Global Financial Markets and Turmoil of 2008

Introduction

This paper assesses the financial market in light of the global financial turmoil of 2008 and scrutinizes the reasons that led to the economic crisis through an analysis of the key culprits, victims, and the governmental roles.

The Government and the Market

Changes in the financial markets since Enron and WorldCom mishaps

Enron and WorldCom mishaps significantly hampered the confidence of the investors and customers, and consequently, the government became concerned to find out ways to restore the lost confidence in the market (United States Senate, 2011). The government put forward regulatory burdens over large corporations, but these were tepid in nature and soon many corporations restarted manipulation of their financial accounts.

Steps taken by the government to protect investors and consumers

After the breakdown of Enron and WorldCom, the US government took a halfhearted step to enact the Sarbanes Oxley Act in order to tackle the outrages caused by Enron and WorldCom’s fraudulent and misguided financial disclosures, and more importantly, to lessen the anxieties and to revive the confidence of the investors on the financial market of the country. In addition, the regulation contained a number of measures, which comprised of provisions of ‘better auditing supervision’ at gigantic companies through the formation of a bureau called PCAOB to keep enormous businesses in check.

The Economic and Financial Crisis of 2008

The reasons that led to the economic and financial crisis in 2008

According to Norgren (2010), several factors led to the financial and economic downturn in 2008, and it took decades before those underlying causes helped the crisis to develop; nevertheless, malfunctions in the US financial markets resulting from innate flaws and irregularities in the fiscal markets played the role of a vital ‘root cause’. Norgren (2010) argues that the macroeconomic origins of this economic disaster include long periods of poor inflation and abridged interest rates, which led to a quick increase in the number of loans taken by folks to buy properties, resulting in a considerable rise in property values, and subsequent increase in people’s debts as a whole.

Conversely, as the boost in debt demands was much higher than the number of bank-deposits, banks started taking money from other sources riskily, becoming highly reliant on funding-markets; moreover, the disparities continued to mount as numerous nations ran with huge deficits and numerous vital banks (such as the US Federal Reserve) continuously ignored the augmentation of credit and asset-values.

Numerous researches suggest that the downturn occurred mostly due to inbuilt faults at the financial systems, as nonintervention in the markets, in conjunction with globalization, created intricate global institutions, whilst dangers in the market were undervalued since fiscal-institutions merely studied past statistics to understand future market instead of taking into account true macroeconomic conditions. High salary of corporate executives, poor corporate governance, the inability of institutions and investors to assess threats involved in new-fangled products, avoidance of fund regulatory practices by banks, governmental strategies to reduce credit-control, and pro-cyclical character of undertaking risks caused banks to get excessively leveraged, making markets exceptionally fragile.

The primary players who were the victims in the crisis

Abugre (2014) said that one of the primary players to be a victim in the crisis was Lehman Brothers, which became bankrupted after turning property credits into securities that were exchanged and recorded out of the balance sheets to receive extra bucks; helping it to earn the name of the icon that represents the dark roots of global financial turmoil. According to Norgren (2010), the other most important victims of the downturn were the nations that possessed feeble financial backdrops, and it has been added by Fukuda-parr (2009) that five billion individuals of the third world nations were the blameless sufferers in the downturn, while further three million individuals were fired and twenty-eight million lost their securities (Abugre, 2014).

Culprits who played a strong hand in the economic downturn

Even though companies like Enron and WorldCom had been playing major roles in preparing a field of fraudulent representation speeding up the recessionary process, United States Senate (2011) put forward a report detecting numerous culprits who significantly contributed in the economic turmoil during 2008, such as Office of Thrift Supervision, Washington-Mutual, Moody’s Investors Service, Standard & Poor’s, Deutsche-Bank, and Goldman-Sachs.

The first was a supervisory body, the second was a belligerent mortgagee (which dissolved during the crisis), the third and fourth were credit-ratings institutions, and the last two were banks, who, all together, according to the Senate report, defrauded the customers and people with the help of supervisory bodies and other credit-ratings institutions for their combined benefit (United States Senate, 2011). In report backed by the European Commission, Young (2014) further added the constant misrepresentation, manipulation, and masking of actual financial accounts by a number of US-based corporations, and the subsequent assistance from the part of the auditors and regulators in exchange of bribes, together with a high level of non-compliance to corporate governance codes, aided the firms to cause the crisis.

TARP and the mortgage crisis

According to United States Senate (2011), the administration of the United States of America put forward bailouts under Troubled-Asset Relief Program with the intention of alleviating constant collapses during the mortgage crisis because certain organizations possessed enormous toxic-assets, which were likely to fail in the same way as Lehman if they were incapable to trade those and make some money. Therefore, the government enacted TARP in 2008 in order to make the Treasury capable of buying almost seven hundred billion dollars of mortgage-backed securities from the firms who were willing to trade them, and so for about a year, this program was the mere international customer for those toxic-assets, helping institutions to affix the much-desired liquidity in the fiscal market.

It is important to state that TARP helped the most significant monetary agencies and banks to remain buoyant while reorganizing their accounts; however, while some argued that this program became quite divisive (because reports suggested that TARP was about to cost taxpayers three hundred billion dollars), others confirmed that TARP defended the impact of the crisis and lowered its gravity. At last, it was widely reported in the national media that the TARP program had concluded in December 2014, and it was able to generate a lucrative profit of more than fifteen billion US dollars.

Conclusions

Why governmental steps did not prevent the crisis

The global financial crisis of 2008 was the result of a long period of manipulation and misrepresentation of the balance sheets of various financial institutions and banks, with the combined efforts of the auditors and regulators. Even though it is not practicable to expect that the government could have fixed these long periods of irregularities within a couple of years since 2008, it is arguable that the government must have paid more attention since the fall of Enron and WorldCom to make sure that companies were compliant with the law and regulations enacted during that time.

The government enacted Sarbanes-Oxley Act after the collapse of Enron to make sure that the financial reporting issues are not misguided but paid little attention in closely scrutinizing whether the auditors are playing fairly because the downturn of the market suggested that the widespread corruptions ultimately won the battle (the watchdog, that is, auditors and regulators, forgot to bark, interestingly). Many smarter individuals involved in the companies prevented disclosure of risks to investors and deceitfully persuaded them to fund into something that perhaps, has no real value.

Recommendations for preventing further economic and financial crisis

It is important to argue that in order to prevent further economic and financial crisis, the government of the USA should establish deliberate and long-enduring monetary revival strategy that would not only reach the rich but also the middle-class and the SMEs, through a more strong financial revitalization by the use of the more effective and efficient fiscal policy. More significantly, the government must take strict steps to oversee and scrutinize full compliance of the firms with the financial disclosure rules and corporate governance laws to prevent further manipulations and frauds. In addition, to avoid further recession, the US government must also ensure the firmness of the property market, and meet the needs of the market as well as averting the overstraining of the undersized financial institutions and credit rating agencies, because they promote the advancement of local communities.

Reference List

Abugre, C. (2014). Global Financial Crisis Forgotten Too Soon. Web.

Fukuda-parr, S. (2009). The gender perspectives of the financial crisis. Web.

Norgren, C. (2010). The Causes of the Global Financial Crisis and Their Implications for Supreme Audit Institutions. Web.

United States Senate. (2011). Wall Street and the Financial Crisis: Anatomy of a Financial Collapse. Web.

Young, B. (2014). Financial crisis: causes, policy responses, future challenges. Web.

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NerdyTom. (2021, October 29). Global Financial Markets and Turmoil of 2008. Retrieved from https://nerdytom.com/global-financial-markets-and-turmoil-of-2008/

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"Global Financial Markets and Turmoil of 2008." NerdyTom, 29 Oct. 2021, nerdytom.com/global-financial-markets-and-turmoil-of-2008/.

1. NerdyTom. "Global Financial Markets and Turmoil of 2008." October 29, 2021. https://nerdytom.com/global-financial-markets-and-turmoil-of-2008/.


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NerdyTom. "Global Financial Markets and Turmoil of 2008." October 29, 2021. https://nerdytom.com/global-financial-markets-and-turmoil-of-2008/.

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NerdyTom. 2021. "Global Financial Markets and Turmoil of 2008." October 29, 2021. https://nerdytom.com/global-financial-markets-and-turmoil-of-2008/.

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NerdyTom. (2021) 'Global Financial Markets and Turmoil of 2008'. 29 October.

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