Effects of the Global Financial Crisis

Effects of the Global Financial Crisis

The magnitude of the problems due to the global financial crisis of 2008 had been so serious that some of the world's largest financial institutions had collapsed. Others have been bought at low prices by their competitors and, in other cases, the governments of the richest countries in the world have used extensive bail-out and rescue plans for the large banks and other financial institutions. Some Governments had taken steps to make it more difficult to manipulate markets by shorting the stocks during the financial crisis, preventing them from aggravating an already difficult situation.

$14.5 trillion, or 33 per cent of the value of global enterprises was completely depleted by this crisis. Many companies were taken over or merged with other institutions, many were nationalized by government banks or central banks while many others liquidated. Lehman Brothers, Washington Mutual, General Motors, CIT Group, Chrysler, Thornburg Mortgage, General Growth Properties, Lyondell Chemical, Colonial BancGroup, Capmark Financial Group, Ambac Financial Group, Guaranty Financial Group, BankUnited Financial, Charter Communications, Tribune Company etc. are some of the examples.

For some companies, such as Lehman Brothers, a Chapter 11 bankruptcy is fatal. Their valuable assets are sold off and the decomposing carcass is left to a custodian. For others, such as General Motors or CIT Group, bankruptcy is more akin to a car wash, it is an opportunity to get rid of the filth and grime of toxic assets and to emerge as before for another chance in the life of the company.

There seems to be little sympathy-and even a growing resentment-towards the financial sector workers, because they are considered to have played with the money of others, and thus their lives, while obtaining large premiums and increases in salary for it in the past. Although in gross dollar terms the huge wage increases and bonuses are minimal compared to the magnitude of the problem, this has aroused the anger of many people, because of what it encouraged in the pas as well as the type of culture it creates. Wall Street's pay system lavishly rewards the appearance of profit, even if that appearance proved to be an illusion. At the most brutal level, the ill-gotten gains of Wall Street have corrupted and continue to corrupt politics, in a very bipartisan way.

Paul Krugman, winner of the Nobel Prize in Economics, speaking about the $50 billion fraud of Bernard Madoff, notes that a large part of the financial services sector has also been corrupted in similar fashion.

Former chief economist of the IMF (and recently appointed economic adviser to the Indian Prime Minister), Raghuram Rajan wrote a paper back in 2005, fearing that financial development in its current form would be risky. One of the main reasons was the incentive/compensation mechanisms for investment managers, which not only rewarded risky behaviors, but perhaps encourages them. (He also feared that this form of financial capitalism could have serious negative effects as well as the positive effects observed at the time, it was of course ignored and somewhat ridiculed at the time because it was at the peak of the rise of economy.)