Introduction”In the modern era, the largest and the sharpest drop in the global economicactivities had an enormous impact on the world” (McKibbin and Stoeckel, 2009,p. 6). Despite, bringing an era of prosperity andgrowth to a sudden halt, the global financial crisis resulted in a recessionthat led to a disaster for millions of people who lost their jobs, homes, andsavings (Grant and Wilson, 2012). For example, thecollapse of a 154-year-old investment bank, the Lehman Brothers, distorted thesubprime crisis into a catastrophic global financial crisis that led to theGreat Recession (Sharma, 2014).
The GlobalFinancial Crisis raised many ethical issues surrounding the causes and responsibilitiesfor the crisis. Well-renowned corporations such as Fannie Mae and Freddie Mac,Merrill Lynch, Bank of America, Lehman Brothers, American International Group,with recognised reputations, were involved in corporate financial scandals dueto the questionable activities of some of their senior leaders (Sharma, 2014, p.1-2). The onset of the global financial crisis led management researchers’interested in the dark leadership further investigated why dark leadershiparose during the economic crisis. An example of dark leadership is the corporatepsychopath (Boddy, 2011).
These leaders are known as dark leaders that aregreedy, and through their actions, they destroy corporations. The seniorleaders involved in corporate scandals walked away with a clean conscience andhuge money. Their actions revealed that they were not concerned about thecorporate collapse which they created, not worried about those who had losttheir jobs, investments, and savings, and even do not show regrets for whatthey had done (Boddy, 2011). This paper first elucidatedthe plausible theory of the global financial crisis and the roles of the seniorleaders of the corporation in that crisis. Then, it includes the causes and theconsequences of the global financial crisis that began in 2008 and whoseeffects are still being felt. It also includes suggestions that a similarcrisis could happen again and what we should do to avoid it. Lastly, itconcludes that the global financial crisis was due to the bad managementtheories, greed, economic imbalance, housing bubble, and lax of governmentregulations.
CorporatePsychopaths Theory of GFCAccording to Boddy(2005), the term corporate psychopaths marries to the word psychopath from thepsychological literature. The author states that the term corporate denotes thearea of organisation and psychopath means those who work and operates the organisation.Robert Hare (1980), the world’s leading experts on psychopathy, said: “if hedid not look for psychopaths to study in prison, he would look for them in the stockmarket” (as cited in Boddy, 2011, para. 10).
Hare has repeatedly drawnattention that the corporate psychopaths can lead to major destruction in theorganisations. The expert commentators pointed out that the corporatepsychopaths are found in the top-level of the organisation and not at bottomlevel. Research on corporate psychopaths by Baliak, Neumann, and Hare (2010) inthe USA, and Board and Fritzon (2005) in Australia had shown that indeed,psychopaths are found at senior management levels. According to Bolmanand Deal (2015), the senior leaders do quite dump things and have narrowthinking perspective. They do not have common sense and the ability to thinkthat their actions can have dire consequences for others. Boddy (2011), statesthat “the presence of corporate psychopaths at senior levels of the organisationfavoured working with others money in the large financial organisations has createdthe Corporate Psychopath Theory of Global Financial Crisis” (p. 257).
Thechanges in organisation nature, such as rapid changes in key staff make it hardto spot the corporate psychopath because their behaviour looks invisible(Boddy, 2011). Similarly, Westerlaken and Woods (2010), mentioned that those leaders’extrovert personal charisma and charm make them appear normal and ideal leaders,so it is difficult to identify that they possess corporate psychopaths. The CorporatePsychopath Theory of Global Financial Crisis indicated that senior leaders withmost power influenced the moral climate of the organisations that resulted inthe crisis.
Corporate psychopaths arenarrow-minded people who pursue their own self-interests without anyconsideration for the corporate social responsibilities (Bakan, 2004). Inaddition, the changes in the way people acquired knowledge facilitated the riseof corporate psychopaths at senior position (Boddy, 2011). The organisationsthat collapsed had the corporate psychopaths because corporate fraud, financialmisrepresentation, greed, and unethical behaviour was revealed.
Anotherconsequence of the counter-constructive behaviour was the collapse of hugecompanies, resulting in the global financial crisis that we are now in. Causes and consequences of Global Financial CrisisMany researchers pointed out that major causes of the Global Financial Crisisare the results of global imbalances, greed, defect of free market system, andthe lack of prudent regulations and supervision. Moreover, the members ofUnited States Congress were blamed for the collapse of Fannie Mae and FreddieMac (government-sponsored enterprises), which had more than USD 5 trillion inmortgage-backed securities and debts outstanding. Despite red flag raised andwarning by some, the government allowed the corporation to increase in size andrisk and encouraged them to buy lower credit quality loans (Sharma, 2014). Accordingto Howard (2010), in the 2008 crisis, there waslax in the government regulation of sub-prime mortgage and the Federal Reservefailed to step in and investigate lenders affiliated with national banks. However, Porte (2009), the President of Centre for Economic Policy Research,claimed that “global economic imbalance was the underlying causes of the crisisand not only the greed, incentive problems and weak regulation” (p. 2).
Hestated that the global imbalance led to an increase in dispersion in thecurrent account and placed pressure on the intermediation. In addition, the capitalflowed from developing countries to developed countries, resulted in a surplusin the current account for developing countries and increased deficits incurrent accounts of developed countries (Porte, 2009). For example, “in 2008,the United States current account showed a deficit of USD 600 billion, while onthe other hand, China, a developing country’s current account had a surplus of$900 billion” (Tricker, 2015, p. 17).
Moreover, the financial ecosystems aremade by interdependence between developing as well as developed countries, andif there was a problem with one economy, the whole system collapsed rapidly. McKibbin& Stoeckel (2009), stated that the United States is the epicentre of the globalfinancial crisis because of the housing bubble, sub-prime market, and lax lendingstandards. In early 2000’s, interest rates were low, and the households consideredhousing as a new investment. “During the period 1996 to 2006, the housing pricesin the United States increased by 134%, while in the United Kingdom it increasedby 150%” (Allen, 2013, p. 68). The housing boom was also noticed in othercountries. Economic theory assumes when the price of good increases, the demanddecreases for that good, however, the housing bubble case was different.
In thehousing bubble market, as the price of houses increases, the demand also increasesbecause the households assume the price of houses will continue to grow(Tricker, 2015). However, in 2007 the price of houses dropped which resulted inthe negative equity in the accounts of the homeowners. The mortgage loan was greaterthan the value of their homes and households default payments. Foreclosuresescalated, driving the house prices down further (Howard, 2010). This resultedin bankruptcy and collapse of many banks and the financial institutions, whichfurther led to the global financial crisis. Furthermore,Hull (2014), believes securitisation of asset opens the new source of fundingfor banks and credit risk bear for the investors. The sub-prime loan was commonin banking sector that gave the loans to people with bad credit history.
The interest rates on sub-prime loans werehigher than the prime loans and the banks and mortgage brokers do not careabout it due to securitisation of these bad loans. Lenders were only motivatedby profits and they pass the loan as well as the credit risks to the investors.However, the problem grew significantly, as the bank who gave the sub-primeloan, invested in the Asset Based Securitisation and Collateralised Debt Obligationmarket (Tricker, 2015). Accordingto Grant and Wilson (2012), the institutions involved in securitisationactivities had shadow banking practice such as the mark to market and off-balancesheet. Altunbas, Kara, and Ozkan (2014) emphasised that during the crisis thesecuritisation market collapsed catastrophically after mortgage-relatedinstruments experienced severe credit quality deterioration.
As such, theinstitutional investors had lodged and won the cases against banks and mortgagebrokers. For example, in the “United States, the JP Morgan and Bank of Americahad to pay USD 4.4 and 9.1 billion, respectively, to settle the court caseswith intuition investors” (Altunbas, Kara, and Ozkan, 2014, p. 4). Similarly,the US Federal Housing Finance Agency had to pay USD 16.5 billion to 18institutional investors in violation of securities law and fraud (Altunbas,Kara, and Ozkan, 2014). Therefore, the financial contagion of the crisis was sofast and from the housing market of the United States, it went to the realeconomy all over the world (Grant and Wilson, 2012).
Now in the followingsection will discuss whether the similar events could be expected again and howwe can avoid another catastrophe. Could we expect similar crisis soon?Today,the world is becoming unsustainable because the corporations have becomeworld’s dominant institutions and it governs our life (Bakan, 2004). I think wecould expect similar or even worse crisis very soon. The corporations havefailed to solve, and even worst, some of the world’s direst problems such aspoverty, environmental destruction, war, ill-health and much more. Moreover, the corporations have become ambiguous,complex, deceptive, and surprising (Bolman and Deal, 2015). Firstly,the reason for future catastrophe is due to the failure of educators to teach,encourage and develop future leaders to acquire a proper understanding ofcomplex issues. Recently, some of the Universities have holistic education, butmostly more emphasis still focuses on scientific methodology (Bolman &Deal, 2015).
Scientific methodologies arebased on objectivity and ignore the subjective matters and perhaps the studentsare not fully equipped to face the challenges of this complex and ambiguousworld. Today, most of the business decisions are made on “gut feel”, which theleaders are not taught at Universities because it lacks the brutal clarity (Kelly& Morse, 2000). Boehnert (2015), also mentioned that the root of the economiccrisis is epistemological, which I agree with her.
The executives of highprofile corporate collapse in America possess a Masters of BusinessAdministration qualifications from top-ranked business schools and have anarrow perspective in the business decision making (Howard, 2010). This showsthe business school is teaching economic theory and not ecological literacy. Asa result, these executives have a narrow perspective in their decision modelsand are too focused on maximising the profit. As a result, they tend to practiceimmorality and unethical behaviour that causes harm to themselves, people and theenvironment (Boehnert, 2015). Secondly,I think the economic and financial instability can happen again because thecapitalist system has made people too greedy and selfish and most of thecorporate collapse anywhere in the world are the results of unethical behaviourof the leaders. Gordon Gekko “greed is good” factor overrode the usualprinciples of deferred consumption and prudence (Howard 2010, p.
203). Further,the human greed is present everywhere and this could lead to another crisissoon. For example, in the New Zealand housing market, some people own manyhouses and they keep on bidding a higher price. This shows the exploitation ofthe first home buyers who cannot afford to purchase a house. Besides, thehousing bubble is still observed today where we can see that the price ofhouses is increasing and so does the demand for houses because buyers assumethat the price of the house will further increase.
Eventually, after some timethe housing bubble will reach its peak and then burst, turning into thefinancial instability in the market. Anotherreason we can expect crisis is that the world is becoming digital and many ofthe businesses are online. The closure or automation in many shops has createdunemployment to many people who now rely on government social benefits. Thegovernment is not able to get enough tax revenue due to the closure of manybusinesses and their expense increased. Thus, they tend to borrow and thisleads to an increase in their debts, which results in a deficit in the accountof the economy. Besides,the growth of global debt continues unabatedly, and many countries’ debts haveincreased in recent years including the United States.
According to Amerman (2017), “the UnitedNations national debt is currently about USD 20 trillion, and the Federalgovernment is paying some of the lowest interest rate in the history on thatdebt” (p. 1). The buyers (individuals, companies, and foreign governments) owntwo-thirds of those debts (U.S Treasury bill, notes and bonds) and one-thirdare the intragovernmental debts (Amadeo , 2017). Although, after the 2008financial crisis, the Congress passed Dodd-Frank Wall Street Reform Act toreduce bank size and risk, the banks keep getting bigger and even trying to getrid of this regulation. This show there could be a financial crisis in theUnited States and the whole world will suffer again (Amadeo, 2017).
Furthermore,there is speculation on the war between America and North Korea and if thisbuilds into war, then it will have a severe impact on the whole world. TheCapital Economists, Gareth Leather and Krystal Tan argued that if there is war,then the consequences would be devastating and the United States debt willskyrocket. This will have an impact on the global economic growth, globalsupply chain, global inflation, and massive loss of life (as cited inTikhonova, 2017). How can we avoid this catastrophe?Therefore,to avoid the global economic and financial instability from happening again,people and nations should work together in various ways to solve this problem.In my opinion, I think there is a need for a paradigm shift in the Universityeducation system. That is, all Universities should offer a holistic educationnot only in business school but also in other disciplines. Howard (2010),argues that “by training tomorrow’s leaders to manage the risks of thefinancial system effectively and ethically, we’ll have a fighting chance ofsurviving even the largest crisis” (p. 193).
Indeed, the students will be ourfuture leaders and it is the responsibility of the educators to teach themecological approach so that the students have developed critical thinking andmake wise decisions that could be beneficial to the society and help us avoidanother catastrophe. In addition to this, the ethical values should also betaught in schools and Universities. Many corporate collapses had been theresults of unethical behaviour of the senior leaders, so if the future leadersare aware of the ethical behaviour, they can adapt ethical approach towardsolving business problems. They can be aware that the greed is not good and itcan ruin the business, society and their life. Thus, with holistic education, thefuture leaders will develop their self-confidence, wit, courage, and have scepticalmind that can demand change in the corporation behaviour so that there is noexploitation of people and the environment. Additionally,I think there is a need for transformation of corporate culture to includecorporate social responsibilities. The senior management should not only focuson shareholder value, but also consider stakeholder perspective. I understand thechanging corporate culture is a messy and challenging since there will beresistance from some people.
Thus, the management should communicate well withall the level of the organisation so that everyone in the organisation canrealise and recognise the importance of new culture and they could becooperative. This way the corporation can profit and be beneficial to theiremployees, community, and environment. Furthermore,the public awareness of global catastrophe required so that they can raisetheir voice against any corruptions by the government or the corporations.
Themedia should inform and educate public about the awareness of the crisis andany misdeeds by the corporation. The public can punish those corporations thatharm our society and environment by not associating with those corporations. Inaddition, many people are the shareholders of the corporation so with theirvoting rights, they can demand corporation to consider sustainable developmentrather than just economic values. Furthermore, public as households should notinvolve in the mortgage when there is a housing bubble because if the housingbubble burst, the households could lose all their savings and property. It isbetter to have savings in the form of precious gold metals rather thaninvesting all their money in the stock market.
If the stock market crash, youwill lose your paper money, but gold is a safe haven asset. Ofcourse, the tied regulation required on the corporate governance andaccountability so that we can make our world sustainable and avoid any furtherglobal crisis. At present, the legislation and regulations do not havesustainability development, but some corporations do voluntary sustainablereporting which remains a cause for concern. Boehnert (2015), also mentionedthat “in 2010 Sustainable Development Commission, the only independentenvironmental watchdog and advisory body, was abolished” (p.
5). In addition, thereshould be a tied monetary policy so that banks should not recklessly trade andincrease risk. Thegovernment should efficiently redistribute the income to reduce the debts of aneconomy. The global financial crisis increased the income inequality where therich got richer and the poor became poorer.
Thus, the government shouldintervene and reduce the income gap through tax and benefits system. That is,they should employ a progressive tax system where the high-income earners andcorporations should be taxed at higher rates and then redistribute the welfarebenefits to the lower income earners. In addition to this, the governmentshould have a good relationship with other nations and help those in need. Theyshould communicate with other nations and solve their difference, particularly theU.
S and North Korea. ConclusionThe GlobalFinancial Crisis (GFC) has been the most severe international economic crisissince the Great Depression. However, there weremany factors that cause the 2008 global financial crisis, but I have onlymentioned the major factors such as global imbalance, bad management theory,greed, housing bubble, subprime loans, securitisation, and lax in governmentregulation. Moreover, in my opinion, we can expect similar crisis soonbecause the debts of nations are increasing rapidly, there is house bubble, laxin monetary policies, speculation of war between America and North Korea,scientific approach is given importance in education systems, and greed presenteverywhere. Therefore, the whole system needs a paradigm shift. The sustainabledevelopment is required and not maximise shareholder value.
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