Was the Financial Crisis Avoidable?
The 2007-2010 Great Recession was the result of a dreadful financial crisis that tormented not only the United States but also the entire world. It is perceived as the worst economic meltdown since the end of World War II in 1945 as it caused severe economic problems that are still being felt up to date which include unemployment, heightened poverty level and increased inflation rate thus impairing economic growth. The Great Recession was a nightmare every nation is still dealing with and has absolutely no desire to relive those dreadful moments thus the yearning to minimize the chances of its recurrence in future which has formed the basis of the ongoing debate of whether the financial crisis could have been avoided or its impact reduced. Some argues, especially policy makers, that there was nothing anyone could do to avert the situation claiming the financial crisis was bound to happen since its occurrence was as a result of uncontrollable forces. However, most financial analysts as well as economists believe that the crisis that raked havoc across the globe was preventable with their view backed by the Financial Crisis Inquiry Commission’s report.
The report placed the government, policy makers, regulators and financial institutions at the heart of the problem claiming the financial crisis resulted from their weakness signified by poor decision making. The crisis is largely attributed to ignorance, negligence as well as meaningless ideologies that clouded the relevant authorities’ judgment consequently leading to the inappropriate actions that costs the world a stable economy. The root causes of the financial catastrophe that brought the world to its knees are all attributed to human failures that could have been tamed once realized of which was not the case. They include, unethical practices by financial intuitions, reckless corporate and government practices, mismanagement of the financial markets, inadequate policies governing housing and financial markets and macroeconomic problems. This factors were the result of excessive foreign borrowing by the government, reckless lending practices and extreme loose borrowing monetary policies. Therefore, most analysts argue that most of the factors contributing to the crisis are manageable thus their support on the notion that the financial crisis was avoidable as expressed by Taylor & Hoover Institution Press (2009, pp. 21).
Friedman, J., & Kraus, W. (2011, pp. 8) dismisses claims that the financial crisis was caused by natural factors and neither was it the result of technological difficulties. She says that the recession was purely human oriented; in that it was absolutely caused by human actions yet human actions are controllable thus implying that the crisis was avoidable. The crisis was the result of inappropriate decision making regarding the actions that were right or wrong for the economy attributed to misjudgment, an element of human weakness that were uncounted for at the time. By the mere fact that the financial system was created and is controlled by humans proves that the crisis could have been tamed by thorough evaluation of the then system in terms of its weaknesses and strengths and appropriate adjustments implemented immediately which was not the case.
Taylor & Hoover Institution Press (2009, pp. 47) claims the recession’s impacts could have been suppressed or even prevented had the relevant authorities heed the warning signals given by several analysts of international economic conditions. They were concerned about the growing global macroeconomic imbalances particularly worried about the United States’ borrowing trend that resulted to excessive capital inflow by 2003-2004 agreeing that such trends would cause problems in future as much as they were unsure of the nature and the timing of the mayhem. Thus the blame of the crisis on politicians, regulators, financial institutions and credit agencies is based on the perception that they neglected their duty to protect the economy. For instance different economist including Ken Rogoff, Nouriel Roubini as well as Raghuram Rajan from 2005 all throughout 2006 were worried of hazards looming in the financial and housing markets thus proving that had the warning not been overlooked, the world would have been in a better position economically as described by Friedman (2011, pp. 58). This is because governments would have prepared adequately in response to the threatening economic mishap thus minimized its effect or avoided it completely as the warning started as early as 2003; unlike what transpired in the wake of the crisis that saw the situation intensify as a result of the government ill preparedness to handle the situation.
The Great Recession caused by the financial crisis that commenced in 2007 is also attributed to impunity and unethical financial practices pertaining to moral decay indicated by greed and exploitation for personal benefits by financial institutions at the expense of the economy. For instance, bankers risked the financial system for their own personal gains by manipulating the system to enable them take advantage of the homeowners. A practice associated with recklessness and extreme level of irresponsibility stirred by selfishness as their actions jeopardized the overall economy and cost the entire globe a lot of which had the bankers exercised moral values as well as self-restrain, the disaster would have been prevented as implied by Petrick (2011, pp. 94).
The economic breakdown is further believed to have been the result of inappropriate government practices like excessive foreign borrowing. United States is believed to have been borrowing close to a trillion dollars annually from the rest of the world which was lethal to the economy in the long run. This is because, it contributed to macroeconomic imbalance since there was too much inflow of capital compared to outflows. The macroeconomic imbalance encouraged unstable real estate and financial prosperity that crumbled in no time resulting to losses. Furthermore, most of the gains seemed to be channeled towards the loan repayment and not into development. Therefore, the overheated economy would have been slowed had the government minimized the outside fiscal deficits consequently suggesting that the crisis was preventable as affirmed by Taylor & Hoover Institution Press (2009, pp. 60).
Petrick (2011, pp. 97) blames reckless financial management attributed to wicked ideologies that relied foolishly on inadequate accountable bailouts and gave the impression that financial institutions could manage themselves, and other factors related to the shift in financial risk management pointing out the bail out. By proposing a theoretical model to minimize its impacts and prevent another financial crisis in future, Petrick indicates that the financial mayhem experienced in 2007-2010 could have been prevented. For instance, the theoretical model he proposes based on reformed macro-level practices could have promoted responsible risk management and integrity in systematic global financial institutions suppose it were implemented at the time of crisis commencement since failure by the government to respond immediately to the financial unrest prolonged crisis leading to further damage to the economy as echoed by Alfaro & Chen (2010, pp. 11).
Connolly & Wall (2011, pp. 8) strongly believes that the crisis was the as a result of mismanagement backed by poor inadequate policies governing the financial markets. Absence of proper financial policies fostered excessive risk taking culture among financial firms and mortgage institutions; a clear indication of poor risks management strategies and reckless decision making that is avoidable. Financial firms got into the habit of investing large in very risky short term investments blindly without caring whether the investments were viable. Therefore, clearly stressing the regulators role in stirring the crisis and failure in their responsibility to oversee economic growth since had they established and implemented strong policies such practices would have been curbed earlier and the crisis prevented. The regulators further encouraged malpractices in the shadow banking system that was largely popular yet unregulated. The shadow banking system was characterized by security debt obligation and extreme use of leverage notorious among two government sponsored institutions as stated by Kirshner (2014, pp. 73).
Furthermore, Friedman (2011, pp. 67) claims that interventions of government in the housing market is believed to be one of the major setbacks in the financial system that sparked the economic collapse. Inflation of the housing bubble was encouraged by the government who underestimated the impacts of its bursting to the economy. Thus the collapse of the housing bubble led to huge loses of funds that had initially been implanted in the system in the form of risky sub-prime mortgages with its impact being intensified by complicated financial derivatives pertaining to the mortgage loans whose risks had been miscalculated. This left most credit agencies like commercial banks and mortgage institutions bankrupt thus unable to support themselves financially. This situation could have been avoided had the housing market properly been examined and the defect in mortgage securities realized as observed by Taylor & Hoover Institution Press (2009, pp. 56).
Spiegel (2011, pp. 5) agrees that the economy could have been saved affirming that the crisis was avoidable had credit agencies like commercial banks adopted appropriate lending practices and had every agency and authorities responsible for overseeing activities of the financial market played their role as expected of them. The commercial banks for instance, experienced massive liquidity crisis when the housing market they had been recklessly financing declined and the assets rendered worthless due to low quality home loans embedded into mortgage-backed securities. This contributed to severe losses of large amount of money threatening their existence considering some of them did not survive the economic downfall and others had to be bailed out by taxpayers. This misfortune would have been prevented had the Federal Reserve raised lending rates in order to discourage the credit boom. Furthermore, assertive expansion by financial firms that placed them in a compromising position when it came to managing their assets- in that they were completely unequipped to handle large assets- also contributed to huge financial shortfalls, a practice that should have been discouraged as explicated by Lagorde-Segot (2010, pp. 34).
Moreover, since the commencement of the Great Recession in 2007 numerous economists and financial analysts have come up with ways to better protect the economy. By analyzing factors that contributed to the crisis such as mismanagement and poor financial policies, Kwon managed to establish suitable measures to be taken in order to curb the crisis and its recurrence thus echoing that the financial crisis was avoidable. Kwon bases his ideas on eliminating mistakes made prior and at the time of the crisis that cost the global economy like unethical financial decisions attributed to greed and recklessness. He proposes a situation where the government is at the core of financial management through establishment of appropriate financial market policies and dedicated regulatory agencies to oversee the governance of all financial sectors and institutions whose inexistence played a major role in stirring the financial unrest as explained by Kwon (2011, pp. 13) thus disregarding the notion that there was absolutely no way at the time of the crisis to deal with the economic drawback.
In summary, the financial crisis that tormented United States and nearly the whole world could have been prevented as much as most policy makers do not agree. The financial crisis lead to the Great Recession whose impact is still lingering appearing as one of the worst economic disaster since 1930s and particularly after the second World War. Numerous economic analysts across the globe agree that the economic meltdown that began in 2007 resulted from manageable inappropriate human actions and inactions prior dismissing claims that it was contributed by uncontrollable factors since it was not caused by natural calamities or technological malfunctioning thus was avoidable. The root causes of the crisis are attributed to negligence, wicked ideologies and ignorance that were the driving of poor decisions made by the relevant authorities charged with the responsibility of managing the economy. Failure to acknowledge and deal management weaknesses inspired by lax regulations governing the financial markets that further led to inappropriate lending practices by commercial banks as well as improper corporate strategies that inclined towards extreme risk taking in terms of investments causing problems in the financial system. Macroeconomic imbalance resulting from excessive government foreign borrowing was also among the factors that contributed to the crisis of which most of them are controllable hence justifies the perception that the financial crisis could have been avoided. The analysts maintains that had every individual including regulators, policy makers and financial institutions played their role appropriately then the situation would have been different. This is because The root causes of the crisis is believed to be reckless risky investments, excessive foreign borrowing and poor market strategies among others that could have been discouraged by the relevant authorities.
Alfaro, L., & Chen, M. X. (2010). Surviving the global financial crisis: Foreign ownership and establishment performance. American Economic Journal: Economic Policy.
The journal focuses measures that could have been implemented in order to curb the impacts of the crisis as well as eliminate chances of a future recurrence. The journal highlights the value of learning from past mistakes clearly suggesting that the crisis was human oriented and could have been prevented.
The journal attributes the crisis to failure by regulators to properly manage the financial markets greatly cultivating excessive risk taking culture by financial firms and mortgage institutions, an indication of poor risk management strategies and decision making that is preventable. Alfaro & Chen (2010, pp. 7) highlights the inappropriate shadow banking system that was unregulated but largely popular.
Connolly, C., & Wall, T. (2011). The global financial crisis and UK PPPs. International Journal of Public Sector Management.doi:10.1108/09513551111163648
The journal discusses the financial crisis that led to the global recession in terms of its causes, impacts and possible solutions that could have saved the economy at the time. The journal highlights poor management in the financial sector as one of the major causes. Connolly and Wall stresses the irresponsible ideologies by the government and financial institutions that led to the economic meltdown (Connolly & Wall, 2011, pp. 10).
The journal particularly points out poor corporate government practices like the excessive foreign borrowing that results to too much loans straining the entire economic sector as most of the gains were spent on loan repayment instead of development. Due to negligence of significant crisis warning signals the government failed to adequately handle the situation as they were unprepared as implied by Connolly & Wall (2011, pp. 19).
Kwon, E. (2011). Managing a financial crisis: A comparative political economic analysis of the United States and South Korea. Journal of East Asian Affairs 30 pages.
Kwon also focuses on appropriate ways of managing the financial crisis drawing lessons from the 2007-2010 financial crisis. By evaluating factors that contributed to the crisis such as mismanagement and poor financial policies, the journal manages to establish suitable measures to be taken in order to curb the crisis thus echoing that the financial crisis was avoidable. Kwon bases his ideas on the eliminating mistakes made at the time that cost the global economy like unethical financial decisions attributed to greed and recklessness. It proposes a situation where the government is at the core of financial management through establishment of appropriate policies to oversee the governance of all financial sectors and institutions whose inexistence played a major role in stirring financial turmoil (Kwon, 2011, pp. 13).
Petrick in his journal describes the factors that contributed to the financial crisis that resulted to a severe economic recession and gives theoretical insights on the way forward. He blames reckless financial management attributed to unethical ideologies that relied foolishly on inadequate accountable bailouts and other factors related to the shift in financial risk management (Petrick, 2011, pp. 97). The journal further proposes a theoretical model to minimize its impacts and prevent another financial crisis in future.
The journal therefore, suggests that the financial havoc experienced in 2007-2010 could have been prevented. For instance, the theoretical model Petrick proposes based on reformed macro-level practices could have promoted responsible risk management and integrity in systematic global financial institutions in case it were implemented at the time of crisis commencement as implied by Petrick (2011, pp. 100).
Spiegel M. (2011). The academic analysis of the 2008 financial crisis: Round 1. The Review of Financial Studies.
The journal looks into the root causes of the financial crisis clearly indicating the initial warning signs prior to the economic meltdown. Spiegel (2011, pp. 20) dismisses claims that the recession was caused by natural factors and neither did it result from technological malfunctioning thus states clearly that it resulted from poor decisions made by humans hence could have been avoided. The journal maintains that politicians, regulators, financial firms and credit rating agencies played an active role in stirring the crisis.
Spiegel places the blame of negligence of the earlier financial crisis warning by regulators and financial firms who failed to inquire, understand and come up with appropriate ways to manage the evolving risks in order to lower its impact or prevent its occurrence altogether. Instead, they held on to the notion that financial institutions could make their own policies thus failure to regulate them was one of the human weaknesses that should have been looked into as suggested by Spiegel (2011, pp. 25).
Generally, all the journals suggest that the financial crisis that contributed to the great global economic recession was human oriented thus was avoidable. The crisis is attributed to inappropriate decision making by humans and failure to acknowledge and deal with the management weakness. The journals maintains that had every individual including regulators, politicians and financial institutions played their role appropriately then the situation would have been different. The root causes of the crisis is believed to be reckless risky investments, excessive foreign borrowing and poor market strategies among others that could have been discouraged by the relevant authorities.
Friedman, J. (2011). What caused the financial crisis. Philadelphia: University of Pennsylvania Press.
Friedman, J., & Kraus, W. (2011). Engineering the financial crisis. University of Pennsylvania Press.
Kirshner, J. (2014). American power after the financial crisis. Cornell University Press.
Lagorde-Segot, T. (2010). After the crisis: Rethinking finance. New York: Nova Science Publishers. Inc.
Taylor, B. J., & Hoover Institution Press. (2009). Getting off track: How government actions and interventions caused, prolonged, and worsened the financial crisis. Stanford, CA: Hoover Institution Press.