The United States has been plunged in a very acute financial meltdown since the fall of 2008. Discussions on the causes have had more than their fair share of coverage in the local and international media
There seems to be some consensus around the country amongst informed observers that one of the major causes of the problem was the predatory lending practices of the past several years. During this period, the Bush Administration actively encouraged middle class Americans to own homes. Fannie Mae and Freddie Mac were encouraged to purchase huge quantities of mortgages from lenders who gave them out with little regard for the repayment prospects of the borrowers. Housing prizes soared during this period and homeowners used their homes to borrow lines of equity hoping the value of their homes would appreciate.
Then came the summer of 2007, when banks and other mortgage lenders began noticing that many people who had received loans could not make their payments. Foreclosures skyrocketed across the country and consumer spending came to a standstill.
The second part of the problem has more to do with core of the financial service companies. Because of the very light regulation of the sector and the millions of new mortgages being generated daily, they began looking for ways to make a quick buck. They created very complex investment instruments, some so complex they themselves could not control. One of such instruments is the mortgage-backed securities. These were bundled up and sold to unsuspecting investors only for them to find out years later that these securities were so complex that no one really knew how much they were worth.
Both issues combined have had two very devastating effects. First, the credit market is clogged, and banks have tightened their lending criteria. Secondly, stock prices of almost all US businesses have fallen, some as much as 90%, driving them out of business and into bankruptcy. Unemployment is at an all-time high and this period is being compared to the Great Depression era of 1929.
Because the US economy drives global business, this crisis was reverberated all over the world. Europe, Asia and South America are now experiencing similar troubles and there’s beginning to be a concerted effort to stop the downward spiral.
There are three observations I can make of the situation;
From a Managerial Accounting point of view, there seems to have been an over-emphasis on profits by all businesses so much so that they lost sight of the big picture. They failed to do strategic planning for their businesses. Instead, they became greedy and concentrated on accumulating huge profits and bonuses. This resulted in unethical behavior and other malpractices on the part of lower, middle, and upper management.
Secondly, because of this overemphasis on profits, and bonuses, the shareholders were not protected. I believe the biggest losers of this crisis are the shareholders who have seen their money disappear before their very own eyes. Companies like Lehmann Brothers, Circuit City, or Linens N’ Things just to name a few have gone bankrupt and shareholders have seen their life savings wiped out. I think this is a very serious ethical concern. Business managers should know that shareholders have trusted them with their hard-earned money and they are responsible to make sure that money produces profits. It is unacceptable that a retired person invests their entire retirement fund with a company like Lehmann brothers, only to find out in September of 2008 that the company is filling for bankruptcy and its assets are being auctioned
Finally, I think the government missed the ball on this particular crisis. The financial service companies were pretty much left to themselves in the name of free market. Everyone, including hard-line free-market proponents like Larry Kudlow of CNBC now agree that the government could have done a better job of regulating the sector. The hands-off approach has clearly brought us disaster and I hope we learn from it
The new administration seems to have gotten the message that free market capitalism doesn’t mean the government should be absent from the picture. Rather, it means the market needs strong and powerful government entities keeping watch over the activities, and safeguarding the interests of the shareholders. President Obama announced a major overhaul of the US financial services industry in the coming days. I hope the outcome of such an endeavor will be strong and relevant enough to insulate average Americans from the devastating effects of any future crisis.
In addition, I believe that the massive American Recovery and Re-investment Act recently passed by Congress and signed into Law by the President will go a long way to get the US economy back on track. The tax cuts to low income Americans and small businesses, as well as increases in federal spending should stop the monthly increase in unemployed Americans. The billions of dollars in direct aid to States should also serve as a lifeline for them to keep basic social services running until the economy recovers.
To avoid such a recession/depression/financial meltdown from happening again, we as Americans must accept our own part of the blame. We were spending more than we earned and bought things we could not afford. This should be an opportunity to reset the clock to zero and start a new journey to a different kind of American Dream where businesses do not chase profits to the detriment of the shareholders and consumers do not demand excessive dividends on investments.
The world is watching to see how we recover from this crisis and as President Obama said in his address to Congress on February 24, 2009, the world is waiting for the US to lead again and this begins with the way in which he rebound from the crisis.
There seems to be some consensus around the country amongst informed observers that one of the major causes of the problem was the predatory lending practices of the past several years. During this period, the Bush Administration actively encouraged middle class Americans to own homes. Fannie Mae and Freddie Mac were encouraged to purchase huge quantities of mortgages from lenders who gave them out with little regard for the repayment prospects of the borrowers. Housing prizes soared during this period and homeowners used their homes to borrow lines of equity hoping the value of their homes would appreciate.
Then came the summer of 2007, when banks and other mortgage lenders began noticing that many people who had received loans could not make their payments. Foreclosures skyrocketed across the country and consumer spending came to a standstill.
The second part of the problem has more to do with core of the financial service companies. Because of the very light regulation of the sector and the millions of new mortgages being generated daily, they began looking for ways to make a quick buck. They created very complex investment instruments, some so complex they themselves could not control. One of such instruments is the mortgage-backed securities. These were bundled up and sold to unsuspecting investors only for them to find out years later that these securities were so complex that no one really knew how much they were worth.
Both issues combined have had two very devastating effects. First, the credit market is clogged, and banks have tightened their lending criteria. Secondly, stock prices of almost all US businesses have fallen, some as much as 90%, driving them out of business and into bankruptcy. Unemployment is at an all-time high and this period is being compared to the Great Depression era of 1929.
Because the US economy drives global business, this crisis was reverberated all over the world. Europe, Asia and South America are now experiencing similar troubles and there’s beginning to be a concerted effort to stop the downward spiral.
There are three observations I can make of the situation;
From a Managerial Accounting point of view, there seems to have been an over-emphasis on profits by all businesses so much so that they lost sight of the big picture. They failed to do strategic planning for their businesses. Instead, they became greedy and concentrated on accumulating huge profits and bonuses. This resulted in unethical behavior and other malpractices on the part of lower, middle, and upper management.
Secondly, because of this overemphasis on profits, and bonuses, the shareholders were not protected. I believe the biggest losers of this crisis are the shareholders who have seen their money disappear before their very own eyes. Companies like Lehmann Brothers, Circuit City, or Linens N’ Things just to name a few have gone bankrupt and shareholders have seen their life savings wiped out. I think this is a very serious ethical concern. Business managers should know that shareholders have trusted them with their hard-earned money and they are responsible to make sure that money produces profits. It is unacceptable that a retired person invests their entire retirement fund with a company like Lehmann brothers, only to find out in September of 2008 that the company is filling for bankruptcy and its assets are being auctioned
Finally, I think the government missed the ball on this particular crisis. The financial service companies were pretty much left to themselves in the name of free market. Everyone, including hard-line free-market proponents like Larry Kudlow of CNBC now agree that the government could have done a better job of regulating the sector. The hands-off approach has clearly brought us disaster and I hope we learn from it
The new administration seems to have gotten the message that free market capitalism doesn’t mean the government should be absent from the picture. Rather, it means the market needs strong and powerful government entities keeping watch over the activities, and safeguarding the interests of the shareholders. President Obama announced a major overhaul of the US financial services industry in the coming days. I hope the outcome of such an endeavor will be strong and relevant enough to insulate average Americans from the devastating effects of any future crisis.
In addition, I believe that the massive American Recovery and Re-investment Act recently passed by Congress and signed into Law by the President will go a long way to get the US economy back on track. The tax cuts to low income Americans and small businesses, as well as increases in federal spending should stop the monthly increase in unemployed Americans. The billions of dollars in direct aid to States should also serve as a lifeline for them to keep basic social services running until the economy recovers.
To avoid such a recession/depression/financial meltdown from happening again, we as Americans must accept our own part of the blame. We were spending more than we earned and bought things we could not afford. This should be an opportunity to reset the clock to zero and start a new journey to a different kind of American Dream where businesses do not chase profits to the detriment of the shareholders and consumers do not demand excessive dividends on investments.
The world is watching to see how we recover from this crisis and as President Obama said in his address to Congress on February 24, 2009, the world is waiting for the US to lead again and this begins with the way in which he rebound from the crisis.
