Financial Crisis

The latest world(prenominal) fiscal crisis was exploded in 2008. This was the most life-threatening fiscal crisis since the stinting depression which occurred in sass and it severely impacted the spheric pecuniary securities industry. Lots of corpoproportionns collapsed during the 2008 monetary era bulge which was puddled by breakage of groovy chain. Although ab turn out companies did not bankrupt during t assume period, they as well as had suffered great divergence. The 2008 spheric pecuniary crisis began from America. Ameri green goddess pecuniary crisis came from the prosperity of real estate.Before the 2008 planetary monetary crisis, a grown drinking chocolate of pecuniary derivatives were generated and monetary bubble became to a greater extent(prenominal)(prenominal) and more effective. Finally, Ameri laughingstock sub- overage crisis occurred which leaded to a large number of bank failure. This paper willing analyze the reason of Ameri muckle su b- run aground crisis and indicate the relevancy among shallows article, federal chest of drawers system and the 2008 global pecuniary crisis. This sample will argue that execution surmisal contributes to the 2008 global monetary corner. 2 check into of the literature 2. confidence opening Agency possibility has exposit a family between principals and agents. It in any case an solve this family relationship through a contract that sensation or more persons (the principal(s)) engage approximately former(a) person (the agent) to perform well-nigh helper on their behalf which involves delegating almost purpose making authority to the agent denser and Neckline, 1976308, citied in Lehman and Continue, 2013). 2. 2 Bad possibility and humans morality and ethical code After the collapse of Enron, Shoal (2005) potently argues that job tutor does not need to do oodles of things.In contrast, they except need to terminate some old courses which they be inst illing for their students. The reason is that the ascendent of the fares in coun mete outing practices shadower be found in the theories of management. Additionally, management practices which argon condemned argon enhanced by these theories and ideas (Shoal, 2005 75). Moreover, argumentation school brooknot address the issues of moral and ethic. Clansman, policy change and Heckler (1998 77, citied in Shoal, 2005) claim that management studies is regarded as a branch of the amicable acquirements.Namely, the issues of worry studies do-nothing be study and resolved in rule of cordial acquirements. However, Ghosted (2005 77) sozzledly argues that people use scientific focal point o explore regulation so that they draw ignored the moral and morality of humans. Because at that place atomic number 18 some cardinal basic diversities between physical sciences and business studies, some theories of physical sciences be not suitable for business studies. Furthermore, t he parts of business studies which argon related to physical (2005), steady though scientific methods (p. 7) exerts some validatory influences, the cost is expensive. Therefore, this approach denies the subjective green light of human. In addition, humans morality and ethic which are neglected by individuals are inevitable in human intentionality. Jensen and Michelin (1976, cited in Shoal, 2005 75) assert that an idea which mangers push asidenot be trusted was taught to their students in business school. As a result, when these students graduate, they plainly trust their leaders and do not realize that they should strictly maintain in the flesh(predicate) integrity.Additionally, level though Friedman (1953, citied in Shoal, 2005) ac liveledges that the profession of agents is to maximize the clear of shareholders, Shoal discounts this determine and argues that compared with finding a spick-and-span theorize by employees, it is easier that shareholder hobo sell their p otty (Shoal, 2005). Furthermore, shareholder take to be minimisation is the fundamental of the situation theory. However, Shoal (2005 81) strongly asserts that they are not relevant and points out that these research and analyses are built on incorrect assumption, which meaner they are kafkaesque.Moreover, Chicago Agenda ingrained emphasis laws and rules and against human intentionality and indicates that ethic and ethics which are only relevant with persons tooshie be removed from social science (Shoal, 2005). Nevertheless, Shoal disagrees this view and approves of the stewardship theory, because it can efficaciously give understandation to he profit of customers, employees, shareholders and their communities (Davis, Chairman and Donaldson, 1997, citied in Shoal, 2005 81). 2. 3 scope of monetary crisis The 2008 global financial recession has been described a once in a century impute tsunami (Earl, 2009 785).This is a disastrous blow to global financial community. Ballard (et al, 2009, citied in Huh et at, 2012) points out that many economists regarded the global financial crisis as the most flagitious global finance disaster since sass. Compared with only 11 banks was bankruptcy during 2003 to 2007, at least 160 American banks went broke in 2008 and 2009 (Fide, 2011, citied in Huh et al, 2012). From this statistics, it is not difficult to know how strong influence brought by this financial crisis. There is a close combine between the 2008 global financial crisis and sub- set of life crisis.Bernard (2007, citied in Hellenize and Chaos, 2012) asserts that sub- efflorescence mortgages are loans made to borrowers who are perceived to commence a high credit risk, often because they lack a strong credit history or keep other characteristics that are associated with high probabilities of indifference. Furthermore, during 1990 to 2000, cause of the IT bubble economy, the American government took some steps to pr even sot sparing downturn, much(pren ominal) as reducing delight rate, acidulous tax, decreasing the cost of sub-prime etc.Even though there were high(prenominal) risks that some of sub- prime borrowers cannot devolve bullion punctually, the sub-prime mortgage had drive an super phenomenon in that period, because this kind of debits can institute more return due to the higher hobby rate. In addition, secondary grocery store had Thus mortgagor can easier gain mortgage credit, no matter he or she is the sub- prime borrowers or prime borrowers. As a result, sub-prime mortgage market had developed rapidly.Furthermore, a large section of American best-loved to buy a field in installment mean before the 2008 global financial crisis and some of them were sub-prime borrowers. Basic and Chine (1996, citied in alteration and Chine, 2013 14) claim that people need more than enough fortune to certify their social status. This is wherefore lots of American purchased a house in installment plan. Because of the highe r interest rate, local banks were pleasured to borrow currency to these sub- prime borrowers. Goodhearted (2007) claims that in order to assess the default risk, here is no experience that the hurt of house has reduced in the whole of America.However, the expense of house started to fall from the end of 2006 in lots of areas of America (Goodhearted, 2007). Because the rate of mortgage is less than the debts and the growing interest rate, increasingly sub-prime borrowers gave up re buckle undering currency to banks. Consequently, even though lenders had sold these mortgages, it cannot cover the loss. In other words, the income gained by selling houses was not enough to offset the measure outs of the credit and interest. As a result, these banks were suffering serious loss and some of them had to close down. 4 The join between Shoal article, agency theory and financial crisis In recent years, agency theory is widely used in lots of corporation and regarded it as the fundamental theory of corporate governance. Agency theory has contend an heavy role in handed-down control systems. Moreover, in this theory, shareholders use the method of supervision and reward to control mangers and employees. It is the arse of agency theory to maximize the protect of shareholders. Principals need to supervise agents whether they heighten on shareholder interest when they are operating a corporation.However, Shoal (2005) strongly points out hat this theory does not improve the companys performance, because it is analyse by physical science and indeed neglect the moral and ethic of human. Because the contrastive perspectives between shareholders and agents, they can make the various(a) terminations. Thus some primary issues should be focused on in agency theory. Firstly, because of the diverse goals between principals and agents, how to align them has become difficult (Lehman and Continue, 2013 1). Secondly, how to guarantee agents carry out fit to principals id eas. Lehman and Continue, 2013). Shareholders are interested in semipermanent strategies which can backable evolve their corporations. In other words, in semipermanent strategies, shareholders value, such as stock footing and dividends, can be maximized (Klein, 2009). In contrast, agents focus on miserable-term strategies so that they reject long-term strategies. In this way, they not only can efficaciously avoid unpredictable parking brake which usually occur in long-term strategies, but also can strike profit in a pathetic time. It is why leaders Just give way attention to currently profit and eclipse long-term development.For example, they whitethorn use lowly raw material to manufacture (Lehman and Continue, 2013 1). As a result, current margin can amplify however, they engender overlooked some more corporation. Obviously, the loss of long-term cannot be estimated. This is sympathetic as the sub-prime mortgage. Lenders prefer to lend currency to sub-prime borrowe rs, because of the higher interest rate. They can store more properties in a short time. In addition, if the housing scathe is higher than the price of mortgages, borrowers will try their go around to repay the debt, because they do not indigence to lose their house.To assume, if a mortgagor cannot well timed(p) repay, house, as a mortgage, will go bad to the bank. Namely, when the bank sale this house, it can narrow extra property immediately. In this case, bestow currency to borrowers, even though they are sub-prime borrowers, it is hardly to get damage to lenders. However, loaners set out only noticed the short-term profit, therefore, they loaned mortgage to sub-prime borrowers instead of prime borrowers however, they had neglected sustainable development, specially when the price of house dramatically declined.In fact, when the housing price decreased, some borrowers favored to give up the mortgage to lenders, especially the value of house is lower than the loans (Kl ein, 2009). In other words, banks only can grow these mortgages instead of the loans. As a result, colossal loss derived these banks collapse. Furthermore, mortgage lender also can resell theses mortgage to enthronisation bank. However, some of them had haze overd some information in order to a higher price (Klein, 2009). In this way, some drawback of mortgage cannot be known by a new buyer.What is worse, these shortcomings whitethorn be modified to become some advantages to attract others. This fraud and lemonlike practice had continuing occurred. Namely, there are increasingly investing companies were involved in this event. Nevertheless, because the housing price decreased, these mortgages had devalued, which caused a serious debt crisis. Shoal (2005) points out that business school should open some ethic courses to teach their students more accountable. Obviously, he has predicted this perspective.Initially, if lenders do not only pay attention to short-time strategies, the y did not only pursue the minimization of value in a short time and preferred to lend currency to prime borrowers rather than sub-prime borrowers. Even though the price of house decreased, borrowers are bound to consider their reedit, because they do not want to be classified in sub-prime borrowers. Additionally, they had stable Jobs to reassure the possible of repayment. Namely, banks whitethorn not systematically suffer such a gigantic blow.Furthermore, in order to earn greater profit, some agents had lent more than 20 times cash than the value the companys trade protection assets. Was (2010) convincingly points out that highly leveraged balance existed in some financial institutions. For example, investment banks liabilities-to-assets ratio was 0. 96 at the end of 2006 (Was, 2010). In other words, the majority of assert was borrowed. Even though these agents used insurance to communicate risk, blind pursuit of interests had brought some commodious hazard. Sometimes, if an a gent is indeed regarded as a selfish man, it will damage the do good of his or her corporation.Even though it may be reasonable that agent should some implicit in(p) differences between physical science and business studies. In other words, some theories which are correct in physical science cannot be reasonably used in business studies. Eisenhower (1989, citied in Lehman and Continue, 2013 1) points out that it is a significant issue that if an agent makes a decision, it will be fisticuff for principals to check whether this decision is beneficial for the company, such as creative accounting which is seriously harmful the profit of corporation.Furthermore, managers may not want to spend capital on long-term research and development, because it can compress the short-term interest (Lehman and Continue, 2013 2). Therefore, even though it seems exact that mangers should maximize the value of shareholders, Shoal discounts this view. He (200581) convincingly argues that this is the unrealistic assumptions and humans moral and ethic have been overlooked in this theory. In fact, shareholders and agents have the diverse goals, which meaner that shareholders are interested in long-term strategy oppositely, agents prefer to focus on the short-term strategy.Because of the unrealistic assumptions, agency jobs which contribute to the 2008 global financial crisis are ignored. 3 Implication in article 3. 1 Stewardship can remit financial crisis In Shoals article, he argues that stewardship theory which can be alliterative to flip-flop the agency theory can remit the problem between principals and agents (Shoal, 2005). Stewardship theory does not embolden face-to-face interest, but the elective profit. In this theory, collective profit is higher than the personal benefit.Hernandez (2008) points out that agents and shareholders benefit can be aligned in stewardship theory. Responsibility and psychological ownership are combined with the profit of shareholders (Block, 1996 Davis, Chairman, and Donaldson 1997 citied in Spheres et al, 20122). In other words, they have become a collective and the interests of collective have intimately linked with personal profits. According to Hernandez (2008), employees can feel more responsible and effectuate their obligations in stewardship theory.Because the interest has become consistent, the at odds(p) goals may not exist. Compared with agency theory which monitoring is necessary between shareholders and agents, shareholders and supply can cooperate in a harmonious environment. Furthermore, stewardship is also beneficial for realizing the interactions between sales personnel and consumers (De Router, De Gong and Wetness 2009 Hernandez, 2008, citied in Spheres et al, 2012). Therefore, it is good for a corporation to pay attention to customers, staff and shareholders simultaneously.Take sub-prime crisis makes an assumption, if the majority of corporation judge he stewardship theory instead of the agency th eory before the 2008 global financial crisis, the credit tsunami might not occur or it was not as heavy as this. Interest among agents, shareholders and customers are tightly relevant. In other words, agents and shareholders may not only focus on the short-term profit and ignore long- place. Therefore, they may prefer to lend currency for prime borrowers while limit the amount of loans which is loaned to sub-prime borrowers.In addition, when lenders resell their mortgage, they may not deliberately hide weak information and ay not qualify shortcomings in order to resell a higher price. Even though the agency theory has been extensively used in the world, Shoal has realized the drawback of it and try to replace it. The agency theory has contributed to the 2008 global financial crisis to a large degree. Namely, Shoal has forecasted the issue which has widely existed in the majority of companies. Furthermore, the stewardship theory advocated by Shoal can effectively remit the problems between shareholders and agents.It also can decrease the harm brought by financial crisis to some extent. 4 practice relevance 4. The power of government While it can effectively decrease the probability of financial crisis that using the stewardship theory replaces the agency theory, it is not enough. Therefore, the power of government cannot be overlooked. Because it can cause frugal bubble that a government continually slash interest rates or dramatically reduce interest rates. However, American government had incessantly reduced the interest rate xiii times from 2001 to 2003.As a result, it caused the boom of American real estate. In addition, the application setting of sub-prime mortgage had decreased. A large umber of people preferred to purchase a house in installment plan, which caused the 2008 global financial crisis. Therefore, except for the stewardship theory, government also should pay attention to the frequency and the flow of decreasing rate. Excessively fast dec line the interest rate or outsize decrease them may cause economic bubble, which can harm for the domestic financial market.What is worse, it can lead to global economic crisis. Thus improper regulations may validatory lead to financial crisis. In addition, it is important that government should limit the rate of the sub-prime mortgage in any investment bank. Klein (2009) points out that regulation which can defend financial marker should be built by government. In other words, reasonable legislative can effectively prevent financial crisis. Consequently, the effect of government cannot be ignored. It also can effectually protect financial market and prevent huge loss.While the preponderant economic system is free marker, political macro-control, which is beneficial to the current economic system, is inevitable. 5 Conclusion Agency theory has described the relationship between principals and agents. Even Hough the universe of the agency theory is to maximize the value of shareho lder, Shoal (2005 81) convincingly points out that it is falsely built on an unrealistic crisis. Because sub-prime borrowers have the lower credit and lower repayment ability, when the value of mortgage was less than the loan, they preferred to give up repaying the debt.As a result, sub-prime lenders had to sustain the huge loss. However, agents only focused on the short-term profit. They preferred to loan currency to sub-prime borrowers. Therefore, borrowing currency to sub-prime borrowers had become a common phenomenon in that period. Even though Shoals article was published before the worldwide financial crisis, he was still advised of the problems of agency theory in economic system. While agency theory is accepted by the majority of corporations, it still has some serious problems.