdowns. The reason this study is important is that confidence is a key indicator of trust, and investors want to know if their investment is in trustworthy hands. How bankers show or maintain confidence can impact decision making with respect to investment funds. Applying rational choice theory to the issue of confidence in banking can help to show how the cost vs. benefit argument plays a part in the critical thinking process or whether there are other variables impacting bankers’ confidence. The next chapter of this study provides a literature review of pertinent studies and articles.
Chapter 2: Literature Review Comment by Author: MeetsAcademic Reader checklist for this chapter: Literature review is aligned with the variables/constructs outlined in the problem, purpose, and research questions and flows in a logical sequence.Academic Reader checklist for this chapter: Literature review is current and includes synthesis of ideas around themes, including how study fits within theoretical/conceptual framework. Literature review is sufficient in breadth and depth for a dissertation.
This quantitative descriptive study focuses on what factors impact bankers’ confidence and how confidence impacts decision making in banking. Considering that there is now $17 trillion in negative yielding debt around the world, the prospects of central banks having enough dry powder to address a recession or a depression is surely one that bankers have considered—particularly since their very livelihood stands to be affected should a significant and long-term downturn take place (Ainger, 2019). Understanding the knowledge and confidence levels of bankers in the present circumstances by measuring their awareness of geopolitical risk and determining whether that awareness impacts their outlook could be a way for stakeholders to better manage their investments.
This chapter provides a discussion of the theoretical framework used in this study. It then proceeds to summarize the literature relevant to this subject by looking at research on the Global Financial Crisis of 2007-2008, how it happened, how it was handled, and what the lasting effects have been; how geopolitical risk is related to finance issues, such as liquidity drain, leverage, flight to safe havens. It also discusses the current geopolitical risks facing the global banking community today and what it means in the future.
Databases. Comment by Author: Nice discussion on your literature search strategy Sedric!
The databases accessed for this literature review included Taylor & Francis Online, JSTOR and others using the Google Scholar search engine. The search parameters included key words “international finance banking geopolitics,” “china and us symbiotic relationship,” “geopolitical risk banking,” “international banking economic crisis,” “banking qe,” and numerous others. Many search terms were gathered by snowballing literature, with one article providing terms that would be used to generate more returns, and those articles offering new terms. There was no constraint on range of years, though most literature focused on articles written post-2008, as this marked the shift in central banking monetary policy that has led the international banking community to where it is today. Instead, articles were selected for content, whether qualitative or quantitative, and a range of subjects, including economics, finance and banking as it related to Russia, China, Europe, Japan, the U.S., currency, trade, debt, equities, bonds, gold, real estate, politics, geopolitics, oil, and more. The point of these searches was to obtain a sufficient macro-level view of the industry, with context being provided both by recent (past ten years) studies and older studies that have proved seminal and helpful for understanding the evolution of the industry over the years.
Theoretical Framework
Rational choice theory was used as theoretical framework for this study. Originally developed by Cornish and Clark (1987) and applied to criminology, it has been used by sociologists, economists, and various other researchers in a multitude of disciplines. The underlying basis of this theory is that people base their decisions on how to act by looking at the effects likely to follow the act. This is known as evaluating the risk vs. reward or as conducting a cost/benefit analysis (Buskins, 2015). By looking at both risk and reward, the individual makes a rational choice based on the information obtained. The information suggests the best course of action within reason. In economics, rational choice has become the dominant paradigm (Buskins, 2015). The typical definition of rational choice theory in economics is that people will use rational calculations to make decisions that they believe will allow them to reach their goals. The underlying assumption of the theory is that most individuals will attempt to maximize their position or advantage while minimizing risk or losses. The key concepts in this theory are that in order to effectively make rational choices, one must know the costs or the benefits as they are and not merely as they appear in one’s mind. If one is not confident about the costs and benefits, one cannot proceed effectively in the decision-making process: this is one of the basic axioms of how rational choice is made even in situations where uncertainty looms (Loomes&Sugden, 1982).
Risk is a major factor in determining the extent to which rational choice theory has utility, and critics have often used the concept of Subjective Expected Utility (SEU)—the approach to decision-making focusingon the subjectiveassessment of variables and probabilities—to levy their attacks (Bauman et al., 1984). However, as Anand (1995) pointed out, SEU is a false paradigm that places “unnecessary constraints on rational agency” (p. 1). Colander et al. (2009) noted that the illusion of control and temptation to lure economists and bankers into erroneous ways do not negate the utility of rational choice theory.On the contrary, it makes it necessary since rational choice theory is best understood from the perspective of duty and responsibility. Actors have a duty to act rationally—it is not a matter of whether most do or do not; the duty is what matters as this is what drives stakeholders to be invested on their accounts.
In instances where uncertainty abounds, critics have argued that rational choice theory fails to hold much predictive or explanative power (Sen, 1977). For that reason, rational choice theory is opposed by scholars within the field of behavioral economics who posit that individuals do not always or necessarily make rational decisions with a view to maximizing their assets or position. Sen (1977) argued that actors in economics are “rational fools” and that none should be considered rational as none truly demonstrates rationality—i.e., actions that can all and entirely be explained logically—the reason being that actors do not really have as much choice in matters as it appears. However, Sen (1977) approached the theory of rational choice from his own framework, which precludes the existence of choice even in the most restrictive and constraining of environments. Even a slave has choices to make. Simon (1972) proposed the idea of bounded rationality, which is that individuals tend to have only limited knowledge about an issue and/or options available and thus they are not going to be able to make the best possible decision.
Simon (1972) noted that the counterargument is that at some point decisions need to be made and there will inevitably be a moment when information gathering comes to an end. One may believe or feel that adequate information was obtained or that more information would be helpful; however, given the nature of reality and the fact that time does not stop, one can assume that most rationally-minded individuals will attempt to make rational decisions based on whatever information they were able to accumulate up to that point. There are numerous examples of leaders or individuals who made poor decisions, who did not demonstrate the concept of accepting prudent risk—one of the U.S. Army’s six principles of Mission Command—but these exceptions prove the rule.This is what students of economic theory study to improve their perception of how best to act in a given situation. For that reason, the theory of rational choice is best applied as it represents the ideal approach that one seeks to take in decision making.
To better explain how this theoretical framework should be applied, it is helpful to consider it in terms of an historical anecdote, using the principles of Mission Command as a launch point for exploring and explaining this theory. The case in question is the failure of Confederate Commander Van Dorn at Pea Ridge in 1862 during the American Civil War to accept prudent risk and act rationally.His failure turned into his opponent’s success, as his opponent engaged in a more rational approach to the conflict and as a result won the day (Hanson, 2013). Situated within this simple example is a larger analogy for how the framework must consider all the principles of Mission Command to explain how banks work as a group of teams within an industry where they are all essentially battling (at times), or working with forces of economics to facilitate the achievement of financial and economic goals. First, the historical example and consideration given to how rational choice theory aligns with the principles of Mission Command are discussed, and second, the application to banking is described.
Conceptual Diagram
Figure 1The conceptual framework of rational choice and the principles of mission command.
Figure 1 shows the relationship between information, understanding (beliefs) and action and the impact that desire has on each of those factors is equal. Desire can influence which information is acceptable to a person; it can influence understanding, and action. The influence is mutual, too, as the desire will influence the action of the individual, and action will in turn affect one’s desire. Desire is informed by the data one obtains but desire can also influence which data one seeks. One can be biased by desire, but one can also use information to shape one’s desire and reduce bias created by uninformed or unrestrained desire. Action will impact goals, and the achievement or failure to achieve goals will likewise influence action. Goals are shaped by the information one has obtained. Principles must be used to shape all of these—how desire is formed, what information is sought, what actions are commenced and what goals are identified. Without principles at the heart of the decision making the form is lost and the relationships have no measure. Therefore, the idea of mission command can serve as an adequate source of principles for rational choice decision making. Elster (2018) explained, “rational-choice theory must tell the agents how best to realize their desires, given their beliefs. Furthermore, the theory must prescribe which beliefs it is rational for the agents to hold, given their evidence or information.” Though a belief may be rational, it can be false, and understanding may not always be the main driver of action: desire can cloud the application of reason. Therefore, using the principles of Mission Command to help frame the application of rational choice theory to this study is helpful. Mission Command principles illustrate the proper application of reason in the decision-making framework for maximum positive effect, as shown in Figure 2 below.
Figure2 The principles of mission command meet factors affecting rational choice. Comment by Author: Sedric – Just a consideration: I suspect Figure 1 and 2 were self-developed, correct? If so, nice work. If no – then Be sure this is not copyrighted material. If so, be sure to obtain permission to use in your dissertation manuscript. . See section 5.06 (p. 128) in APA6. Also: https://ncu.libguides.com/APAStyle/copyrightinformationhttp://blog.apastyle.org/apastyle/2016/01/navigating-copyright-part-1.htmlhttps://academicwriter-apa-org.proxy1.ncu.edu/learn/browse/QG-28
Figure 2 shows the relationship between the principles of mission command and how they should be applied if one is going to act rationally and effectively. One must first understand the operational state—the external environment. One must also define the desired state: what one wants to achieve. The problems or obstacles must be faced and acknowledged so that a strategy can be devised. Risk must be assessed and accepted, but it must be assessed and accepted prudently in accordance with the principles, a safe plan is based upon the acceptance of prudent risk, which is one of the principles of mission command. As Figure 2 shows, the six principles of mission command are: 1) teamwork, 2) shared understanding, 3) clear intent, 4) discipline, 5) execution, and 6) accepting risk prudently. When these principles are aligned and followed, they lead to the decision-making stage. That stage will be impacted by the forces of desire and environmental factors, as occurred with Van Dorn, which is seen in the next section. When the decision-making stage is fortified by the above principles, the flow of information from desire to action to goals is stable and appropriate and decisions are more likely to be made rationally.
Literature Review
Pea Ridge Comment by Author: Sedric, I believe you have been using APA, 6th edition, correct? If so, then this is a level 3 heading. Please place in APA style format. If you transitioned to APA style 7th edition, then this formatting is correct.
In the principles of Mission Command, there is considerable overlap. Each of the six principles is essentially integrated and interwoven with one another so that to be without one is really to be without all. The failure of the Confederates to counter the Union attack at Pea Ridge in 1862 resulted from a variety of problems.These problems can be analyzed from the perspective of the Army’s six principles of Mission Command and show why the problems began to mount for the Confederate Commander.As soon as he failed to create shared understanding and act prudently with respect to the upcoming fight, Van Dorn failed to collaborate well with his colleagues.He did not accept their considerations as valid or shared his own thinking on the matter at hand. He insisted on attacking instead of resting and thus the risk he took was imprudent (Hanson, 2013). Van Dorn could have succeeded had he taken the advice of McCulloch, by resting his men and himself, and devising his plan. He also could have succeeded had he accepted risk prudently, by accepting the risk of cutting off his line of communication by swinging to the rear of the enemy—but he did not accept this risk prudently. Instead, he should have made sure that McCulloch understood the importance of being there to support Van Dorn. By not communicating effectively, Van Dorn took risks without precaution—and eliminated the potential for shared understanding. Ultimately, Van Dorn failed in building a cohesive team as he rejected McCulloch’s advice to let the troops rest. Van Dorn wanted to “beat Curtis to the punch” and obtain glory for himself in this manner (Hanson, 2013, p. 9). Van Dorn was exhausted and not in a position, mentally or physically, to act in the most desirable or ideal rational manner. His advisors were more rational and his opponent most rational.
Van Dorn committed several violations of the principles of Mission Command, but his first and biggest was his failure to create a sense of shared understanding, as this is the lynchpin that allows so many of the other principles to fall into place (ADRP 6-0, 2012). Since rational choice is predicated upon understanding, Van Dorn handcuffed himself by failing as a leader to establish understanding. Creating a shared understanding depends upon collaboration. Collaboration depends upon communication. Communication depends upon a two-way flow of information, with consideration and respect for those communicating (ADRP 6-0, 2012). It depends upon trust and respect—but it also depends upon using one’s own intelligence and skill and contributing to the decision-making process instead of relying solely upon others for information, as Van Dorn did when he neglected to do standard reconnaissance—which would have presented him new and helpful information regarding Curtis’s plans (Hanson, 2013). Van Dorn did not listen to McCulloch when the latter advised against attacking Curtis following a lengthy trek across Arkansas: McCulloch saw that rest for the men would be good. Van Dorn saw only the opportunity to seize the day and thereby his own glory (Hanson, 2013). There was no shared understanding of what was at stake or why, despite the supposed advantage in attacking immediately, an alternative plan could also succeed and allow the men to be fresh and ready for a fight. Van Dorn saw an opportunity for glory; McCulloch saw the risk of disaster (Hanson, 2013).
The risk of disaster was exactly what Van Dorn should have considered more prudently. However, half exhausted himself from the trek across Arkansas, Van Dorn was not in a prudent frame of mind. This led to his second major violation of the principles of Mission Command: he did not accept prudent risk—he just accepted risk. Had Van Dorn been prudent about waiting to attack and prudent about circling around to Curtis’s rear, he very likely might have placed himself and his men in a better position to win. However, he failed to communicate effectively with McCulloch, whom he had essentially dismissed because McCulloch did not seem to grasp Van Dorn’s insistence that a glorious victory against the Union was within reach if only, they acted immediately (Hanson, 2013). Van Dorn should not have simply relied on the information given him by Price and McCulloch, as this was further imprudence on his part (Hanson, 2013). He was in command and should have contributed something to the data by ordering a quick reconnaissance mission to see if Curtis’s position had changed at all or if the layout of the land was as reported. Doing so would have brought back new information about the roadblock that caused McCulloch to be distracted, which led to Price lacking the support he needed to counter the Union’s defenses.
Yet if Van Dorn had done a better job of collaborating with McCulloch and coordinating a plan with a clear intent—i.e., the need to overwhelm Curtis and unite their forces—he would have demonstrated better adherence to the principles of Mission Command and thereby brought out a victory. By taking rest, Van Dorn would have given himself time to establish a disciplined initiative among the men (Hanson, 2013).
The overall theme that runs through the case study of the failure of the Confederate Commander at Pea Ridges is the theme of poor understanding. Van Dorn was in no state—and neither were his men—to carry out a flawless execution. ADRP 6-0 (2012) noted, “effective commanders build teams within their own organizations and with unified action partners through interpersonal relationships” (p. 2-2). Had Van Dorn been more concerned about his men, he would have rested them and allowed his own mind to recalibrate so that it would be fresh and ready for the days ahead.
In summation, Van Dorn simply did not bother to build effective relationships, and it set the stage for a total lack of collaboration, communication, initiative, and clarity of vision. Prudence governs understanding and acts as the light that allows knowledge to go to work effectively. Van Dorn clouded his own understanding and the understanding of his men by not giving them rest, not surveying the scene through his own reconnaissance, and not communicating his overall strategy and the important details of the strategy that would have allowed his men to be more flexible in their execution of the mission.
Rational Choice and Principles of Mission Command Apply to International Banking
Risk is an accepted part of international banking and finance, however, as with the principle of mission command, risk must be accepted prudently. The events that led to the 2007-2008 global financial crisis were precipitated by imprudent risk taking by several large investors and institutions (Harris, 2013). Rational choices were made by some but not made by others (Greenfield, 2010). Goldman Sachs identified the risky and highly over-leveraged nature of the situation and acted accordingly by purchasing credit default swaps [an insurance hedge against the subprime market bubble bursting] (McLean & Nocera, 2011). The bank was thus protected financially—but it was also protected politically thanks to Henry Paulson being U.S. Treasury Secretary at the time (McLean & Nocera, 2011). Paulson was a former Goldman CEO and now was the one man with the most power to protect the sector should those, like AIG, who would have to make good on the credit default swaps they sold to firms like Goldman, suddenly find themselves unable to come up with the money in the event of the bottom falling out of the subprime market. Paulson ended up signing off on the Troubled Asset Relief Program (TARP), which bailed out AIG, which in turn could pay off the insurance hedge purchased by Goldman (McLean & Nocera, 2011). Goldman was able to create a sense of shared understanding with Paulson and the U.S. Treasury regarding the need for TARP, and thus the bank did not suffer any negative consequences from the fallout of the mortgage bubble bursting, while those who had only purchased the troubled mortgage-backed securities, asset-backed commercial paper and collateralized debt obligations were in a much riskier position.
Firms like Lehman had not acted rationally by accepting only prudent risk: they had constricted their own risk management teams and thus were not even aware of the risk mounting at the time. In one sense one could argue that this validates Simon’s (1972) objection to rational choice theory—but it simply shows what happens to highly leveraged firms that fail to act rationally.Firms that act rationally (like Goldman) do quite well for themselves even in adverse environments. This is the point also made by Kanagaretnam et al. (2015), when banks act with prudence and accept only prudent risk, they are far less likely to suffer negative consequences in times of economic or financial turmoil. Goldman’s example showed the tenacious foresight of uniting political supports with financial ones so that if one’s insurance provider (in this case, AIG) suddenly found itself strapped by a liquidity crisis, the federal government could intervene with a bailout of $700 billion and make sure that the bank received its pay (McLean & Nocera, 2011). Goldman understood the possibility of a major default and the effects it would have: by having Paulson in position to outflank the rising tide of defaults via TARP, Goldman effectively engineered its own coup de grace at a time when other firms were losing everything.
The lesson learned from this example is that rational choice theory can easily and simply be applied to the international banking community with predictive and explanative power. Simon (1972), stated that rational choice theory applies because some people sometimes act irrationally or fail to consider or seek out all the data needed to make a wise decision. People and institutions are expected to act rationally by stakeholders. Van Dorn had as much of a duty to act rationally as a commander as Goldman’s executives did in the years leading up to the 2007-2008 crisis. Van Dorn failed in his duty, just as Lehman and Bear Stearns failed in theirs. Goldman did not. Goldman not only survived the crisis but managed to make a large profit (McLean & Nocera, 2011).
The theoretical framework of rational choice theory is applicable to the present economic situation in the context of this study as well. Especially when considered in the light of the philosophy of mission command, one sees an entirely new set of principles or duties the banking industry should be mindful of to avoid repeating the same mistakes of the past. The only question is whether those mistakes can be avoided or if the current situation is beyond the control of anyone and the only thing the banking community can do is engage in reactionary decision making. Dimon (2017) and Lupton (2018) acknowledged that by weighing the costs and benefits of increasing debt and leverage among governments and corporations, the conditions for banking success at this point are rather perilous. When the added element of geopolitical risk is thrown into the mix, the situation can be judged to be even markedly worse. Do these considerations warrant a reaction of concern among members of the international banking community? Should investors and stakeholders take heed? Or is all well and does Van Dorn have a handle on the situation? When investors purchase equities (risk assets) they do so because they judge the return on their investment will be greater than the cost (consisting of both the price of the asset and the associated downside risk). But what happens when one inaccurately assesses the facts—when one does not accurately understand the benefits or does not properly identify the risks involved in the transaction? By examining the international banking industry through this lens and asking these questions, the problem can be more easily seen, and the research questions that this study asks to come to the fore organically like the voice of McCulloch pleading for rest and prudent action prior to the onset of a major battle.
International banks cannot be confident unless they understand the risks of leveraging and the need to have enough liquidity to meet obligations should a situation like 2007-2008 rear its head once more. Simon (1972) would not be remiss to point out today, however, that knowing the costs and benefits of any action has become increasingly difficult. Indeed, the out-going governor of the Bank of England, Mark Carney has acknowledged how difficult global issues—geopolitical conditions—have made things for the banking industry (Giles, 2017). At Jackson Hole in 2019, Carney went so far as to suggest that the days of USD as reserve currency, or rather as currency hegemon, were numbered and the end now in sight. Such a change in status of a currency and a nation that have been at the apex of financial markets and economic development since World War II, would surely create havoc (as well as opportunity) for certain banks, stakeholders and investors. The key would be to consider the most rational course of action by creating shared understanding, accepting prudent risk, and planning accordingly. In other words, awareness of what is going on in the global economy has made it challenging for banking leaders in the community to know how to adjust their policies and procedures—but it does not mean that appropriate action cannot be applied. What it does suggest is that banks need to engage in proper assessment, proper cultivation of a spirit of mission, effective communication, adequate risk management, and prudent risk-taking. They need to be mindful of the faults of Van Dorn, AIG and Lehman and think more like Goldman. While they may not be looking at collateralized debt obligations and credit default swaps or plotting a rear attack against the enemy, they will have their own unique sets of circumstances to prepare against. As Van Lerven (2016) pointed out in reference to QE and which stands to be reiterated here: “after more than a year since its initial inception, a review of the programme’s impact reveals that policy makers should think twice before further expanding the programme–and could benefit from considering more direct ways of increasing spending in the real economy” (p. 237). In short, risk is rising—now the question is: who is ready for it?
2007-2008 Global Financial Crisis and Today
To begin to assess the literature on what it means for banks to be ready to accept prudent risk, and to act rationally in the face of economic and financial crises, one must begin with the most recent crisis to shake the global markets and see what can be learned from it. For that reason, the subprime crisis, its origins as well as fallout presents several lessons. Lewis (2010) provided a strong analysis of what took place in the background of the crisis, and McLean and Nocera (2011) provided even more substantial details in their analysis of the lead-up to the crisis. However, both focus primarily on the domestic character of the crisis and the reality is that it was global. Thus, starting with their takes on the subprime crisis of 2007-2008 can provide some groundwork, but there is also a need to expand to international studies to see what other researchers have said about banking, human capital, rational choice, and so on. Crucial to the success of this literature review is establishing grounds for the relationship between risks such as geopolitical risk, economic/financial risk.
Subprime
Numerous factors precipitated the subprime crisis. Some blame AIG for insuring what were essentially poorly bundled and shoddily rated mortgages (Lewis, 2010). Companies such as Fannie Mae, Countrywide Financial, the Federal Reserve, Moody’s, Merrill Lynch, Bear Stearns, Goldman Sachsand others were all involved, indicating that the financial crisis was not an isolated incident that sprang from one faulty policy or from one group of bad actors (Vo, 2015). Rather, it was a train wreck set in motion decades prior to the crash. As McLean and Nocera (2011) show, the crisis originated in the 1990s with the Clinton Administration’s desire to get more people into affordable housing, which accelerated the trend of risky lending that ultimately led to securitization of subprime loans. Yet, one could go even further back, as Lewis (2010) did by implicating Lewis Ranieri of Salomon Brothers—the banking executive who created the concept of the mortgage-backed security, which allowed the original lender to divest himself of the risk by selling bundled loans to investors seeking yield (Ashton, 2009). Brown (2019) showed that it is the same thirst among yield-starved investors that appears to be driving today’s equities bubble, which is related to the boom-bust cycle of corporate leveraging—a cycle indicating that the bust phase is approaching.
One of the big issues with the subprime crisis, however, was the institutional negligence, deception, and self-deception among investors. Michael Burry was one of a handful investors who realized early on that the mortgage-backed securities were compiled of shoddy subprime loans at a high risk of defaulting (Lewis, 2010). He bet against the market by stockpiling credit default swaps (insurance against the securities defaulting—an event that he correctly foresaw likely to occur). The ratings agencies—were complicit in rating these securities as AAA-rated—i.e., as having a very low risk of default—when the reality, as Burry concluded, was just the opposite due to the composition of the securities and the number of subprime loans compiled in them (Lewis, 2010). Burry saw what Lehman with its flawed corporate governance failed to see (Harris, 2013).
Lehman
Lehman had the same risk profile as Goldman at the time of the subprime crisis (Harris, 2013). The problem was that Lehman’s corporate governance was flawed: the firm had acquired not one but five mortgage lenders leading up to its collapse. One of them—BNC—was wholly involved in subprime lending. Another—Aurora—had been lending to borrowers who provided zero documentation of their income or net worth (Greenfield, 2010). The move appeared to be profitable during the housing boom. When the boom turned into a bust, Lehman held $150 billion worth of risky loans on its books just from 2006. The firm was not insured against them and was actively engaged in purchasing more, blissfully unaware of the mounting risk (Nilakantan, 2010). The risky loans themselves were not the worst part as Vo (2015) showed that by 2007 “CDS had become the dominant credit market…already 20 times larger than its size in 2000 and was three times exceeding the U.S. GDP, with a notional outstanding value of $57 trillion” (p. 207). When defaults began increasing in number in 2007, Lehman’s CFO revealed a complete lack of concern, telling investors that the rising risk was not going to have a significant impact on the institution. Lehman’s corporate governance had failed to create an environment in which risk could be properly assessed (Harris, 2013). Harris (2013) noted a great deal of emphasis had been put on risk, but the actual cause of the crisis was poor corporate governance as risk management “is but one function within the broader role of effective corporate governance. Corporate governance encompasses all the significant functions of the organization as it interacts with its stakeholders” (Harris, 2013, p. 88). Even after Lehman was forced to shut down both BNC and Aurora, the company continued to buy mortgage-backed securities at one point having so many of these toxic securities that their value was four times the worth of investors’ equity in the company itself (Chang et al., 2011). The ratings agencies—like Moody’s—only served to prop up the illusion, however, that these securities were worth having. From the perspective of rational choice theory with a view to the mission command example provided earlier, there was no shared understanding creating among the various entities: instead, there was shared mass-deception.
The Groundwork. Just as today there has been a rush for yield with the Federal Funds rate dropping to near zero and hovering there for years in the wake of the global financial crisis.In the lead-up to the housing bubble burst of 2007 interest rates had been suppressed as well. The tech bubble at the end of the 20th century had led to interest rates falling under 2% between 2002 and 2005. The rates, then as now, prompted more borrowing and over-leveraging [some homeowners began owning 2, 3 or 4 homes with no realistic salary to justify such extravagance] (Lewis, 2010). Today, low rates have led to corporate borrowing at a hyper rate (Lupton, 2018), thus indicating to some that a potential risk crisis is looming (Dimon, 2018). The groundwork for the 2007-2008 crisis was similarly lain: low rates, extravagant borrowing, institutions looking the other way or showing negligent corporate governance. It created an environment in which speculators rushed into home buying to obtain a quick return. The Clinton Administration had pushed for easier lending standards, so that at the height of the bubble virtually anyone could receive a loan for a home well out of their price range (McLean & Nocera, 2011). In other words, demand for these homes was artificial but it was promoted because the financial transactions that followed—particularly the sale of mortgage-backed securities, collateralized debt obligations, credit default swaps and synthetics (Lewis, 2010). This was Ranieri’s gift child to the financial world. Lenders like Countrywide Financial were eager to get into the market and that eagerness reflected a larger culture throughout the banking and shadow banking industries—a culture of imprudent risk acceptance. The international demand for fixed yield spurred the culture on (McLean & Nocera, 2011). This was not exactly the kind of fixed yield that made much rational sense, as Burry and others uncovered (Lewis, 2010). With 20% of all mortgages having a high-risk character it was only a matter of time before the securities sold came back to destroy funds. The credit default swaps would have to be paid out and that meant Paulson would have to deliver at the Treasury. Comment by Author: Indeed! Appears to be APA style 7th edition – nice work Sedric.
Goldman Sachs
Goldman is another example of a firm that sold collateralized debt obligations to help precipitate the crisis—but at the same time, it began buying credit default swaps in order to protect itself from the shoddy investments it was selling to clients (McDonald & Paulson, 2015). McDonald and Paulson (2015) pointed out that “Goldman Sachs had 44 transactions with AIG, with a total notional value of $17.09 billion” (p. 98). Goldman ended up being charged by the SEC with “Fraud in Connection with the Structuring and Marketing of a Synthetic CDO” (SEC, 2010) for misleading and omitting material facts about its financial products. Goldman paid $550 million to settle the case with the SEC but admitted no wrongdoing. Ironically, the charges had but a minimal impact on the firm’s share price. Goldman’s stock was trading at $180 when charges were filed. It fell to just below $90 by the end of the following year in 2011. Today, the stock is trading over $200. Goldman made nearly $5 billion from its short on AIG alone during the market meltdown in 2007-2008. The fine it paid to the SEC was thus merely a wrist slap and the damage to its reputation has been negligible. The reason for this is simple: Goldman represents the best example of rational choice theory in action. It communicates effectively, creates a shared sense of understanding, and accepts prudent risk. That is one reason for Goldman’s elevated share price today. Another, however, is QE—quantitative easing—unconventional monetary policy by the Federal Reserve that has resulted in inflated equities (Heller, 2017).
Quantitative Easing (QE)
As Lima et al. (2016) noted, quantitative easing essentially put the worlds’ central banks in the position of being market backstops, which greatly undermined the role of risk management. The cause of the 2007-2008 financial crisis was rooted in central bank intervention, which took on a new course in response to the crisis through the application of unconventional monetary policy known as QE (Heller, 2017). The outcome of that intervention was a distortion in markets and bubbles across a range of asset classes from equities to precious metals to real estate (Huston & Spencer, 2018). The cause of the crisis was basically the same as the Federal Reserve’s response to the crisis: the central bank was artificially suppressing interest rates. In response to the DotCom bubble that burst at the start of the 21st century, the central bank began driving rates down, which led to reckless borrowing (and lending), as Lewis (2010) showed. When sub-prime borrowers began defaulting in the housing bubble, the junk bonds trading as AAA-rated securities began causing serious financial stress among investors, setting off a domino-effect of deleveraging as institutions scrambled to divest. The Federal Reserve stepped in to be the buyer of last resort, and to help stimulate the market it lowered rates even more (with some countries taking them to zero and even into negative territory). The effect was inflation along with debt increases among corporations and governments, as corporate and government borrowing was incentivized by low rates: it appeared that the central banks around the world were working in conjunction with one another to backstop the markets (Haitsma et al., 2016; Van Lerven, 2016). The Federal Reserve had fueled the bubbles by easing credit restraints and effectively creating a command economy as opposed to the classical model of laissez-faire market economy.
The causes that aggravated the financial crisis during the period were the Federal Reserve’s interventionist policy. All told, the Federal Reserve spent $4 trillion to prop up or stimulate the economy from 2008 to 2014 (Heller, 2017). The central bank bought mortgage-backed securities—the junk bonds no one else in the market wanted—and Treasury Notes. This had a spillover effect as money went from bonds into equities, which promptly soared to all-time highs. Historic P/E valuation averages were left behind as indicators of any value while growth stocks became the justification for P/E ratios in the hundreds (Zhang et al., 2013). The real result of Federal Reserve intervention via unconventional monetary policy was inflation, even if the CPI failed to show it because of its usage of hedonics to mask the reality of the price rises. Housing prices soared, rents soared, food costs have gone up, the price of health care has gone up, the price of education has gone up, the price of stocks has gone up, the price of bonds has gone up, the price of precious metals has gone up. The Federal Reserve flooded the market with new money in a short span of time, which, as Milton Friedman has pointed out on more than one occasion, is the best way to trigger inflation. Thus, one could argue that these are not genuine bubbles across asset classes but rather the effect of inflationary practices by the Federal. However, they appear as bubbles particularly when trade wars start to cause investors to want to pull their investments out of risk assets and suddenly equities look overvalued to the extreme as their current valuation has been based on Federal policy rather than on actual price discovery dictated by the market itself and it focus on fundamentals. In either case, it is uncertain and perhaps unlikely that the Federal Reserve will be able to support markets again using the same policy without triggering hyperinflation should another crash and/or recession occur in the coming years. The more money it creates the more value the dollar loses—especially as wages stay relatively stagnant.
During the same period in which the Federal was conducting unconventional monetary, the government was engaging in a fiscal policy of borrowing at an unsustainable rate. The national debt has more than doubled since the crisis. This exponential increase of debt (not just by the government but also by corporations) at a time when interest rates are low is now seen as a serious risk (Dimon,2017). Neither policy should have been enacted. The bad investments around mortgage-backed securities should have been allowed to fail. The crash that was delayed should have been allowed to happen. The market should have been permitted to correct itself. The problem, as the government and central bank sees it, is that should failure have been permitted, pension funds, sovereign wealth funds, mutual funds, etc. would all have crushed and it would have been the end of the economic pyramid scheme that has been in place since monetary policy under the Keynesian model was put in place.
The policy that should have been implemented and that would have resolved the financial crisis would be to return to classical economic theory and allow the market to correct itself and for true price discovery to occur. It would have meant a world of pain—but the crisis eventually would have been addressed organically by the market instead of the market being commanded by the central bank. Even Chair Powell had urged the Federal Reserve not to reverse course on quantitative tightening. More QE is not going to help to create an environment of accountability though it will for a time push markets higher. However, political factors have come to play in the matter in recent months as former NY Federal President Bill Dudley publicly urged Powell and the Federal Reserve to punish President Trump by refusing to underwrite his trade war with China (Durden, 2019).In other words, Dudley told the Fed not to lower rates or to engage in QE. This is a political move to be sure, but it is also an indication that the lines between markets and politics have been blurred, and that line was substantially blurred by Paulson and Goldman who certainly conspired to make sure that the bank received its due.
Dudley is correct, however, according to critics of the Federal (Durden, 2019). The balance sheet should be run off and interest rates should be allowed to rise as the market determines them—not the central bank. The zombie corporations currently relying on low rates to secure investment will have to restructure or declare bankruptcy, naturally—but savings and investment must co-exist. Command economies are fantasies that cannot last. Reality always reasserts itself and the longer it is kept locked away, the fiercer and more devastating its arrival is when it finally returns. To prevent future economic crises, interest rates must not be artificially set by the central bank. The market must be allowed to engage in true price discovery and determine what is best for itself—rather than the Federal attempting to determine what is best for the various funds depending upon ROI to perpetuate the pyramid scheme.
Where Things Stand
While President Trump has often insisted that this is the best economy ever, there are signs that this might not be true—and those signs can be seen in terms of how one interprets labor market data (unemployment vs. labor participation rate), wages vs. inflation, and income inequality (BBC, 2019). Since the Federal Reserve along with the other central banks of the world engaged in unconventional monetary policy aka quantitative easing in response to the global economic crisis of 2007-2008, asset prices have increased exponentially—whether one is looking at the S&P 500, housing costs, healthcare costs, education costs, or even precious metals (which are known for tracking inflation). Now, with the President calling for rate cuts and theFederal responding with a 25-basis point mid-cycle cut at the end of July, the same issues of wage growth, income inequality and labor market participation remain.
Cox (2019) stated that the current labor market shows signs of tightening as small businesses are showing signs of slowing down: “Hampering job growth are labor shortages, layoffs at bricks-and-mortar retailers, and fallout from weaker global trade” (par. 5). In the past the labor force participation rate was defined by the type of jobs that laborers are willing to accept—and if those jobs are not available, workers do not actively seek employment elsewhere and thus are not counted in the rate. Today, the fact that manufacturing and high-skilled labor jobs are not coming back and instead are being shipped overseas or being replaced by robots, suggests that workers are now willing to take what they can get in the services industry.
This sentiment is echoed by Harwood (2019), who stated that the reasons income inequality is such an issue today are that technology (robots) have moved workers from the labor market and globalization has increased competition and thus corporations pay lower wages.This situation widens the gap between the rich and the poor—especially since the wealthy can buy the S&P 500 year after year and see their wealth grow by 20% thanks to the central bank always being there to backstop the markets. Harwood’s (2019) argument is that income inequality is an issue in America that politicians want to address by raising the minimum wage and increasing workers’ rights. However, Trump’s base believes like him that this is the best economy ever with unemployment hitting multi-year lows and job growth improving under his administration.
Bernstein (2019) took a different position on the top labor market, however. He stated that “in an economy with too little worker bargaining power and too much inequality, the benefits of closing in on full employment are powerful and equalizing” (Bernstein, 2019, par. 2). The author claimed that most American workers do not have the means to bargain for better wages because union membership is down.Jobs that used to be associated with unions—i.e., manufacturing jobs—have been sent overseas where corporations can hire cheaper labor resulted ina lack of organizing force that workers can turn to for help in getting better wages. This leads to no wage growth and the central bank’s role in inflating asset prices leads to the widening of the income inequality gap. Yet, low unemployment should be leading to a rebalancing of power in the favor of workers (Bernstein, 2019).
The problem with the theses of these authors is that there is no real room for explaining the lack of wage growth, income inequality and the labor market without examining the effects of central banking intervention since 2008, the effects of offshoring in a globalized economy, and the reasons for income inequality in the first place. The problem of stagnant wage growth over the past few decades is that the Phillips Curve is not really an effective tool at predicting the relationship between interest rates (inflation) and employment (wage growth), as Milton Friedman famously argued. The problem of wage stagnation is one that has stemmed from globalization and the fact that corporations are now fiercely competitive as a result of the widening markets. American and European companies are now competing with Asian companies and in order to compete prices are being slashed. To keep margins intact, the companies must resort to hiring cheap labor. This means offshoring for Americans, which decimates the labor market in the U.S. and Europe as jobs are shipped to Asia, where wage slaves work for pennies on the dollar much in the same way prisoners in the U.S. work for pennies on the dollar for corporations who outsource labor to the prison industrial complex.
The problem thus is one of corporate governance and corporate social responsibility. Corporations have a duty to protect the communities around them and when they offshore their labor, they do their communities a major disservice that has real economic consequences. A lack of labor opportunities over time means that individuals, many of whom are graduating with a college degree, will not be able to find work in the fields for which they have been trained. With debts such as student loan bills and car or house payments to service, they take what work they can get eventually and end up in the services industry. This explains why all the new jobs added in recent months can be found in services: there is simply no other real work available in the U.S. Automation has overtaken what remains of many low-skilled jobs (and the rest have been offshored), which means unless one is entering a highlyskilled industry that has not yet been taken over by robots, one is unlikely to have many other options than entering services.
And while the cost of services has increased over the years, wage earners have not seen much of an increase in wages because companies are still basically competing at such a high level that they cannot afford to increase the wages of their workers. Thus, whenever minimum wages are raised in states, there is blowback from both small and large businesses in terms of laying off employees. If workers are going to be paid more, more is going to be expected of them and they will be required to do more work that was previously done by more employees.
However, as the central bank has chosen to backstop the markets so that pension funds, mutual funds, insurance funds and sovereign wealth funds can best be ensured of getting some sort of return (which is needed to keep the promises alive), those with wealth can simply invest in the markets and see positive and large returns. Today’s economy is may be verging on recession, though Federal members may not wish to admit it (Heller, 2017). The manufacturing sector in the U.S. has been gutted by years of offshoring and now, as a result of QE and interest rate suppression, corporations are addicted to easy credit and cannot tolerate any raising of rates because they will not be able to service the debts they have taken on (Heller, 2017). They are like the U.S. government in that sense. Wages will remain stagnant unless minimum wage laws force hikes. However, forcing wage hikes will only lead to more layoffs and the greater implementation of automation. Income inequality will remain so long as the central bank remains the buyer of last resort. The labor market will continue to offer mainly jobs in services, as this is all that will be left after offshoring and automation have accomplished what the owners of the means of production intended. Clearly there is a great deal of risk in all this that must be considered.
Risk and the Banking Community
In determining the relationship between perceptions of risk in the international banking community and how risk management is conducted, several researchers have posed different questions to help understand this relationship. With the Great Recession still fresh in the minds of many and the possibility of another, worse recession looming, understanding the degree to which international banks are integrated can help to develop a sense of whether defaults in one part of the world—say, Italy—will impact the entire international banking community. The study by Bouvatier and Delatte (2015) measured the extent to which international banks are integrated by examining a) “the asset side of banks to document the adjustment of their foreign claims across time,” b) bilateral positions, and c) “the current state of banking (dis)integration in different geographical areas” (p. 354). The main variable that the article examines, therefore, is international banking integration—but to measure this variable, a series of other variables needed to be measured.These variables include countries’ GDP, geographical distance, common language, common border, whether or not they are members of the Economic Integration Agreement and the European Economic Area, along with bilateral flows and a number of other indexes such asthe Chinn-Ito index and the legal structure and property rights index. Among the 14 reporting countries and 186 partner countries during the period 1999–2012, the researchers found strikingdivision inside the euro area, while outside the euro area the international banking community has become even more integrated than before. In short, the integration of EU banks has reversed while the integration of banks throughout the rest of the world has progressed more dramatically than before the Great Recession.
The study is helpful for showing a divergence of trends between the euro area banks and the banks of the rest of the world. It represents a serious risk to banks both inside the euro area and banks outside the euro area—but for different reasons. However, the study ends with more questions than answers. For instance, does the retrenchment in the euro area indicate that international banking has transferred to outside the euro area? If so, what tail risk does that impose on international banking should a default or collapse occur, whether in Italy or in China or in the U.S.?
The study by Bruno and Shin (2015) examined the state of international banking in light of low interest rates since the Great Recession and the “risk-taking channels” that have opened up as a result. The relationship between loose monetary policy and banking leverage adjustments have assisted in a global risk-on strategy in the international banking community. The relationship has generated a “feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies” (Bruno & Shin, 2015, p. 119).
The variables measured by the researchers are a) the Federal Funds rate and b) the VIX aka volatility index. The relationship between these two variables indicates that as interest rates are suppressed, the VIX follows suit, which has an opposite effect on the equities market and capital flows into risk-on investments around the world.
This study clarifies the recent rise in volatility in 2018. The Federal Funds rate had been increasing [until the 25-bpscut “mid-cycle” as Powell put it in summer 2019] (Cox, 2019), and under new Federal Chair Powell the expectation up to the summer was that interest rates would continue to rise. The market saw VIX increase in February 2018 and again in December of 2018, as the Federal Reserve communicated to the market its intention to continue raising rates. However, the recent comments by Powell under pressure from President Trump, who had gone so far as to call Powell an “enemy of the state” via Twitter, coupled with the call from Dudley (2019) for the Federal Reserve to stop underwriting Trump’s trade war by lowering rates, means that confusion and instability are circulating through markets. Yield curves have inverted. Germany has seen two negative prints of GDP (Constable, 2019). What this means for the international banking community and the flow of capital into risk-taking channels should be of evident concern. As the researchers conclude, “the risk-taking channel of monetary policy may yield insights into the transmission of global liquidity conditions across borders” (p. 132). After all, with USD’s role in international banking, financial implications of rising bond yields for fixed income could be devastating for emerging markets, equities, and all manner of funds and institutions that have grown accustomed to receiving liquidity from the hands of the Federal.
Kanagaretnam et al., (2015) examined the variables a) risk-taking, b) religiosity, c) transparency in financial accounting, and d) timely recognition of negative news that could wreck investments if otherwise missed. The researchers found a negative relationship between religiosity and risk-taking among international banks—i.e., the more that religion played a part in the culture and lives of a nation, the less likely those banks were to suffer calamitously during the 2007-2008 economic crisis. The less religion figured into the nations’ culture, the more likely those countries’ banks were to take risks and ignore signals of impending collapse. The study is interesting because it humanizes the international banking sector in a way that is too infrequently seen. Instead of focusing on models, economic data, and so on, the researchers looked at the character and instincts of the people who actually run the banks. The findings of Kanagaretnam et al. (2015) indicated that religious people and cultures are essentially risk adverse. The banks in these countries, it is shown, fared well in comparison to the banks of countries where no moderating religious influence could be identified. The implications of this study for this paper are that risk impulses in international banking may have as much to do with the characters and cultural formation of the bankers themselves as it does with the economic and financial models that the banks employ. A measure of the extent to which religion plays a role in today’s international banking sector could be a good indicator of what to expect in the coming years, knowing that all the dominoes are lined up, so to speak, as Bouvatier and DeLatte (2015) and Bruno and Shin (2015) have shown. A cultural cue from modern society could be just one more input to consider—particularly since the one big rationally-acting bank from the 2007-2008 crisis—Goldman Sachs—also was accused of acting exceedingly unethically by the SEC and compelled to pay a half billion dollar fine (admittedly a pittance for Goldman Sachs, but an indication nonetheless of the culture of the firm).
The study by Weiß et al., (2014) correlates with the study by Kanagaretnam et al. (2015) in terms of what regulates the international banking sector and, specifically, the decisions of some banks to adopt risk-on versus risk-off strategies. The variables examined by the researchers were: a) bank size, b) leverage, c) non-interest income, and d) the quality of the bank’s credit portfolio to see if these were influential factors in the rise or fall of systemic risk during periods of global financial crisis. Surprisingly, the researchers found that there is no empirical evidence to support the theory that the size of the bank, its debt, its non-interest income level or its credit portfolio have anything to do with systemic risk. What they did find contributes to the rise or fall of systemic risk was the regulatory regime of the individual banks’ nations. If regulations were lax, bank behavior was lax and more risk-on in terms of having a banking strategy. If regulations were tight, the opposite was true: banks displayed more risk aversion. This study thus, in a way, corroborates the findings of Kanagaretnam et al. (2015), who also showed that unless there is a moderating influence (which they linked with religion and its impact on a nation’s culture) banks around the world will adopt risk-on strategies that can go explosively wrong when the so-called music stops.
This study reveals the ultimate factor in the level of systemic risk at the local level—the regulatory regime. Where strict regulatory regimes exist, low levels of systemic risk are found in periods of financial crises. The question that can be drawn from therefore are regulations tighter in some countries and looser in others? By drawing on the study by Kanagaretnam et al. (2015) one could argue that the religious culture of the nation may have something to do with its regulatory framework.
The variables examined by Wong et al., (2015) were: a) liquidity risk, b) loan growth, c) risk transmission, and d) USD liquidity. Their research focused on liquidity risk in Honk Kong and was part of a series of studies conducted for an IMF symposium on liquidity risk in the international banking sector. The researchers found that home-country liquidity risk was less of an influential factor on risk transmission than USD liquidity. In other words, their finding corresponds with the finding of Bruno and Shin (2015) that the main factor in the stability of the international banking sector is the USD. This point should drive home an important message for the international banking community, especially as the world begins to assess the consequences of a monumental trade war between Xi and Trump, China and the U.S., with a potential hot war between the West on one side and a Sino-Russian alliance on the other. With China being the largest holder of U.S. treasuries in the world, any calculated move designed to crush the dollar can and has been anticipated by market observers. However, the real risk among international banks is USD liquidity.
Geopolitical Risk Effect on Liquidity
Domm’s (2019) article entitled “Falling Interest Rates Are Sending A Warning Signal To The Stock Market” posted on CNBC Market focused on the fact that bond yields are falling, signaling a rush by investors into safe haven assets (bonds) and out of risk assets (equities). The signal for the market is that as bond yields continue to fall and even invert (with the short end yield going higher than the long end) the stock market could be facing a severe pullback and the economy overall could be facing a recession. Domm (2019) explained how, as investors become nervous about the global economic outlook, they turn to the safety of government bonds like U.S. Treasuries for a fixed return on investment—as opposed to parking their capital in high-priced stocks that could tumble with economic crises potentially around the corner (such as a trade war with China escalating).
Indeed Domm (2019) pointed out that trade war fears may be at the heart of the current fall of the S&P and the current rise in the price of bonds. As the price of bonds goes up (it means they are in more demand) the yield goes down (it is not necessary to entice buyers with higher yields when the buyers are willing to take lower ones just so they can be sure to have something giving them a safe ROI). As Domm (2019) noted, “Treasury yields have been moving lower on worries about the U.S. economy and trade wars.” The yields—i.e., interest rates—are a signal of what the future holds, Domm noted, referring to a Credit Suisse analyst for an explanation of why sinking yields matter to the market.
It is not so much that the yields themselves matter—it is what the falling yields signify that should matter to investors. Investors who are still tied up in high-priced equities may want to rethink their investments, as the bond market is telling them that investors are no longer interested in risk assets: they want safety—especially now that it appears that the trade war between the U.S. and China has not been averted but is ratherlikely to increase in scale and scope.
That is the big worry for investors because, as both countries slap tariffs on one another’s products, it means businesses are going to find it harder to make money. That, in turn, means bottom lines are going to shrink and dividends will dry up. Stock prices will fall, and bag holders will suffer. Smart money is thus making an exodus to haven assets and dumb money is still thinking that buying the dip is a strategy that will work. In a bull market it does work—but the trade war may be signaling that the market is turning bearish—and that appears to be what the bond market is saying. Investors want safety, not risk. Equities are risky. Bonds are safe. There is not much upside in equities at this point in the cycle—unless the Federal intervenes—but if the Federal does not lower rates in September (2020) and signal to the world that more is coming, there will be a whole lot of downside risk. For that reason, investors are likely to begin getting out of the stock market in a haste and pouring more into bonds and other safe haven assets. The only source providing liquidity at that point will be corporations engaging in corporate buybacks, which are at record highs (Rooney, 2019).
If a liquidity crunch appears, are banks prepared to handle it? Do bankers believe it could spell trouble for them personally if the Federal fails to act—i.e., to intervene? With a former Federal President calling for the current Federal President to resist the American President’s overtures and essentially allow the market to crash—something Bill Maher has been calling for on television as well, stating that the only way to defeat Trump in 2020 is to have the market crash—signals that politics and economics are interrelated as well. Culture and economics are certainly issuing, and that should be explored more in depth. Huang and Shang (2019) showed, for example, the merits of investigating the relationship between social capital and corporate borrowing wherethey found a positive correlation.
Over-Leveraged Institutions and Firms
Huang and Shang (2019) found a direct correlation between social capital and responsible banking in their study on leverage, debt maturity, and social capital. Their finding is in line with what other researchers have shown in the past, specifically Kanagaretnam et al., (2015) in their study on the link between a society’s religiosity and a bank’s risk-taking. Kangaretnam et al. (2015) showed that bankers’ risk-taking, religiosity, transparency in financial accounting, and timely recognition of negative news that could sink investments if otherwise missed, were all related in nations that avoided being negatively impacted by the 2008 great economic crisis. Huang and Shang (2019) essentially arrive at the same conclusion: the more social capital is valued in the community; the more likely banks are to leverage responsibly.
Huang and Shang (2019) started off their study by defining social capital as “the degree of altruistic tendency and the level of mutual trust among people within a community” (p. 26). This definition allowedthem to assert that, when a locale has a high degree of social capital, the individual members of the region are less self-centered, more cooperative and more trustworthy than in low social capital regions. As a result of the high social capital level, the finance managers of banks in these communities are more likely to manage funds responsibly and to resist behaving in a way that could potentially harm their investors and clients. As the researchers pointed out, this relationship is a consequence of “their society reflecting who they are, shaping who they become, or forcing them to be more concerned about reputation losses before taking value-destroying actions” (Huang & Shang, 2019, p. 27). Because the managers handle their money more wisely and responsibly, they themselves are in turn viewed as more credible by their clients and investors. Because leverage increases bank risk, the researchers hypothesized that firms in high social capital markets are less likely to leverage and accrue short-term debt, which the researchers identify as antithetical to social capital.
The researchers didindeed find that “firms headquartered in high social capital areas are indeed associated with lower leverage and less short-term debt” (Huang & Shang, 2019, p. 44). Moreover, banks in high social capital communities have both lower costs of debt and lower costs of equity (Huang & Shang, 2019). These findings indicate that developing high social capital within a community can reduce risks associated with banking leverage and lack of oversight as the community itself serves as a kind of cultural oversight committee. This finding is consistent with what Kanagaretnam et al. (2015) have shown: there is a negative relationship between religiosity and risk-taking among international banks; that is to say the more that religion plays a part in the culture and in the lives of a people, the less likely banks are to suffer calamitously during a crisis in which margin calls force them to sell, close out positions and take losses just to live to see another day. The less religion figures into a community’s culture, the more likely the banks in that community are to take risks and ignore signals of impending collapse. They do not find themselves beholden to stakeholders in the community—that is essentially how Huang and Shang (2019) put it, and that is what Kanagaretnam et al. (2015) also indicated.
The method used by Huang and Shang (2019) to test their hypothesis was to collect data from banks over a thirty-year period “covered by the intersection of Compustat and CRSP from 1985 to 2015” (p. 28). The sample was quite large and consisted of “56,840 firm-year observations with 7,811 unique firms for the leverage estimations and 57,417 firm-year observations with 7,844 unique firms for the short-term debt estimations” (Huang & Shang, 2019, p. 29). The researchers then used book leverage and market leverage to test the relationship between leverage and social capital using a variety of controls recommended by previous literature. Control variables for debt structure included: “firm size, firm size squared, leverage, market-to-book, abnormal earnings, asset maturity, asset volatility, R&D, missing R&D dummy, regulation industry dummy, credit rating dummy, and term structure of interest rate” (Huang & Shang, 2019, p. 29). In order to measure social capital of a region, the researchers had to construct the variable by defining it as the degree of mutual trust within the region. The measures of social capital included a county level social capital index developed by previous researchers and state level social capital index also developed by prior researchers. The first was the RGF index. The latter was the Putnam index. Descriptive statistics showed the correlation and validation of the hypothesis put forward by Huang and Shang (2019).
A significant theoretical approach to the study by Huang and Shang (2019), rooted in social psychology, would suggest that the relationship between trustworthiness, selflessness, and cooperation and banks’ lack of incentive to over-leverage reflects the value associated by other researchers who have linked banking responsibility with religiosity. Something about religious regions and markets puts a tempering influence on banking behavior and moderates the desire of bankers in these regions to seek to over-leverage and risk financial capital at the expense of social capital.
The study is interesting because it humanizes the banking sector in a way that is too infrequently seen. Instead of focusing on models, economic data, and so on, the researchers considered the character and instincts of the people who run the banks. What motivates these people to invest, to lend, to borrow and to leverage? What is the influence of social capital on the risk-taking impulse of these individuals? How do their impulses impact the overall bank and how do their banks stand in comparison to banks where social capital does not figure predominantly into their culture? The findings suggest that high social capital markets derive from cultures that are essentially risk adverse. The banks in these marketsface less stress, have lower debt-maturity ratios, and have lower debt and equity costs in comparison to the banks of regions where no moderating social capital influence can be found.
The implications of this study are that risk impulses in banking may have as much to do with the characters and cultural formation of the bankers themselves as they do with the economic and financial models that the banks employ. One could make the case that leverage increases oversight and thus makes banks more responsible to themselves (Harris &Raviv, 1990; Rajan& Winton, 1995), but as Huang and Shang (2019) showed, this responsibility is superficial at best because that oversight does not negate the new risks that are created that could potentially lead to significant losses, defaults or collapses. At the end of the day, it is the bankers who run the system—the models are only tools. The tools still have to be used by minds that are going to be governed by some force external to themselves. If self-centeredness is the opposite of social capital, then selflessness must by synonymous with social capital—and a force of governance that is outside the self must therefore be required in order for banking firms to oversee their own actions, lending and borrowing in a way that is in alignment with the values of the high social capital community. If bank managers lack awareness of this external guidance and view themselves as responsible only to themselves, they are more likely to rely more heavily on margin and risk assets and collateral to finance investment schemes that could backfire if unforeseen risks suddenly become legitimate threats. If there is no moderating influence of bankers’ risk-taking impulses, the international banking sector could be in a bad way—and in fact, as 2007-2008 showed, this is exactly what has been seen before. Thus, the study by Huang and Shang (2019) is corroborated not only by the work of other researchers in the field who have examined this exact same line of thought but also by the evidence brought forward by reality.
A measure of the extent to which social capital plays a role in today’s banking sector could be a good indicator of what to expect in the coming years, knowing that the interconnectedness of finance firms around the world is as strong as ever, as Bouvatier and DeLatte (2015) and Bruno and Shin (2015) have shown. As Bruno and Shin (2015) noted, “the risk-taking channel of monetary policy may yield insights into the transmission of global liquidity conditions across borders” (p. 132). This is particularly important to consider in light of the study by Huang and Shang (2019) due to the USD’s role in international banking, for financial implications of rising (or sinking as the case may be) bond yields for fixed-income could be devastating for emerging markets, equities, and all manner of funds and institutions.
The findings of Huang and Shang (2019) could also be extrapolated and applied to the environment of finance as a whole. The researchers showed that their study contained a high degree of robustness and therefore its generalizability is well-suited for making the following argument: If regulations of banking institutions are lax as a result of community (local, state, regional, national or international) standards arelax (i.e., being formed by low social capital committees), bank behavior will be lax and more risk-on in terms of employing a high-leveraging banking strategy. If regulations are tight (because of their being formed by high social capital committees), the opposite is likely to true: banks will display more risk aversion. This idea can be corroborated by the findings of Huang and Shang (2019) as well as of Kanagaretnam et al. (2015), who also have shown that unless there is a moderating influence—an influence which they linked with religion and its impact on a nation’s culture—banks around the world will adopt risk-on strategies that can go explosively wrong when economies hit their limits and margins are called.
In other words, where strict regulatory regimes exist, one can expect to find high social capital communities, where low levels of systemic risk are found in periods of financial crises. High social capital leads to reductions in leverage, which leads to reductions in short-term debt structures, lower borrowing costs, and lower equity costs. High social capital is thus a win-win for all stakeholders in the community and should be cultivated as a matter of national policy. In order to ease rising tensions (notably in today’s bond market), nations, states and local communities may find it to be helpful policy to begin to promote social capital within their districts so as to stem the rising risk associated with over-leveraged banks. It is never too late to start and is certainly worth the attempt.
Social Capital as Context
The idea of social capital having importance is also evident in the study of Miquel et al. (2015) in the realm of behavioral economics: In the article by Miquel et al., the researchers explore the relationship between culture, politics, and finance in China. In particular, they note the role that culture plays as a determining factor the election process. One of the representatives of culture in China is the village temple, and what the researchers found was that “villages with temples experienced much larger increases in public goods after the introduction of elections” (Miquel et al., 2015, p. 1). One of the most important findings of this study is the confirmation that the norms of one culture that govern one nation’s economy are not going to be the same in another country that has a completely different culture. In other words, culture and formal institutions intersect to establish the pre-conditions that will dictate the outcomes for those same institutions.
Miquel et al. (2015) established that culture plays the dominant role in establishing the pre-conditions for the formal institutions and the outcomes they achieve. Set in the rural countryside of China, the study looked at the change in the post-Mao economy of the rural village following the decision to make village committees elected bodies rather than appointed ones. This brought about an air of accountability to the village life and the culture of the village thus played a role in the process based on the concept of social capital within the village.
The researchers citedGuiso et al. (2011), who defined social capital as “civic capital – i.e., those persistent and shared beliefs and values that help a group overcome the free rider problem in the pursuit of socially valuable activities” (Miquel et al., 2015, p. 1). This definition helps to show what is meant by the intersection of culture and formal institutions. Civic capital is the expression of social capital within the village. The researchers suggested that villages with higher social capital would benefit less from having elected village committees (as the members would already be civically engaged) than would villages that had low social capital (as the committees would foster a spirit of accountability). However, this flies in the face of the findings of Tocqueville, who reported that formal institutions thrive most in regions where social capital is in great abundance. The point here is that culture fosters care and both political and economic responsibility.
The goal of a 1976 reform in China was to give villagers the power to choose local leaders and vote out of office those who performed badly. The hope was that this would encourage local support for greater spending on local public goods. Qian et al. examined whether local civic culture is a pre-condition for the success of locally elected government by examining the temples in these areas. Temples in China are locally built and locally maintained with voluntary contributions. The presence of a local temple in a village thus is an objective measure of civic culture: it reflects the extent to which the citizens of the village are civically engaged in maintaining the temple and in keeping up with the upkeep and work through contributions and donations of money and time. Culture is an important determinant of the effectiveness of formal democratic institutions, such as elections, and villages with temples experienced much larger increases in public goods after the introduction of elections. Thus, the money was raised through direct civic engagement and the role that culture played in influencing the villagers to make voluntary contributions. Miquel et al. (2015) explained it this way: “Village residents are expected to make donations [of money and time] to help fund activities... [Village temples] provide strong institutions enforcing each member’s responsibility to contribute to the collective” (p. 8). It is through this devotion to the temple that the civic engagement of the community can be seen and the extent to which the temple is supported financially shows the extent to which it is viewed as having cultural significance and value within the village community.
As Miquel et al. (2015) showed, the construction of a temple is an indication that “villagers have the ability to create and sustain voluntary organizations. The latter depends on pre-existing norms of reciprocity” (p. 7). Thisreciprocity is based on the idea that the village temple is an all-inclusive place: no one is excluded from the temple based on religious belief. During periods of festivities, the temple is a community-wide place of centrality. Money is collected by the village temple committee, which seeks donations from villagers to assist in the organization of parades and performances, film showings and other events that might take place at the temple. The village temple is essentially like a civic center in the U.S. It is used by one and all and open to one and all. It is a place of collective use and utility.
The village temple also serves as a reinforcement of civic and social capital by bringing people together in one setting. Many of the temples assessed in the study had been reconstructed, while village governments finance public goods “by imposing ad hoc taxes (e.g., fees, levies)” (Miquel et al., 2015,p. 11). The financing of public goods, however, is determined collectively: “To successfully provide public goods, a community needs to overcome two difficulties. First, it needs to find a way to aggregate the preferences of members to establish which public goods would contribute the most to social welfare. Second, it needs to overcome the free-rider problem” (Miquel et al., 2015,p. 12-13). By introducing elections—i.e., democracy—into the villages in the post-Mao era, the impact of social capital could be felt more strongly. Culture, where trust plays an important part in the formation of social capital, would play a part in determining elections, as the villagers would trust that each elected person would do his duty by the village. The expectation of paying for public goods is thus reinforced by social capital and the belief that everyone will do his part in sustaining the public goods that are deemed important to the life of the village. As Toqueville noted, the formal institution is a complement to high social capital cultures and vice versa. This is essentially what Miquel et al. (2015) found in their study of behavioral economics regarding the evidence in China.
Trust was essential to the raising of money for public goods in China, as the study of the villages and the village temples shows. Without trust and appreciation for high social capital, there was no culture in the village to sustain the temple. The temple was a reflection of the value that the villages placed in their community functions—the parades, the festivals, the shows, the events—all of these were deemed important and as having high social value. They had high social value because of the culture of the village passed on from generation to generation the importance of their worth.
By actively coming together in community organizations, villagers were able to discuss the value and importance of the public goods they would be funding. This provided opportunities for them to affirm their shared values. The presence of a temple in a village is independent of the village’s religiosity, as Miquel et al. (2015) found. The temple was linked to the concept of inclusivity and social capital—the importance of trust being a valued characteristic of the community.
Significant Contribution to Behavioral Economic
The significant contribution that the article by Miquel et al. (2015) madeto behavioral economics is that it confirms the supposition of previous theorists as well as Tocqueville, who argued that public functions and culture were complementary to one another. A community without high social and civil capital is one that will be depleted in culture and will have a low sense of value forpublic goods and functions. The latter will likely be non-existent in a community of the former. In a village, however, that does have a high degree of social and civic capital, the culture will inform the community and lead to the preservation of and expenditure on public goods and functions that go to support and maintain that culture.
This shows that behavioral economics will be determined by the culture of the community. The study supports the findings of prior research and illustratedthat this concept is most likely universal in quality, as other research has established the idea in the West. This study established that the idea is also found in the East. Thus, the role that culture plays in the establishment of behavioral economics can be seen as universal in character.
Suggestions and Critiques
The study by Miguel et al. (2015) is helpful in showing how culture plays a role in the establishment and definition of behavioral economics from the perspective of the Chinese village. However, the study is limited because it only examines the Chinese village and does not examine other communities where traditional customs and culture may be less easily defined. In the globalized world, the increasing tendency of society to be fragmented and fractured, culturally speaking, has become a global phenomenon. While cultural homogenization has occurred in one respect and thus led to the linking of economies the world over, on the other hand the proliferation of tribalization has led to the opposite effect—the production of numerous subcultures within the homogenized culture so that it is impossible to delineate how culture is passed on from place to place and what impact culture now might have on economic behavior overall.
In the globalized world, therefore, the concept of culture itself has become devaluated on a national and international level. Culture denotes something of the past, something of the Old World that has been abandoned since the onset of modern politics and emphasis on new doctrines of how society should be integrated. In the villages of China, aspects of the Old World are still preserved, which is vastly different from the situation in modern Chinese cities andother more modern regions elsewhere. Thus, it is important to determine what is meant by culture and what aspects play a part inculture.
The researchers emphasized aspects of the study by discussing culture from the standpoint of how social capital and civic capital play a part—but this is possible in the village because there are no competing subcultures that can fragment the community. In a more modern community, there will be many subcultures that work to fracture the cohesion of the whole, which makes it much more difficult to study the overall effect of culture on behavioral economics.
At the local level, however, the election will solve the problem of accountability, with preconditions, but there are institutions that do have preconditions, like the temple, and can successfully create collective action. The goal will not be achieved if the preconditions are not met. Temples (social capital) might be the precondition: villagers create trust and shared experiences that increase the public good expenditure in the village. The culture will inform the community and lead to the preservation of and expenditure on public goods and functions that go to support and maintain that culture. That is what can be observed at the local level in China.
Social Capital and Social Change
Hickman (2010) showedthat social change does not spontaneously manifest itself as a protest like that seen during the 1960s or 1970s. Instead, the author showed that social change begins organically, usually at a grassroots level, and grows as more and more people find commonality with the views of the movement. When the ideas have spread to a large population from a small population, social change is demanded and effected, sometimes through the sort of protests that one typically associates with social change. The author pursuedthis purpose by defining social change, the purpose of social change, the language of social change, concepts in social change (particularly the periods of social change—i.e., the first period being the classical period in which movements are irrational, the second period in which rational action within structural constraints is demonstrated, and the third period in which new social movements arise). Types of important social change concepts include leadership without formal authority, transactional leadership, charismatic leadership and so on. The author investigatedsocial movement structure, resource mobilization, political opportunity structure, and the development of strategic capacity.
The key question that Hickman (2010)was addressing is what it means to engage in social change and how the engagement is demonstrated. The author aimedto answer this question by looking at theories of social change over time. The key question in his mind was most likely this: How can I discuss the issue of social change in a comprehensive and informative manner that addresses the most important issues without glossing over important substantial details?
The most important information Hickman (2010) broughtis the idea that “social change initiatives call for the development of social capital to succeed” (Hickman, 2010, p. 208). In other words, social change cannot succeed without the proper movement and use of people in one’s network. That network will generally start out small and then grow as important people from other communities sign on and commit to spreading and promoting the message (Woolcock, 2001). The idea of using social capital effectively is really at the heart of social change. How this impacts the international banking industry should be obvious: just as Occupy Wall Street threatened to bring greater accountability to the financial sector, the risk of social change destabilizing modern finance and economics is a very real risk.
The main inferences/conclusions in this chapter are that social change is generally achieved through a complex interaction of factors and variables, such as a ripening political environment in which social change can serve as a lever for political action—somewhat like the movement for a new economic order is happening today among far-left politicians responding to a far-left movement for social change. There also has to be an environment of non-constituted leadership in order for change to happen, as this allows for multiple people on multiple fronts to lead in a truly collective effort that does not depend upon a single leader or decision-maker to call all the shots. Instead, the collective moves organically.
The key concepts to understand are the concepts of political opportunity structure, strategic capacity, and non-constituted tactics. By these concepts, Hickman (2010)meantthat political opportunity structure is the “conditions in mainstream institutional politics or policies that either enhance or inhibit prospects for social movement participants to take action” (p. 212). Strategic capacity is a function of the motivation of actors or leaders, access to salient knowledge, and the quality of heuristic or imaginative processes actors employ in their deliberations (Hickman, 2010, p. 212). It gives support to the basic engine of social change in that it reveals the extent to which change is possible. It links up with and connects to the concept of opportunity structure. Non-constituted tactics are ways of drawing the most “attention to social issues through a process of signalizing—the activity of apprising [constituted] leaders of circumstances that appear meaningful enough to merit diagnosis and policy response” (Hickman, 2010, p. 207). Of the three, the non-constituted tactics concept is perhaps most important because it shows the importance of the mass media in spreading the ideas of social change. Social media is particularly important in today’s digital age as it can allow information to spread quickly to the greatest number of people on the planet who are interested. Little et al. (2014) explained this phenomenon by referring to the Egyptian demonstrations against President Mubarak in 2011 that erupted across national boundaries and were possibly fueled by videos spread through social media. Another example of spreading social action via social media is the flash mobs that became popular (Little et al., 2014). By understanding these ideas, one can better understand what social change is and how it works.
The main assumption underlying Hickman’s (2010) thinking is that all social change happens along the same general lines: there is a grassroots vision that is organically manifested and spurred on by individuals who share a desire to get the message out and spread it far and wide (Hickman, 2010). Mass media can help and soon the message has caught on among groups all over the nation. These groups then network and connect in bigger ways and proceed to take advantage of political opportunities to effect change. There is thus an interaction between culture and commerce (Miquel et al., 2015).
The implications are that social change is almost more like a science than an art and that change can be implemented simply by taking it step-by-step, starting at the grassroots level, developing a vision, promoting it, getting people to identify with it, get behind it, networking it, and spreading the vision so that it becomes a mission to get the vision implemented (Hickman, 2010; Little et al., 2014). The idea is that social change for anything can be accomplished simply by following this blueprint for change. That means social change is all just a matter of organization and promotion (Hickman, 2010).
If one fails to take this line of reasoning seriously, the implications are that people will never understand how easy it is to develop social change and create a social movement (Hickman, 2010; Stephan et al., 2016). Or they will never understand how the formula for social change can be exploited by those who seek to manipulate the nation into adopting and accepting a social change that is not truly organic or wanted by the majority of people (Hickman, 2010). The formula for social change as put forward by Hickman (2010) can easily be used by any group that seeks to foment change.
The main point of Hickman (2010) is that social change occurs and has occurred in the past in a way that can be patterned, analyzed, interpreted, and understood in terms of thematic structuring. There is a pattern to how social change happens. Social change also happens at characteristic pace, should change come too suddenly it would be extremely upsetting to the public (de la Sablonnière, 2019). The perspective presented by Hickman (2010) is that social change happens because of very real factors and variables being taken advantage of at a time when it is feasible for them to exist. The more that these variables are present, the more likely social change is to happen.
Hickman (2010) also showed how public value creation and social responsibility are at the foundation of social change, and how leadership and political interest play a part in strengthening social change. Gaither et al. (2018) explored social responsibility of corporations in the light of their ability to bring about social change in an ethical manner. Gaither et al. suggested that organizations that prioritize social values instead of chasing profits will better achieve social change. Hickman (2010) described the importance of networking and also discussed the importance of the language of social change, and how established interpretations can be a block depending on how the media presentsthe available information. Hickman (2010) showed that people start asking more questions and get involved in groups that seem to have the answers. Marvel, mystery, and magnificence will also play a part in social change: the networking and use of social capital allows for individuals to connect in a marvelous way yet it retains some degree of mystery as the people do not really know or need to know one another. What binds them is their appreciation for the vision, the change that is being promoted and the good that can come from it (Gaither et al., 2018; Hickman, 2010). This is the magnificence aspect of the process that comes into play: there has to be a sense of magnificence among the people and a belief in the incredible, because social change is so unusual in many ways and so unexpected because it seems to come out of nowhere though it is slowly building and building like a volcano that is about to erupt (Hickman, 2010).
The related implications, benefits, impact, relevance, and returns on investment are that social change does not necessarily have to be something that most people are convinced of or are convincingis needed (Hickman, 2010). Instead, social change can occur because the opportunity is there for the right people at the right time to take it and make something new happen, and this can serve to impact the relationship between culture and economics (Miquel et al., 2015). There must be alignment among a number of factors so that there is momentum for the social change, there is access to power that can actually make the change happen, and the movement is real (Hickman, 2010). This will in turn create a new environment in which the discourse of culture and economics is situated (Miquel et al., 2015).
A Comparison of Outcomes
It is also important to understand how geopolitical risk intersects with political and economic fallout. Foreign policy under President George H. Bush and under President Trump differed to some degree about the role the U.S. played in shaping the Middle East and engaging in interventions there as well as relations with Russia and interventions in Central America (Blackwill, 2019; Knott, 2019). Under Bush, foreign policy was mainly impacted by a policy of brief but effective interventionism. Bush focused on maintaining U.S. interests abroad while the economy at home went nowhere—and as a result he was not elected to a second term (Clarke et al., 1994). Under Trump, foreign policy has mainly been impacted by the events of 9/11, which are still ongoing today under the banner of the War on Terrorism. Bush’s foreign policy included the Gulf War, the U.S. invasion of Panama, the fall of the Soviet Union and the winding down of the arms race between Russia and the U.S. that had characterized the Cold War (D\\\\\\\'Haeseleer, 2019). That policy led to the drafting and signing of the START I and II treaties, which helped to create an environment in which the Cold War could be put to a rest and both Russia and the U.S. could face a new era in which mutually assured destruction was no more. Bush also intervened in the Middle East during the Gulf War when he used the stories of Iraqi soldiers taking Kuwaiti babies out of incubators and throwing them to the ground to justify a full-scale invasion to repel Iraqi forces out of Kuwait (Kellner, 2007).
Bush’s foreign policy in Panama was something of an extension of the Iran-Contra affair that had gone on during the preceding administration (D\\\\\\\'Haeseleer, 2019). The U.S. sought to overthrow Noriega, whom the U.S. had propped up till that point. The invasion was not popular, however, and may have contributed to Bush’s failure to secure a second term in 1992.
Bush worked with Russia to limit the development of arms and to curtail the arms race with the Soviets. The Soviet Union fell during Bush’s term and the result was an environment in which the Cold War no longer seemed necessary (Cho, & Kumon, 2019). Thus, Bush’s foreign policy towards Russia was viewed as peaceful, which contrasts with what it has been under the Trump Administration, which has laid heavy economy sanctions on Russia, revoked its missile treaty with Russia, and sanctioned various other nations, such as Iran and Venezuela (Glasser, 2019). Where Bush failed was on maintaining the economy at home. Thus, his successor interpreted the need correctly, thus demonstrating a sense of rational choice, and authorized the offshoring of labor and the deconstruction of building by turning his attention to financials. Yet, with the breakdown coming and likely quickly the need to wait may be the best approach to take.
Foreign policy under Trump is essentially an extension of the policy that has been in place since 9/11, under both Bush II and Obama (Glasser, 2019). While Trump has not pushed for more interventions in Syria, he has escalated tensions with Iran by canceling the nuclear treaty put in place by Obama. Trump has also threatened action against Venezuela but so far has not sought to directly overthrow Maduro. Trump has also tried to create a treaty with North Korea and has even visited North Korea, which is something no other president has done. At the same time, Trump has sought a trade war with China, which has created tensions between that country and the U.S (Hass, & Denmark, 2020). Trump’s foreign policy has thus been a mixture of peaceful approaches and diplomacy and harsh rhetoric and economic sanctions (Glasser, 2019). Trump launched missiles at Syria in response to accusations of chemical weapons being used by Assad, but beyond that Trump has not escalated the wars in the Middle East (Black, 2018; Hassan, 2017).
The social environment under Bush was one in which America was happy enough with the Reagan years that it elected his vice president to the White House (Kellner, 2007; Walton, 1995). The mood was still conservative and not yet entrenched in political correctness (Crabb & Mulcahy, 1995). However, people were becoming disillusioned with the policies of Bush and his failure to address domestic issues. Economically, the 1980s had been good for America and the Reagan years had boomed for Wall Street (Stone & Kuznick, 2012). Business was good but slumping under Bush as the hangover set in and the cycle ended. Politically, Bush represented the same establishment that had basically been vying for power since Ford (Stone &Kuznick, 2012). Bush and the neoconservatives as they came to be called would continue to influence politics from that point forward (Stone & Kuznick, 2012).
Under Trump, the nation has been socially divided, with many who oppose Trump viewing his supporters as racists and xenophobes, while Trump supporters view his opponents as liars and as corrupt (Roberts, 2018). Trump came to power on a wave of anti-establishmentarianism and campaigned as an outsider who would drain the swamp of DC of its long-term politicians and impose a new rule and order in the country’s capital (Gorski, 2019; Roberts, 2018). Economically, under Trump the stock market has hit all-time highs, which he routinely takes credit for, though much of that has to do with the central bank’s willingness to keep rates low and potentially engage in more quantitative easing (Dudley, 2019). Trump enacted new tax legislation that decreased the tax burden placed on businesses, as opposed to Bush raising taxes even after promising not to. Trump’s legislation has allowed corporations to bring home money parked offshore and use it to buy back their own corporate shares. Trump’s trade war with China also threatens to hurt businesses in America (Dudley, 2019). Politically, the country is very divided with Trump.
Bush’s policy was not very effective overall, as the treaties signed with Russia were easy, since the country was falling apart (Stone & Kuznick, 2012). The intervention in Panama did not win Bush any supporters. The Gulf War was viewed as part of an ulterior motive by Bush to send a message to Hussein to not challenge the West. Bush’s foreign policy was tough in some areas, but it was mainly a reflection of Bush’s desire to tie up loose ends about Iran-Contra and take credit for ending the Cold War (Stone & Kuznick, 2012). Trump’s policy’s effectiveness still remains to be seen, but the signs indicate that if Trump does not start WWIII by attacking Iran, he could engage in some further diplomacy with the state, create a new treaty with Iran, solve tensions with Russia, and end the trade war with China (Buchanan, 2019). Trump appears to bounce between making peace and making war, so it is unclear what the situation is from one day to another (Buchanan, 2019). His supporters clearly still regard him highly and view his approach to foreign policy as favorable (Roberts, 2018).
Foreign policy under Bush and under Trump differs in that Trump invaded the Middle East and Panama, while Trump has sought to end American wars abroad [even though he has indicated that he is ready to go to war if a country wants to fight with him] (Stone & Kuznick, 2012; Buchanan, 2019). Trump has been charged with colluding with Russia though he has been sanctioning Russia from day one. He is in a trade war with China as well. While Bush’s policy made him a one-term president, Trump still has a high approval rating and could very well see a second term (Buchanan, 2012). This will likely have impact on markets based on the relationship between culture, including political culture, and economics (Miquel et al., 2015).
China
To begin to understand why geopolitics is such a relevant issue in today’s financial/banking industry, one must have a sense of the role that China is increasingly playing on the world stage (Shambaugh, 2013). No better representation of that role exists than the One Belt, One Road Initiative, which has emerged in the 21st century as one of the most economic order-changing projects in human history—that is if China is capable of pulling it off (Cai, 2018). As Cai (2018) observed, China’s influence in geopolitics and global economics could upend the hegemony that is the U.S. Not only is the One Belt, One Road Initiative a threat to global U.S. interests, the Asian Infrastructure Investment Bank poses a similar threat in the sense that it could ultimately rival the World Bank and the International Monetary Fund, “entities established within the framework of the Bretton Woods system during the aftermath of World War Two, and whose governance has been historically controlled by Atlanticist powers ever since,” (Alonso-Trabanco, 2019, p. 126). The fact that China has the world’s 2nd largest economy, after the U.S., and that the Russia-China alliance could lead to a multipolar world in which the USD is completely bypassed, has geopolitical reverberations for the U.S., particularly with respect to foreign policy.
If China is willing to challenge the economic order that emerged post-World War II, it is only natural that some form of volatility will cascade through markets in reaction. For decades, China and the U.S. have held a symbiotic relationship (Roach, 2009). China is an important market for the U.S. and the U.S. is an important market for China. The trade war between the U.S. and China is more than just about tariffs. It is part of a geopolitical strategy by the U.S. to oppose the expansion of China, which is promoting the Belt/Road Initiative among other projects developed to introduce a multipolar world (Council on Foreign Relations, 2018). The One Belt One Road project aims to link China to the Middle East and Europe so that Chinese trade can be facilitated (Balaawi, 2017). China has also introduced the petro-yuan, which allows traders to buy oil in yuans and exchange them for gold (Cho & Kumon, 2019). This is meant to get around the petrodollar and circumvent America’s power to economically sanction countries, as it is currently doing with nations like Iran and Russia(Cho & Kumon, 2019). The U.S. wants to maintain a unipolar world order in which it is the dominant player in the world (Smith, 2019). Now that Russia and China have joined economic forces and are trading energy in their own respective currencies to one another, and China is building its New Silk Road, the U.S. wants to put a stop to China’s ambitions and prevent the multipolar world order that Russia and China want to see, as it would allow them to get out from under the heel of the U.S (Smith, 2019; Tracy et al., 2017). The U.S. also accuses China of stealing billions of dollars’ worth of intellectual property per year from the U.S.—approximately $600 billion according to President Trump (Hass & Denmark, 2020; Japan Times, 2018), and the trade war also aims to address that as the U.S. wants China to put some form of oversight into place that would prevent IP-theft (Boxwell, 2018). Namely the U.S. wants American companies to be able to work in China without having to form JVs with Chinese companies (Volodzko, 2018).
Thus, the trade war is only partially about trade. It is more heavily about the geopolitical order that has been in place since the end of WW2 and particularly since the 1970s when Nixon closed the window on the gold standard and instituted the petrodollar system with Saudi Arabia by getting the Saudis to sell oil in USD in exchange for military protection from the U.S (Krishna, 2020). Now that China is offering its own incentives to other countries, the risk on the U.S. side is that countries will feel less inclined to need to hold USD, which means the power of economically sanctioning countries (as the U.S. likes to do) will be lessened. Moreover, China and Russia showed a desire to maintain some level of peace and stability in the Middle East (as this region is crucial to the Belt/Road Initiative), while the U.S. is engaged in perpetual war in Afghanistan, Syria and Iraq and is threatening a war with Iran (Glasser, 2019).
If the United States has no economic leverage over other countries, that means it is less powerful than it was formerly and that means the unipolar world order that has been in place for more than half a century will give way to the multipolar world order. America will no longer have hegemony(Krishna, 2020). For these reasons, the United States has entered a trade war, knowing that it will hurt China economically. Anything to stop China’s momentum is seen as a win as far as the U.S. is concerned (Cavanna, 2019). Breaking up the economic union between China and Russia and China and the rest of the world (such as Venezuela, where the U.S. is also attempting a coup in order to force out Maduro and install its own puppet leader in Guaido(Aljzeera. (2020), since Maduro has good relations with both Russia and China and Guaido would shift the country back towards the side of the U.S.) is the goal.
The trade war will likely lead to a hot war, which is really where all this is going anyway.If it does come to that, it will mean a great deal of destruction and, just a new order emerged after the destruction of WW2, a new order will emerge from WW3. Whether the U.S. will be victorious in that war remains to be seen. For now, the war is basically playing out as a Cold War 2.0 and as a trade war—but both create tension and that tension, unless resolved through peaceful negotiation (which seems highly unlikely at this point), will be resolved through hot war. Why? The geopolitical world order that the U.S. wants is being challenged by China (and Russia and Iran), and the U.S. cannot afford to lose its place as the sole dominant player (Hasan, 2020). It has too much debt, too much to lose, and too many interests abroad. It also has a special relationship with Israel, who also wants to spread its dominance in the Middle East by getting the U.S. to destroy Iran (Yom, 2020). China and Russia will not stand for that—and the trade war is just one part of this overall geopolitical strategy.
Another example geopolitical risk is the relationship between the East, the Middle East and the West. As the East—particularly Russia and China seek to create a multipolar world, this prevents certain challenges to the existing order today. The key to understanding US-China relations, however, and, for example, relations between Japan and the UAE is the One Belt One Road Initiative (OBOR). OBOR is the new trade plan that China and various partners have envisioned for the new multipolar world of the 21st century and beyond. It is a view of the world that the U.S. has not particularly taken to, primarily because since the end of WW2, the U.S. has been mainly pushing for a unipolar world order, which it could control through the flow of money and services, with the dollar acting as the world’s reserve currency. Today, alliances between China and Russia, China’s new gold-backed petro-yuan, and the OBOR Initiative, are all reasons to believe that the unipolar foothold of the U.S. will end before long (Cho & Kumon, 2019). Other signs of its end are in view: the thawing of relations between Japan and China, countries that have traditionally warred with one another and viewed one another unfavorably; the role that Japan may play in OBOR; relations between Japan and UAE, which appears to all intents and purposes to be allied with Russia (who is a major partner in trade with China); and the role that the U.S. is playing in trying provoke China in the South China Sea and through a trade war that neither country really appears to want. U.S.-China relations are at the nexus of the new world order that seems to be drawing ever closer. Japan, being the world’s third biggest economy (after China and the U.S.) and the UAE, being a major player in the Middle East and a potential key partner in OBOR, will of course be affected by the outcome of U.S.-China relations.
How Relations between Great Countries Affect Other Countries
With America representing the West and Russia and China representing the East, the world can essentially be said to be divided between East and West even still todayIt was less than 80 years ago that the entire world was at war(Knutsen, 2020). The U.S. was allied with Russia against the bulk of Europe—i.e., Germany and Italy. Japan was at war with America (O\\\\\\\'Reilly, &Dugard, 2016). The U.S. and Russia emerged victoriously but relations quickly cooled between them as the Cold War broke out and mistrust between the two dominant world powers led to the arms race and proxy wars in countries around the world(Goodman, 2016).
The U.S. and Russia never recovered from the Cold War in terms of having good relations. President Trump campaigned for president in 2016 on the idea of becoming friends with Russia once again (Stent, 2020). Once elected Trump was accused of being Putin’s puppet (Schweller, 2018),and he immediately took a defensive posture towards Russia, delivering sanctions and threats to Russia and its partners through the world—such as Iran, Syria, Venezuela and China. Guided by neo-conservative ideologues in the likes of Sec. of State Mike Pompeo, National Security Advisor John Bolton, and special emissary Elliott Abrams, who played a significant role in the Iran-Contra scandal under Reagan in the 1980s, Trump’s Administration is filled with foreign policy hawks who would rather see the unipolar world perpetuated ad infinitum than to see the Russia-China multipolar world come into existence (Buchanan, 2019; Gaman-Golutvina, 2018).
Yet that multipolar world does appear to be inching ever nearer, mainly because so many countries around the world are seeing the ease with which the U.S. can level sanctions against any nation that dares to defy the dictates of the U.S. Such sanctions can cripple a country and destroy its economy (Dorsey, 2019). Few nations are every truly allies for long, and so when better alternatives come their way, nations are willing to talk to see what they can do to better their own situation. For example, countries are interested in partnering with Russia and China in OBOR, March 2020 saw 138 countries that signed a memorandum of understandingwith China (International Institute for Green Finance, 2020). It is in this manner that relations between great nations can affect other countries: when great nations get along and allow one another to prosper, every nation benefit (Van der Putten et al., 2016). After decades of mistrust between the U.S. and Russia, it now looks as though Russia is no longer willing to wait for the U.S. to buy in to the multipolar worldview—so Russia is pairing with China and other countries to bring that worldview to reality in spite of what the U.S. wants, which of course is the continuation of its unipolar position. Van der Putten et al. asserted that under Putin, Russia’s move out of Syria and working in tandem with Trump may be a calculated move to gain more trust in the West solely to benefit his position as Russian leader.
America and China Relations
American and China seem to have a symbiotic relationship today. However, this relationship can be interpreted in many ways. Since China was admitted into the World Trade Organization in 2001, the U.S. has exported millions of manufacturing jobs to China as the U.S. opened itself up to receiving Chinese exports in place of domestically produced goods (Bartash, 2018). The U.S. in other words became a client of Chinese producers. In one sense, this is a symbiotic relationship because the U.S. gets to maintain a trade deficit, which puts the U.S. dollar in high demand, while China gets to grow into a mega-producer and a new world power (Wong &Koty, 2020). In another sense, critics of the relationship say that China is undermining American manufacturing and that the trade deficit is creating an economic imbalance that is hurtful to the U.S. (Hass, & Denmark, 2020). Moreover, China holds $21.21 trillion of U.S. debt, which means China essentially controls the U.S.market(Wong &Koty, 2020).The U.S. is in the debtor seat across China as creditor, should China ever decide that the U.S. is acting unfairly, it can seriously hurt the American economy. Should China be off-loading the U.S. dollars it may cause a decline in the U. S. economy and increased interest rates (Seth, 2020). However, such a move would in turn cause price hikes of Chinese produce which will lead to a downturn in their market and it is not likely that the Chinese would want this to happen (Seth, 2020). For its part, America controls the waterways around the way: its navy is the strongest, so if China were to attempt to undermine America, the U.S. could launch a hot war against China and attempt to bring the now powerful nation into submission. Allison (2017) asserted that by continuing on the current trade war paths, the U.S. and China may steer into a hot war which will impact on the rest of the world.
The need to prevent against a U.S. attack is a going concern in the East, which is why Russia has developed missile shield technology that renders U.S. missiles useless and why Japan has expressed anxiety about hostile neighbors (Wyn, 2018). These missile defense shields are in high demand among various nations, too. Russia has delivered them to Syria and to other allies. What this shows is that the great powers are wary of one another and those with foresight will find ways to protect themselves from acts of aggression. To protect one’s economic interests, war is often a road well-traveled (Stone & Kuznick, 2012).
Japan and the United Arab Emirates
Since WW2, Japan has essentially been a vassal of the U.S. (McCormack, 2007). Thus, to see Japan becoming friendly with the UAE or even with China is for the U.S. something to be concerned about. The UAE has been criticized by the U.S. for supporting terrorism in the Middle East (Sly, 2018). The UAE has also been courting Russia, which is not viewed favorably by the U.S. Japan is an important client of the U.S. because its bonds represent a good carry trade and the Japanese central bank is a fervent practitioner of the unconventional monetary policy of buying everything, also known as quantitative easing[QE] (Charoenwong et al., 2019). The U.S. attempted QE for three rounds from 2008 to 2012 and the result has been a tremendous bull run in the American markets, as companies have taken to leveraging for various expansion or share buyback activities while the lending rates are low (Belke et al., 2016).
The UAE is Japan’s top trading partner in the Middle East. In 2018, the two states agreed “to expand economic, political and defense cooperation. Tokyo and Abu Dhabi also signed an investment protection agreement” (Kyodo, 2018, para. 4). Japan and the UAE thus have an important relationship in terms of trade, which is generally the basis for partnerships today around the world. The joint statement that the two nations’ leaders released in 2018 “stressed the importance of further enhancing trade, investments, and business such as renewable energy, sustainable water desalination … artificial intelligence, health care and medical equipment”—which indicates that the partnership will be important for years to come (Kyodo, 2018). The statement reinforced this idea by stressing the two nations’ “commitment to diversify joint business ventures in the non-energy sector and stressed the need to boost defense cooperation”—and as Kyodo (2018) noted, “the UAE is Japan’s main trading partner in the Middle East, accounting for about a third of Tokyo’s trade in the region. It is also Japan’s second-largest supplier of crude oil, accounting for almost a quarter of its needs. More than half the trade volume between them last year — $28 billion — was energy-related” (para. 12). This is an important point to consider because energy could soon become a major issue for the world’s biggest economies, especially if war breaks out between the U.S. and Iran and Iran closes that Strait of Hormuz.
How the US-China Relationship Impacts Japan and UAE
The U.S. is not thrilled with the idea of a multipolar world or the OBOR—i.e., the Belt and Road Initiative (BRI). The U.S. views China’s rise as problematic for its own hegemony in the world. With the UAE working closely with China to extend the Belt project into the Middle East, the U.S. is watching just as closely. As Xinhua (2019) reported, “the Crown Prince of Abu Dhabi, Sheikh Mohamed bin Zayed Al Nahyan, on Monday met with Chinese President Xi Jinping\\\\\\\'s special representative Yang Jiechi here and discussed means to further bilateral cooperation and the Belt and Road Initiative” (para. 8). Anti-terrorism is an important topic in this issue as well, primarily because of the devastation that the U.S. has wreaked in the Middle East since 9/11. Many parts of the Middle East have been destabilized since then and for the BRI to work, security and anti-terrorism efforts need to be in place. By perpetuating the wars in the Middle East, the U.S. can undermine these efforts and work to ensure that the BRI does not get through. The BRI represents Chinese dominance in the 21stcentury, and the neo-conservative U.S. foreign policy hawks cannot abide that or allow it to happen. This realization is the ultimate reason for tensions between China and the U.S., as indicated by Chatzky and McBride (2019) at the Council on Foreign Relations.
The tensions in the U.S.-China relationship could indicate a decoupling between the two in terms of their interdependence, as Wyn (2018) noted. This is being signaled by the trade negotiations: “On March 8 [Trump] backed words with action, announcing import tariffs of 25 per cent on steel and 10 per cent for aluminum, while exempting Canada, Mexico and possibly other allies. On April 1, China responded by hiking tariffs by up to 25 per cent on 128 U.S. products, including certain fruits and nuts.” Mr. Trump retorted by proposing 25 per cent tariffs on around 1,300 industrial technology, transport and medical products worth around $50 billion” (Jones, 2018, para. 2). Each of these escalations shows that neither country is interested in anything that could potentially undermine the other’s power. Thus, unless a stalemate puts an end to the process, the outcome of this trade war could be very big on Japan and the UAE—and here is why:
Wyn (2018) writing for RAND Corporation gave the best analysis of how the current U.S.-China situation could impact Japan.The analysis is worth quoting in full, as it explains the full extent to which Japan may be caught in the crosshairs of the U.S.-China trade war and thus could have negative implications for Japan-UAE relations. However, a brief summary of the situation can suffice. Basically, Wyn (2018) noted that “Washington and Beijing seem prepared to begin decoupling from one another economically, a conclusion that places Tokyo in a difficult position for at least four reasons” (para. 3). The four reasons can be put this way:
· Japan’s economic growth is dependent upon “the complex supply chains that help structure—and are in turn shaped by—U.S.-China trade interdependence” (Wyn, 2018, para. 4). If there is no more interdependence, Japan’s situation in the East and its relationship with the UAE could be impacted by a recession in trade volume. When the 2008 recession hit, Japan was hit the hardest as exports dropped and the economy shrank. If trade between China and the U.S. ceases, the global supply chain will go into a tailspin.
· If the U.S. follows through on its plan to remain the sole hegemonic power in the world, Japan’s relationship with the UAE could be seen as problematic: “the Trump administration\\\\\\\'s effort to reduce America\\\\\\\'s entanglement with China\\\\\\\'s economy is part of a far-reaching effort to reclaim the competitive advantages it believes the United States has squandered by joining multilateral trade pacts and acting through longstanding Bretton Woods institutions such as the World Trade Organization” (Wyn, 2018, para. 5). Indeed, in a recent speech, Trump stated that Japan was “ripping us off” right alongside China. Thus, if Japan is next put in the crosshairs of U.S. ire, it could mean that the UAE-Japan relationship will be questioned next. Trump has threatened tariffs on Japan’s cars, so the U.S. may also target Japan’s trade partner in the Middle East if it thinks it can achieve more of its hegemonic aims and bring allies of China in the BRI into submission (Wyn, 2018).
· If the U.S. adopts a protectionist policy going forward and breaks off trade with China, Japan may be obliged “to bolster economic cooperation with China, its principal rival in the Asia-Pacific region” (Wyn, 2018, para. 6). Indeed, this appears to already be a high possibility as “Tokyo is working more proactively with Beijing to conclude negotiations over the Regional Comprehensive Economic Partnership, a 16-country arrangement that excludes the United States and would incorporate some 30 percent of GWP” (Wyn, 2018, para. 6). In other words, the fallout of the U.S.-China relationship crumbling could be a stronger relationship between China and Japan.
· If the U.S. begins to compete more openly in manufacturing, the outcome could be a heightened state of insecurity and possible war. Because China and the U.S. have been so interdependent since China joined the WTO in 2001, there has been a mutual need for self-restraint among the nations’ leaders. However, with Trump and Xi not showing any signs of coming to terms in their negotiations, the outcome could be war. This would put Japan in a precarious situation as the sea lanes could possibly be blocked and the Japanese economy could suffer vastly. The sea lanes are the primary lanes used for trade even today, so control of the sea is very meaningful and whoever controls the lanes—whether the U.S. or China—will have to be viewed as a nation to work with as far as Japan is concerned (Wyn, 2018).
One of the big issues between Japan and China, however, remains the China Sea. Japan wants a free and open Indo-Pacific Ocean that is not controlled by China. The U.S. also wants this. China does not. Japan’s Defense Minister has warned, therefore, that China “is unilaterally escalating its military activities in the sea and aviation spaces around our country. This has become a significant concern for our country\\\\\\\'s defense” (Wyn, 2018, para. 7). Thus Wyn (2018) concluded that “if, as seems plausible, we are in the early stages of a long unwinding between the U.S. and Chinese economies, Japan may have to devise new strategies not only for sustaining its growth, but also for insulating itself from the impact of deteriorating relations between Washington and Beijing” (para. 8). In other words, Japan may have to rely more heavily upon the UAE or, depending on the fallout of who gains power and control over the Indo-Pacific, Japan may have to pivot more towards China or Russia for economic trade and support. If the U.S. is really determined to preserve its hegemony, the current risks of holding firm in its trade negotiations with China seem to suggest that it could end up making matters worse for itself by pushing many nations of the world right into the open arms of China and Russia. American obstinacy may have met its match in the new multipolar world that is gaining steam.
That leaves the UAE to figure out where it will go. Currently, the U.S. is reticent about doing more business with the UAE, and China has shown signs of being ready and willing to step in to meet the UAE’s arm’s needs (McLaughlin, 2019). The American Congress recently attempted to prevent American support of the Saudi-UAE war against Yemen—but Trump blocked the bill by refusing to sign it. That may be a signal that the U.S. will continue to do business with the UAE. However, the uncertainty may be enough for the UAE to double down on its commitment to China, which could then impact the UAE-Japan relationship. The factors involved in how things play out from here are numerous and extraordinarily complex. Whichever way it plays out there will undoubtedly be ramifications for the international banking community considering the global interconnectedness of all things today.
Summary
The key points of this chapter are that rational choice theory is an appropriate theoretical framework for this study.It can best be understood in the light of the principles of mission command and the idea that banks owe a duty to clients and communities to act rationally. The problem, as demonstrated by Goldman Sachs, is that banks can act rationally in their own self-interest without considering their clients’ interest, which creates an ethical dilemma that could offset whatever positives arise from rational action. The usefulness of thinking about a rational choice framework according to the principles of mission command is that it gives a clear indication of what the purpose should be: banks are there to serve the interests of clients—of stakeholders. Goldman represents a hybrid between Egoism and rationality. Such a culture, too, is likely not unique to Goldman. This, therefore, could be considered a factor in the assessment of banking community members.
Where things stand today is that the international banking industry is likely to be on a state of high alert as President Trump further negotiates both with the Chinese President and the Federal Reserve Chairman in order to keep systems working and the public from panicking. However, with social change drivers becoming more and more manifested around the world—from London to Hong Kong to the streets of Portland, Oregon—it may be surmised social and human capital are vectors that need to be considered by the industry as well. For rational choice to be determined, a shared sense of understanding has to occur, yet the indicators suggest that the issues from the 2007-2008 have not even been fully addressed yet. There is still too much leverage, as Dimon (2018) has pointed out. The world has barely recovered from the last crisis—for another to come could spell disaster in the same way the Dominican Republic was hit by two shattering hurricanes within the span of two months.
The expansion of China and Russia into the Middle East and elsewhere throughout the world, in no small thanks to the alliance between two countries and the direction that they want to take the next generation. The cultural issues at play in this area may need to be considered as well in order to fully understand whether bankers feel confident or whether that confidence is a tone of despondency based on a dawning awareness that there will come a time when everyone is respectful. OBOR could upset the unipolar world, the head of which is the U.S. President. For that reason, Trump has become very unnecessary regarding the way they are looking at it.
Areas of convergence occur whenever the various researchers begin to identify the themes that commonly unite them: these themes include the utility of social and human capital and how important it is in the finance industry as goodwill is what keeps everything operating and when that goes so too does the confidence in the system that has been in place for hundreds of years. Areas of divergence include the various ways in which the researchers focus on a niche topic and then use that topic to inform their whole perspective and character, whereas the viewing is painfully dull. In the next chapter the methodology of the study will be discussed.
Chapter 3: Research Method Comment by Author: Meets Academic Reader checklist for this chapter: Participant selection is clear and appropriate to the study, ethical processes are described, role of the researcher is discussed, and data collection and analysis is articulated and justified in scholarly literature.Please see feedback throughout the Chapter.
Following the collapse of sub-prime in the U.S. and a tidal wave of leveraged defaults across the global banking sector which only found relief through central banking intervention, the world appeared on the brink of disaster (Haitsma et al., 2016; Heller, 2017). To some extent it has recovered, though some critics of Quantitative Easing (QE) have argued that central banks have merely kicked the can down the road—i.e., they have allowed a bubble economy to form that will be even worse for the global economy when it bursts than in 2007-2008.
Salhin et al. (2016) showed managerial confidence have an impact on return on investment (ROI). More examination was needed on how confidence among members of the finance industry affects investment between sectors (Salhin et al., 2016). Pikulina et al. (2017) found overconfidence among professional investors can lead to high risk situations leading to adverse effects on investment. Overconfidence is linked with financial crisis as investments become so over-leveraged that the slightest disruption bring disaster (Ho et al., 2016). Understanding the connection between confidence and investment in banking is needed (Lee et al., 2019). Do middle managers and regular employees could impact on industries’ sustainability (Buyl et al., 2019)? It is not known what effect regular banking employees’ attitudes have on industry sustainability, further research is needed (Buyl et al., 2019). Lupton (2019) asserted with rapid debt growth worldwide it is unclear whether the industry can sustain this growth without undue risk taking. Midlevel banking workers are vital to a bank’s success (Buyl et al., 2019). The world may face another disaster following the collapse of sub-prime in the United States coupled with the tidal wave of leveraged loans defaulting across the global banking sector where relief was found through central banking intervention (Haitsma et al., 2016; Heller, 2017). It has partially recovered, though critics of QE argued central banks allowed a bubble economy to form that will be even worse for the global economy when it bursts than 2007-2008.
The study problem is one of sustainability in the industry. Lupton (2019), Dimon (2018) and Buyl et al. (2019) questioned the sustainability of today’s banking industry. Confidence may play a part in determining whether the industry is sustainable (Buyl et al., 2019). However, it is unclear how confidence can be defined—emotion metaphors may be an indication of the type of confidence that workers in the banking industry have (Ho & Cheng, 2016). Confidence is vital since it determines how money is invested, what markets will do, and where it is placed (Heller, 2017). Banks need a sense of their confidence should another economic crisis hit (Giles, 2017). The problem this study aims to address is to answer whether the international banking community feels confident that it can weather another global economic crisis, and specifically whether geopolitical awareness impacts that confidence level.
The purpose of this quantitative descriptive study was to assess the confidence of members of the international banking community regarding whether the sector can safely handle another global economic crisis like that seen in 2007-2008 and whether geopolitical awareness impacts that confidence level. The relationship between geopolitical awareness and confidence was determined by using a structured survey tool. Survey participants represented four international banks—HSBC, J. P. Morgan-Chase, Deutsche Bank and Bank of China. Participants remained anonymous by accessing the survey through SurveyMonkey.
Geopolitical awareness is knowledge of geopolitical current events. Geopolitical risks represent risks linked with wars, terrorism, and tension between states (Caldara &Iacoviello, 2018). The model for measuring risk developed by Caldara and Iacoviello was used to measure geopolitical tensions. In the survey, the participants were asked if they see geopolitical risk in the world. Their responses were then measured against the model showing how much geopolitical risk is present. The scope of the data collection was limited to bankers with profiles on LinkedIn.
Considering the impact that the global economic crisis had on the world from 2007-2008 and the role that central banking intervention played (Heller, 2017), it is important to know whether banks are prepared should a similar event occur. Part of the problem for investors today is that they are unsure of whether the financial industry is prepared for another adverse event (Giles, 2017). This study evaluated how confident the members of the international banking community that the sector could safely handle another global economic crisis.
This chapter describes the survey methodology used in this quantitative descriptive study. It discusses the population and sample, material and instrumentation, operational definition of variables, and data analysis. It also discusses the assumptions, limitations, delimitations and ethical considerations for this study.
Research Methodology and Design Comment by Author: Meets Academic Reader checklist for this section: Research method and design are appropriate to answer research questions and justified with scholarly literature.
This quantitative study used the survey method with a structured survey tool in order to obtain data from 1000 different international bankers. Nardi (2018) recommended the structured survey tool for obtaining quantifiable data from a large population. As the aim of the study is to obtain a quantitative sense of whether bankers in the international community feel they are prepared for a black swan event like that of the 2007-2008 global economic crisis. This is an appropriate method for answering the research questions as the primary purpose of these questions is to determine whether the international banking community is confident about the prospects of a future recession. The secondary purpose of these questions is to determine whether confidence levels and knowledge of certain factors regarding the global economy/geopolitical climate are correlated.
Alternative methods and designs could have been to conduct a qualitative study using the interview method, or a case study to examine one bank. A qualitative study using the interview method, for example, could be used to obtain a deeper understanding of how a smaller sample of members of the international banking community see geopolitical awareness as a factor in the sector’s confidence regarding its ability to withstand an economic crisis. As Malterud et al., (2016) showed, the qualitative interview method is best used for small samples in studies seeking a deeper understanding of a phenomenon. A mixed methods study could also be used. But McKim (2017) showed that the mixed methods approach has value for researchers who want to triangulate data and provide both qualitative and quantitative analysis. However, for this study, such an approach would not be ideal because it adds to the amount of data needing to be collected and would require more support that is not currently available for this design (McKim, 2017). Because the purpose of this study is to reflect the current attitudes and feelings of bankers today, a survey method presented itself as the most viable as a large population is more conducive to quantitative studies than to qualitative ones.
Population and Sample
The population consisted of bankers in the international community and includes workers at various levels and functions: financial analysts, personal financial advisors, accountants, auditors, loan officers, investment planners, and underwriters. Each of these banking groups of professionals have roles in determining risk versus reward ratios and therefore stand to have some stake in being able to assess risk in the global economy. The sample aimed for is 1000 respondents. The relevant characteristics should include that they are currently working in one of the four big international banks: J. P. Morgan Chase, Deutsche Bank, HSBC, or Bank of China. A population sample of this size and characteristic should be appropriate in achieving generalization, considering that as Trevelyan and Robinson (2015) have shown the attitudes, feelings and opinions of a population are best reflected when the sample size is large and the characteristics of the sample represent the body the researcher aims to assess. Trevelyan and Robinson (2015) provided criteria that are reflected in this case, where analysts to underwriters will make up the sample from the four biggest banks in the international community, and thus it is assumed that these bankers will reflect the general attitudes of the population. The aim of this study was to have a comprehensive sample that is reflective of the actual population. As J. P. Morgan Chase, Bank of China and HSBC employ approximately a quarter million employees each while Deutsche employs approximately 100,000 workers, the sample of participants were proportionate to the size of the banks themselves in terms of employees (Bank of China Annual Report, 2019; Deutsche Bank, 2019; HSBC, 2019; J. P. Morgan Chase, 2019). This sample is appropriate because the study aims to give an accurate reflection of the international banking community. The sample participants were chosen randomly from these banks. Random sampling is recommended for ensuring validity (Emerson, 2015).
Power analysis refers to the power curve, which is important because it tells at what point a test becomes biased as well as the probability of rejecting the null hypothesis (Cohen, 1988). The curve illustrated the power of the test in a monotonic line that increases as the probability of the rejection of the null hypothesis rises and the null hypothesis becomes more and more false. The illustration helps to show where the level of significance is [if the curve dips below this level, it indicates some form of bias in the test] (Cohen, 1988). The p-value refers to the level of significance. For example, if 95% of the respondents indicate they are not confidant about their banks’ ability to weather another storm like that of 2008, it would indicate that there is a statistically significant problem with the confidence of the international banking community. If the p-value is greater than alpha (.05), however, there is no statistical significance. If it is less than alpha, then the difference is statistically significant. Alpha is the margin of error that is permitted in a t-test and it is usually placed at 5%. This study aims to achieve statistical significance. Increasingsample sizemakes the hypothesis test more sensitive. Beta is the probability of making a type 2 error: the larger and more sensitive the sample, the less chance there is of making a type 2 error. Power analysis was conducted using Quick-R: The significance level defaults to 0.05 (Cohen, 1988). A priori power analysis was performed to estimate the sample size needed by equating the margin of error (E) to the point estimate for the population mean is the sample mean and the margin of error, where Z serves as the value taken from the probabilities of the standard normal distribution for the desired confidence level (here Z = 1.96 for 95% confidence). Additionally, ? serves as the standard deviation of the outcome of interest. The equation is thus presented to solve for n as the desired sample size: Comment by Author: Sedric – was this a a priori power analysis (performed to estimate sample size needed?) or a post hoc power analysis (performed after data collection to determine the power of the test)? Please identify: if a priori then include information on the realized sample size -- if post hoc then also include this information in the Data Validity and Reliability section of Chapter 4.
becomes
Thus, the formula provides the minimum sample size to make sure the margin of error is within the confidence interval. However, because the standard deviation is unknown, the formula had to be adjusted. P is introduced as the unknown population proportion. The approximate value of p is required, so the range for p is established as 0 to 1. With a range of p(1-p), the value of p that maximizes p(1-p) is 0.5. P at 0.5 thus serves as value for estimating the largest sample size:
The equation shows that to achieve a 95% confidence interval, 385 participants are needed in the sample. This study used a sample of 641 and thus reached the target level.
Participants were recruited via email by harvesting contact information from LinkedIn, where banker profiles can be searched, and individual bankers emailed. This is a common practice in recruiting among businesses looking to recruit and hire employees who have profiles that match the criteria for jobs that businesses want to fill. Therefore, it was not expected that this method of obtaining contact information presented any legal or ethical challenges. The ability to identify and connect with individuals in this manner is precisely why the social media site was established in the first place. The platform was searched for bankers from each of the four big international banks, with approximately three bankers from J. P. Morgan Chase and Bank of China being emailed for everyone banker from Deutsche and HSBC in order to preserve the proportional ratio.
Materials or Instrumentation Comment by Author: Sedric – please append the survey. Thanks, Sharon.
A survey instrument (Appendix C) had to be identified that applied to the IV and DV of this study. The researcher was unaware of one that would apply, which is why he surmised that a survey instrument had to be developed specifically for this study as there is no existing survey that sets out to obtain data on the questions this study asks. The survey was field tested with 5 respondents from the sample. The responses were analyzed for any unexplainable patterns or possible confusion caused by the phrasing of the statements. From the responses, it was evident that the research questions could be answered using the data obtained. Feedback was also obtained from the field test sample to see if there were any questions or concerns while taking the survey that could be used to improve the survey. No suggestions were received from the field test participants. The survey consisted of a range of questions regarding the IV and the DV of the study, defined below. The survey used the 5-point Likert Scale created by rephrasing the research questions as statements with which the respondent can agree or disagree on a scale of 1 to 5, 1 being strongly disagree and 5 being strongly agree.
Operational Definitions of Variables Comment by Author: Sedric – Please include the additional variables of:To test RQ1hypotheses (see feedback comment in the Research Questions section of Chapter 1): IV is working or not working in a bank industry. DV is confidence level (this is included here.)To test RQ2 hypotheses – both variables are included here. To test RQ3 hypotheses: IV is ‘alteration in monetary policy and awareness of rising debt levels. Sedric, not sure if this is two variables (alteration in monetary policy AND awareness of rising debt levels) or one variable (perhaps awareness of rising debt levels in the environment (or perhaps because of) rising debt levels). DV is confidence level (this is included here)
For RQ1, the IV is working in a Western banking institution or not working in a Western banking institution; the participants of this survey all work in the bank industry. The DV is confidence level, defined below. To test the RQ2 hypotheses, the variables geopolitical awareness and confidence are used, both defined below. To test the RQ3 hypotheses, the IV is awareness of monetary policy in an environment of globally rising debt levels, and the DV is confidence.
Awareness of Monetary Policy in an Environment of Globally Rising Debt Levels. The construct of this variable is not directly measurable but can be determined by equating the concept of monetary policy awareness in an environment of globally rising debt levels to the degree to which an individual pays attention to Federal Reserve statements or publications from bank analysts or bank CEOs (Dimon, 2018).
Geopolitical Awareness. The construct of geopolitical awareness is not directly measurable, but it can be measured by equating the concept of geopolitical awareness to actual knowledge of geopolitical events. What needs to be measured is the participants’ knowledge of geopolitical events, such as the state of relations between Russia and China, China and the U.S., the U.S. and Russia, Iran and the U.S., and so on; as well as concomitant global economic events, such as what the Japanese bond market is doing, what the proposed Italian deficit is, where the USD is trading against a basket of currencies, what the latest Chinese data was, and so on. It is not necessary for this information to be summarized for respondents, even though it is expected that some of it will be more known to older generations than to younger generations; the purpose of the survey was to asses this awareness and age will be one of the factors used to analyze the results. Age should not be an excuse for having no geopolitical awareness, particularly in this sector. Geopolitical awareness is defined as knowledge of geopolitical current events and whether they are deemed “significant” to the international banking sector. Caldara and Iacoviello (2018) defined geopolitical risk as “the risk associated with wars, terrorist acts, and tensions between states that affect the normal and peaceful course of international relations. Geopolitical risk captures both the risk that these events materialize, and the new risks associated with an escalation of existing events” (p. 6). Significance is determined by whether participants view these events as possibly impactful on the international banking community. Geopolitical awareness is the Independent Variable (IV) of this study and will be measured using the Likert scale in the survey, and this model will be used for this study (p. 1).
The geopolitical risk index for this study will therefore be determined by using the Caldara and Iacoviello (2018) model, based on “counting the number of occurrences in leading English-language newspapers of articles discussing the geopolitical events and risks” (p. 7). A monthly index starting was be compiled Caldara and Iacoviello (2018) by running automated text-searches of the electronic archives of a dozen of the world’s leading English newspapers.
The level of measurement for this variable will be nominal, with respondents having a ranking of awareness, semi-awareness or no awareness as determined by their responses to survey statements regarding geopolitics.
Confidence. Confidence in the ability of the international banking community to weather another global economic crisis is defined as the belief that the sector can healthily and effectively withstand any more shocks like that witnessed from 2007-2008. This variable refers to the subjective perspective of the individual bankers participating in the survey and not to the confidence of the banks themselves, which could be based on anything from the ratio of non-performing loans to total loans to the bank’s share price on public exchanges. Confidence will be self-reported by the participants again on the Likert scale of 1 to 5. Confidence is the Dependent Variable (DV) of this study.
Both variables will be measured using a five-point Likert scale. Responses from participants will be generated using the survey method. The survey will be distributed to the sample via social media, with convenience sampling being the primary way the sample is distributed. The level of measurement of each variable is ordinal and potential scores for each variable will range from 1 to 5 (strongly disagree to strongly agree). ALikert-typescaleassumes that the strength/intensity of experience is linear, i.e. on a continuum from strongly agree to strongly disagree and assumes that attitudes can be measured. Ordinal level variables are used when it is helpful to show how there is evidence of an order or meaning in the way the participants are grouped among the data set. The grouping tends to be hierarchical, which is why the Likert scale is commonly used in surveys, as it allows responses of participants to be grouped in an order or ranking (Polit & Beck, 2017).
Study Procedures
The number of members of the sample who returned the survey was 641. 1000 emails were sent to a randomized sample of employees at J. P. Morgan Chase, Deutsche Bank, HSBC, and Bank of China asking them to participate in a survey hosted on my LinkedIn page. A total of 641 participants took part in the survey. Comment by Author: Nice return rate Sedric!! 64% is amazing – ther must have been great interest in your research study topic.
Table 1
Demographics of Respondents
Job Title
Percentage of Respondents
Application Analyst
5%
Investment Banking Analyst
15%
Executive Director
3%
Risk Analyst
2%
Loan Processor
22%
Financial Advisor
16%
Sales Specialist
39%
As Table 1 shows, the majority of the participants in the survey were in sales, which is a lower level position. Loan processors made up the next highest level of participants, followed by financial advisors. Risk analysts made up only 2% of the respondents and executive directors only 3%.
As Lewis, Hardy and Snaith (2013) showed, nonresponse bias in survey research can result in misleading or inaccurate findings and assessment of nonresponse bias is advocated to determine response sample representativeness. Wave analysis is one method of assessing bias. Waves consisted of three waves—the first messaging to those in the sample with an explanatory letter and a link to the survey; two weeks later the second wave commencing with a message for those who had not yet responded and then the third wave commenced with another reminder and another link to the survey. It was not expected that there would be a discernible difference among respondents of the three waves.
Descriptive statistics are used “to synthesize and describe data” by supplying parameters commonly based on averages and percentages that are “calculated with data from a population” (Polit & Beck, 2017, p. 215). At the nominal level, variables are categorized without any obvious meaning in the relationship. Descriptive analysis of data for the variables consisted of the following: The mean is obtained by taking the sum of the data and dividing by the number of inputs. The mean is useful in describing the central tendency of the data. However, unusual outliers could be negatively affecting the mean and thus making the data set unreliable. The means for the IV was based on the Likert Scale of 1-5 responses. The Standard Deviations and range of scores for this variable were from 1 to 5. The same was for the DV. SPSS was used for conducting statistical analysis. The scores were normally distributed.
Data were collected by first collecting emails from the population that were sampled through LinkedIn. The procedure included log into LinkedIn, click on the Advanced link at the top of the page which goes to the Advanced People Search page. In the search box, the job titles for the following positions were searched: financial analysts, personal financial advisors, accountants, auditors, loan officers, investment planners, and underwriters. The default choice was “current” to allow the search to locate individuals currently in that position. The industry selected was banking. Once 1000 emails were harvested from LinkedIn, a mass email was sent referring the potential participant to an online survey using Survey Monkey posted on the researcher’s own LinkedIn page. An Informed Consent form preceded the survey stating that by taking the survey the participant consents to his or her information being used in the study. The emails introduced myself and described the nature of the study I was doing. Beneath the introduction was a link to the survey that could be taken at my social media profile page. The data were collected in this manner. Data were handled by keeping all completed surveys in a digital locker that is encrypted. Only the researcher had access to the digital locker. As LinkedIn allows for this type of search to take place and messages were sent individually to each of the participants and not to any one LinkedIn group, permission for access was not required, as the site is designed to allow for individuals to connect in this manner.
Data Collection and Analysis Comment by Author: Sedric, the section does not include information on what test was used to analyse the data. Consider discussion the tests by research question hypotheses.
The selection process was nonrandom. Convenience and snowball sampling were used. The SPSS was the tool used to analyze the data. The parametric test is a hypothesis test that is used to obtain general information that can then be used to explain the mean of the sample. A typical parametric test is the t-test. Pearson’s correlation test is another typical parametric test. Essentially, whenever an assumption about the parameters of a sample population is utilized, the parametric test is the statistical test that the researcher will engage. By obtaining data from the Likert Scale survey, both tests were applicable (Boone & Boone, 2012). This study analyzed the data using ANOVA and correlation testing.
Assumptions
Using the Likert-scale of measurement presents the assumptions that the strength/ intensity of experience is linear, i.e. on a continuum from strongly disagree to strongly agree and makes the assumption that attitudes can be measured. This was the primary method of measuring confidence. However, the other variables—geopolitical awareness and monetary policy awareness—were more complex and had to be measured with more nuance. The Likert scale was still used with an overall negative to positive shift, but instead of strongly disagree (1) and strongly agree (5) being the value ranges, the responses ranged, for example, in this way (for RQ2): Comment by Author: Consideration: specify the variables/constructs that will be measured using the Likert scale because not all of your variables/constructs are measured in this fashion – for example you categorical (nominal) variables.
1 Not geopolitically aware at all
2 Unsure, i.e., hear some things but don’t know what it means
3 Neither aware nor unaware, i.e., can process information and talk about it if the subject comes up but do not think about it much
4 Somewhat aware; I do make decisions every once in a while based on what I understand
5 Very aware; all of my decisions are based on this awareness
Using the self-reporting survey method assumes that individuals will report their thoughts and feelings honestly and without fear of reprisal. However, this assumption has been challenged by numerous researchers who have argued that self-reported data is weak and does not necessarily reflect the reality of the situation and can lead to underreporting (Livingston & Callanan, 2015).
Limitations
Self-reported data has been shown to be one of the most common ways of obtaining data. For example, Auty et al. (2015) pointed out that “self-report surveys are among the most widely used methods of collecting data” among quantitative researchers (p. 563). However, self-reported data is not foolproof, and other researchers have questioned its usage in terms of providing valid research results. For example, Gemming et al. (2014) argued that reliance on self-reported data can lead to underreporting. The measures taken to mitigate these limitations are to make the sample as randomized as possible. Though it was convenience sampling to a degree, because it was using LinkedIn for obtaining participants. LinkedIn is a platform used by millions of people, so it is still a very random way to obtain data.
Delimitations
Delimitation was achieved by field testing the survey first and then determining what information I wanted to obtain and what information I did not seek to obtain. The delimitations are the components of the research that were not included in the study. The survey provided more data than was necessary to answer the questions for this research; however, it mainly focused on the correlation between the IV and the DV and the extent that it was measurable. The theoretical framework used here was rational choice theory, which posits that individuals or organizations make decisions based on the weighing of costs and benefits. The key concepts in this theory are that in order to effectively make rational choice, one must know the costs and the benefits as they are and not only as they appear in one’s mind. If one is not confident about the costs and benefits, one cannot proceed effectively in the decision-making process. The framework guided the research decisions, including the development of the research problem statement, purpose statement, and questions, by framing the underlying idea at the heart of the specter that is the over-leveraged industry through the concept of weighing the costs and benefits. Dimon (2017) and Lupton (2018) have essentially called for such an examination in their own public comments and concerns.
Ethical Assurances
Ethical issues include protecting the identity of participants and obtaining their informed consent. Consent was assumed when the survey was completed and returned. Information about the survey was provided at the top of the survey for the participant to read. Identifying information about the participant, such as name and the name of the bank the participant works for was not requested or collected. This preserved the anonymity of the participants. An internal review board was also be used to oversee the process.
The data were safeguarded and protected with confidentiality and privacy being observed, as no identifying names or information were used; instead, each participating respondent was automatically assigned a number. No participants’ names or identifying features was reported in the study and data were preserved in a digitally encrypted lockbox so that third parties do not obtain access to it.
Summary
This quantitative study aimed to assess the confidence levels of the international banking community in order to see if it is capable of or prepared to weather another crisis like that seen in 2007-2008. The population for this study consisted of the international banking community represented by the big four banks of J. P. Morgan Chase, Deutsche Bank, HSBC, and Bank of China. The survey method was used to obtain data from the participants and the sample was obtained by connecting with potential participants via LinkedIn. The variables studied were geopolitical awareness (the IV) and confidence (the DV). The data were analyzed using the t-test and Pearson’s correlation test. It was assumed that these attitudes could be measured using the Likert Scale and that self-reported data would not diminish the study’s credibility. To guard against this limitation, the sample was as randomized as possible.
Chapter 4: Findings
The purpose of this quantitative descriptive study was to assess the confidence of members of the international banking community regarding whether the sector can safely handle another global economic crisis like that seen in 2007-2008 and whether geopolitical awareness impacts that confidence level. Confidence plays a significant role in how money is invested, where it is placed, and what markets will do. Therefore, assessing the confidence levels of bankers at the four major international banks (J. P. Morgan Chase, Deutsche Bank, HSBC, and Bank of China) is essential for understanding if the sector can safely handle another global economic crisis like that seen in 2007-2008. Additionally, the assessment of confidence levels can evaluate the degree of impact on geopolitical awareness.
This chapter comprises four sections: (a) validity and reliability of the data, (b) results, (c) evaluation of the findings, and (d) a summary of results. The validity and reliability of the data section discusses the overall study; factors impacting the interpretation of the data collection and analysis. The results section provides an overview of the categorical demographic data collected and comprise an illustration of factors related to the study. The evaluation of the findings includes an analysis of Likert scale data.
The research questions and hypothesis for this study were:
RQ1. Is the international banking community in the West more confident in its ability to handle another global economic crisis like the one experienced from 2007-2008 than the community in the East?
H0. There is no significant relationship between working in the banking community in the West/East and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between working in the banking community in the West/East and confidence that the industry can handle another economic crisis.
RQ2. Does geopolitical awareness have an impact on the confidence of the members of the international banking community regarding the sector\\\\\\\'s ability to handle another global economic crisis like the one experienced from 2007-2008?
H0. There is no significant relationship between geopolitical awareness and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between geopolitical awareness and confidence that the industry can handle another economic crisis.
RQ3. Do changes in central bank monetary policy (i.e., going from quantitative easing to quantitative tightening) and the awareness of the rising debt levels around the world affect the confidence levels of the members of the international banking community on the sectors ability to handle another global economic crisis like the one seen from 2007-2008?
H0. There is no significant relationship between awareness of monetary policy and debt levels and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between awareness of monetary policy and debt levels and confidence that the industry can handle another economic crisis
Validity and Reliability of the Data
Dependabilityindicates that a study is consistent throughout (Anney, 2014). Confirmability refers to the amount of confidence regarding the findings representing the participants’ perspective rather than the researcher’s (Anney, 2014). Reflexivity is when the researcher maintains a constant state of awareness of how his own ideas might be influencing the study. A reflexive journal can help to be mindful of this awareness, as can the audit trail, which acts as a record of how data was collected, analyzed, and interpreted (Anney, 2014).
Dependability and confirmability can be addressed through detailed, thick descriptions of themes. Meaning, a reflexive journal was kept, and an inquiry audit was completed by a third party to confirm that the research processes were used throughout the study (Marshall & Rossman, 2014). Validity concerns the accuracy of a measure, and reliability concerns the consistency of a measure. This refers to the study’s ability to measure the outcomes that it aims to measure (Dikko, 2016). A valid study is one that can assess what it intends to assess and shows that the findings and conclusions proceed from the interpretation of the data in a logical way. It will explain the variables included for analysis and discuss potential variables that may not have been included. In presenting the findings, it is critical to discuss how accurate the collection of data and analysis reflect the reality of the information sought.
Through the credibility component, triangulation of sources did not occur using a variety of data collection methods, but rather through the surveying of a variety of employees at four different international banks (J. P. Morgan Chase, Deutsche Bank, HSBC, and Bank of China). This method allowed me to obtain data from more than one location within the international finance industry.
Member checking is the process of checking with participants after interpreting responses to make sure that what has been interpreted as what the participant intended to communicate (Marshall & Rossman, 2014). It was also used to answer questions that arose after the initial round of survey data was collected and analyzed. Participants were emailed or messaged through social media when the researcher had a question and wanted to confirm with the participants whether his interpretation of the findings aligned with their actual beliefs and feelings. Follow-up interviews or surveys with participants could perhaps help to answer that question, and member checking was utilized for that purpose.
Emails were sent to the participants to gauge whether they viewed the role of the central bank in supporting markets as having a significant factor in their confidence in the industry overall.
Transferability
Transferability is the extent to which the findings are generalizable to other situations. This study did not include a mixed-methods approach, but rather only multiple data sources, and thus it did not offer a triangulation of sources beyond the banking members who participated in the survey of the four central banks. This lack of triangulation places at least one constraint on the validity of the data in the sense that it means the findings are not tested for consistency across different data collection instruments.
Transferability was, however, ensured by providing detailed, thick descriptions of the way data was collected, the context in which it was obtained, demographics of the participants, and other content that would help to deepen the understanding of the population represented by the findings. (Marshall & Rossman, 2014).
Dependability
Ensuring consistency throughout the study\\\\\\\'s audit trail shows that there are factors that impact the interpretation of the data collection or analysis. The overall study showed that the data met the assumptions of the statistical test. Evidence of psychometric soundness in terms of adequate validity and reliability was obtained through Pearson\\\\\\\'s r and internal consistency, face validity, test for normality, and discriminant validity.
Generalizability of the findings may not apply to other situations outside the international banking industry because of the unique situation that is an international banking and the unique role that variables play in impacting the participants\\\\\\\' sense of confidence, as the findings show. Internal consistency reliability was assessed using Cronbach\\\\\\\'salpha.Internal consistency reliability was supported: Cronbach\\\\\\\'s alpha was .80.Data analysis appropriate for the purpose and design would be: Internal consistency, Construct validity, and Item homogeneity. The following were tested: reliability and item homogeneity using Cronbach\\\\\\\'salpha, item-total correlations, and inter-item correlations; construct validity using factor analysis. Internal consistency reliability was assessed using Cronbach\\\\\\\'s alpha, which tells how closely items in a group are related. Internal consistency reliability was supported: Cronbach\\\\\\\'s alpha was .80, which indicates that the items had a relatively high degree of internal consistency. In the scientific community, the reliability coefficient > .70 is typically viewed as acceptable.Tests for normality were conducted on the dependent variable.
The Shapiro-Wilk test indicated a significant deviation from normality (.99, p < 0.5), after a visual inspection of the histogram was conducted, a normal distribution was reviled.Kurtosis and skewness were also within the 1.96 limitations (.12 for kurtosis and .11 for skewness), and this was further evidence that the departure from normality indicated in the Shapiro-Wilk test was not too extreme.
In statistical tests, parametric testing assumptions must be followed for accurate interpretation. Assumptions of normality, i.e., the distribution of the data, should be normally distributed with a symmetric bell-shaped curve. Skewness and kurtosis can test the assumption of normality, where skewness should be within the range ±2, and kurtosis values should be within the range of ±7. Shapiro-Wilk\\\\\\\'s test should not be significant. In this study, it showed significant but visual inspection of the bell curve showed otherwise.
ANOVAa
Model
Sum of Squares
Mean Square
F
Sig.
1
Regression
57.875
28.937
.611
.547b
Residual
2082.370
47.327
Total
2140.245
a. Dependent Variable: Confidence
b. Predictors: (Constant), Crisis perception
The assumptions of the Pearson correlation test were negligible and included linearity. The data assumptions for the ANOVA test were that the responses for each factor level contained a normal population distribution; that the distributions had the same variance; and that the data were independent. A total of 1000 emails were sent to a randomized sample of employees at J. P. Morgan Chase, Deutsche Bank, HSBC, and Bank of China, asking them to participate in a survey hosted on SurveyMonkey page. A total of 641 participants took part in the survey.
Confirmability
The survey method is most often used in quantitative studies, and the most current survey is the self-reported survey. Surveys can be elaborate or simple but are most frequently used to obtain data from a population regarding a research question that focuses on the correlation of variables or issues of cause and effect (Walliman, 2017). The survey was conducted by first developing the survey questions and statements. Usually, the Likert scale is used to make measuring responses easier. The Likert scale is a numbered scale of responses that indicate the degree to which the responder agrees or disagrees with a statement in the survey. When developing a survey, the researcher must be careful that the statements are written in a way that the responses can be adequately measured using such a scale. Otherwise, the data can be misleading—for instance, if with one statement, a high value is given to responses that agree with statements that are positive towards the phenomenon in question. However, in another statement, a high value is given to responses that agree with statements that are negative towards the phenomenon in question, the survey data results will be worthless (Nardi, 2018). Thus, the survey should be field tested first to make sure it is valid. This survey was field tested with the first five participants. The desired information was obtained from the surveys, and member checking was conducted with the participants to ensure that the interpretation of the data aligned with what the participants meant to express.
Results
The results will address the following research questions:
RQ1. Is the international banking community confident in its ability to handle another global economic crisis like the one experienced from 2007-2008?
RQ2. Does geopolitical awareness have an impact on the confidence of the members of the international banking community regarding the sector\\\\\\\'s ability to handle another global economic crisis like the one experienced from 2007-2008?
RQ3. Do changes in central bank monetary policy (i.e., going from quantitative easing to quantitative tightening) and the awareness of the rising debt levels around the world affect the confidence levels of the members of the international banking community on the sectors ability to handle another global economic crisis like the one seen from 2007-2008?
The findings indicated that there was no lack of confidence in general among employees of the international banking industry. They likewise showed that geopolitical awareness does not have a statistically significant negative effect on international banking employees\\\\\\\' confidence levels. Thirdly, the findings showed that awareness of monetary policy and rising debt levels does not significantly impact in a negative way the confidence of these same employees.
To assist in this discernment, this study provides a convenient tool for assessing confidence levels and providing a reading on the confidence of the associates of four major international banks.The demographics of participants consisted of sales specialists (39%), loan processors (22%), financial advisors (16%), investment banking analysts (15%), application analysts (5%), executive directors (3%), and risk analysts (2%), as shown in Table2.
Table 2
Demographics of Respondents
Job Position
Percentage of Respondents
Application Analyst
5%
Investment Banking Analyst
15%
Executive Director
3%
Risk Analyst
2%
Loan Processor
22%
Financial Advisor
16%
Sales Specialist
39%
Most of the participants in the survey were in sales, which is considered a lower-level position. Loan processors made up the next highest level of participants, followed by financial advisors. Risk analysts made up only 2% of the respondents and executive directors only 3%. This could be a factor in skewing the results of the survey, which is aware of any association between risk-adversity and geopolitical awareness or confidence. Considering that the majority of those surveyed were involved in sales and loan processing, it was expected that the data would naturally reflect a more positive view of the strength of the international finance industry, considering that these individuals’ jobs and careers depended on industry-wide strength. If factors such as geopolitics and increasing-debt levels at record highs could undermine the industry, it could indicatethat the industry fundamentally lacks inherent strength. To assess these relationships, however, it is essential to consider the data in terms of the research questions asked at the outset of this study.
Research Question 1
Is the international banking community confident in its ability to handle another global economic crisis like the one experienced from 2007-2008?
H0. There is no significant relationship between working in the banking community and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between working in the banking community and confidence that the industry can handle another economic crisis.
Table 2 shows that in the international banking community, the most confidence was expressed by HSBC employees and the Bank of China, concerning the community’s determination to handle a global economic crisis. Employees of J. P. Morgan-Chase were overwhelmingly neutral-to-confident and were by far the least concerned group of employees about difficulties that might be faced by another crisis. The recurring theme found in the survey responses was that employees felt that their banks were more prepared to handle another crisis. Here, the outlier was Deutsche Bank, where employees expressed very little confidence, with three out of four participants demonstrating a substantial lack of confidence in the industry’s ability to cope with another crisis. Employees at Deutsche Bank expressed minimal impression of the banks being prepared for what would happen. Of the four banks, employees at the Bank of China were the most optimistic, with only 5% of participants expressing a lack of confidence.
Table 3
Confidence Levels of the Banking Community
Confidence
Bank
Not Confident
Neutral
Confident
J.P.Morgan-Chase
10%
50%
40%
Deutsche
75%
5%
20%
HSBC
25%
10%
65%
Bank of China
5%
35%
60%
Mean
28.75%
25%
46.2%
There was no statistically significant correlation between the two variables regarding confidence and working or not working in Western-based international bank. Deutsche Bank employees were least confident but HSBC employees were most confident, so these two offset each other and produced a confidence percentage that was on average approximately 20 points lower than the Eastern-based Bank of China. But it was by no means a wash in terms of not having confidence in the West. Interestingly, Bank of China employees showed no issues with confidence and only 5% reported a lack of confidence. The realized p-value was more significant than 0.05 at 0.547, and thus, the null hypothesis was rejected. ANOVA testing showed standard deviation of predicted value at 1.1217.
Model Summaryb
Model
R
R Square
Adjusted R Square
Std. Error of the Estimate
1
.164a
.027
-.017
6.8794
a. Predictors: (Constant), Crisis perception
b. Dependent Variable: Confidence
ANOVAa
Model
Sum of Squares
Mean Square
F
Sig.
1
Regression
57.875
28.937
.611
.547b
Residual
2082.370
47.327
Total
2140.245
a. Dependent Variable: Confidence
b. Predictors: (Constant), Crisis perception
Residuals Statistics
Minimum
Maximum
Mean
Std. Deviation
N
Predicted Value
4.295
9.089
7.511
1.1217
641
Residual
-7.9074
31.5980
.0000
6.7282
641
Std. Predicted Value
-2.867
1.416
.000
1.000
641
Std. Residual
-1.147
4.791
.000
.968
641
a. Dependent Variable: Confidence
The findings showed that the model was not statistically significant, as p > 0.05. The R-squared is less than 3%, and therefore not a good predictor. The correlation between the variables was not especially meaningful.
Thus, aside from the outlier of employees at Deutsche Bank, there was no significant indication of an industry-wide lack of confidence among employees in the industry of international finance or correlation between perceptions of crises in the past and projections of fears for the future.
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