Financial Crisis

The latest global pecuniary crisis was exploded in 2008. This was the close serious financial crisis since the stinting depression which occurred in sass and it severely impacted the global financial food market. Lots of corporations collapsed during the 2008 financial nook which was caused by severance of capital chain. Although virtually companies did not bankrupt during that period, they equally had suffered huge loss. The 2008 global financial crisis began from America. Ameri basis financial crisis came from the prosperity of real estate.Before the 2008 global financial crisis, a large hot chocolate of financial derivatives were generated and financial bubble became more and more serious. Finally, Ameri can buoy sub-prime crisis occurred which leaded to a large number of bank failure. This paper lead analyze the cause of American sub- prime crisis and indicate the relevance between modifys article, delegation speculation and the 2008 global financial crisis. This e ssay will argue that operation theory contributes to the 2008 global financial recession. 2 Review of the literature 2. performance theory Agency theory has described a relationship between principals and agents. It also an solve this relationship through a contract that one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent denser and Neckline, 1976308, citied in Lehman and Continue, 2013). 2. 2 Bad theory and serviceman morality and ethic After the collapse of Enron, school (2005) knock forbiddenly argues that task school does not need to do lots of things.In contrast, they Just need to terminate some old courses which they be teaching for their students. The reason is that the root of the issues in management practices can be found in the theories of management. Additionally, management practices which are condemned are enhanced by these theories and ideas (Shoal, 2005 75). Moreover, business school cannot salute the issues of moral and ethic. Clansman, Setback and Heckler (1998 77, citied in Shoal, 2005) claim that management studies is regarded as a branch of the social acquaintances.Namely, the issues of business studies can be analyzed and decide in method of social sciences. However, Ghosted (2005 77) strongly argues that people use scientific way o explore regulation so that they have ignored the moral and ethical motive of world. Because thither are some underlying basic diversities between physical sciences and business studies, some theories of physical sciences are not suitable for business studies. Furthermore, the part of business studies which are related to physical (2005), even though scientific methods (p. 7) exerts some positive influences, the cost is expensive. Therefore, this approach denies the subjective initiative 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 cannot be trusted was taught to their students in business school. As a result, when these students graduate, they but trust their leaders and do not realize that they should strictly maintain personal integrity.Additionally, evening though Friedman (1953, citied in Shoal, 2005) acknowledges that the transaction of agents is to maximize the profit of shareholders, Shoal discounts this view and argues that compared with finding a new Job by employees, it is easier that shareholder can sell their corporation (Shoal, 2005). Furthermore, shareholder take to be minimization is the fundamental of the chest theory. However, Shoal (2005 81) strongly asserts that they are not relevant and points out that these research and analyses are make on incorrect assumption, which meaner they are unrealistic.Moreover, Chicago Agenda extreme emphasis laws and rules and aga inst human intentionality and indicates that ethic and morals which are exactly relevant with persons can be removed from social science (Shoal, 2005). Nevertheless, Shoal disagrees this view and approves of the stewardship theory, because it can in effect give consideration to he profit of customers, employees, shareholders and their communities (Davis, Chairman and Donaldson, 1997, citied in Shoal, 2005 81). 2. 3 Background of financial crisis The 2008 global financial recession has been described a once in a century credit 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 some economists regarded the global financial crisis as the most serious 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 k now how strong influence brought by this financial crisis. There is a close link between the 2008 global financial crisis and sub-prime crisis.Bernard (2007, citied in Hellenize and Chaos, 2012) asserts that sub-prime owes are loans made to borrowers who are perceived to have a high credit risk, often because they lack a strong credit history or have other characteristics that are associated with high probabilities of default. Furthermore, during 1990 to 2000, cause of the IT bubble economy, the American organization took some steps to prevent economic downturn, much(prenominal) as reducing interest rate, cutting tax, decreasing the cost of sub-prime etc.Even though there were higher risks that some of sub- prime borrowers cannot repay currency punctually, the sub-prime mortgage had become an extremely phenomenon in that period, because this kind of debits can get more return due to the higher interest rate. In addition, secondary market had gum olibanum mortgagor can easier re ceive 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 portion of American preferred to buy a house in installment plan before the 2008 global financial crisis and some of them were sub-prime borrowers. Basic and Chine (1996, citied in Change and Chine, 2013 14) claim that people need more than enough fortune to certify their social status. This is why lots of American purchased a house in installment plan. Because of the higher interest rate, local banks were pleasured to borrow currency to these sub- prime borrowers. Goodhearted (2007) claims that in redact to assess the default risk, here is no experience that the legal injury of house has declined in the whole of America.However, the price of house started to fall from the end of 2006 in lots of areas of America (Goodhearted, 2007). Because the value of mortgage is less than the debts and the growing interest r ate, increasingly sub-prime borrowers gave up repaying currency to banks. Consequently, even though supplyers had sold these mortgages, it cannot cover the loss. In other words, the income gained by selling houses was not enough to offset the values of the credit and interest. As a result, these banks were suffering serious loss and some of them had to close down. 4 The link between Shoal article, representation theory and financial crisis In recent years, action theory is widely used in lots of corporation and regarded it as the fundamental theory of integrated governance. Agency theory has played an important role in traditional control systems. Moreover, in this theory, shareholders use the method of supervision and reward to control mangers and employees. It is the root of dominance theory to maximize the value of shareholders. Principals need to supervise agents whether they emphasis on shareholder interest when they are operating a corporation.However, Shoal (2005) stron gly points out hat this theory does not improve the companys performance, because it is analyzed by physical science and then neglect the moral and ethic of human. Because the different perspectives between shareholders and agents, they can make the diverse decisions. 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 thorny (Lehman and Continue, 2013 1). Secondly, how to guarantee agents carry out according to principals ideas. Lehman and Continue, 2013). Shareholders are interested in semipermanent strategies which can begetable evolve their corporations. In other words, in long-term strategies, shareholders value, such as stock price and dividends, can be maximized (Klein, 2009). In contrast, agents focus on short-term strategies so that they reject long-term strategies. In this way, they not only can effectively avoid unpredictable emergency which usually occur in lon g-term strategies, but also can get profit in a short time. It is why leaders Just pay attention to currently profit and overlook long-term development.For example, they whitethorn use inferior rude(a) material to manufacture (Lehman and Continue, 2013 1). As a result, current margin can increase however, they have overlooked some more corporation. Obviously, the loss of long-term cannot be estimated. This is similar as the sub-prime mortgage. Lenders prefer to lend currency to sub-prime borrowers, because of the higher interest rate. They can collect more properties in a short time. In addition, if the housing price is higher than the price of mortgages, borrowers will try their best to repay the debt, because they do not want to lose their house.To assume, if a mortgagor cannot timely repay, house, as a mortgage, will belong to the bank. Namely, when the bank sale this house, it can get extra property immediately. In this case, lending currency to borrowers, even though they are sub-prime borrowers, it is hardly to get damage to lenders. However, loaners have only noticed the short-term profit, therefore, they loaned mortgage to sub-prime borrowers instead of prime borrowers however, they had neglected sustainable development, especially when the price of house dramatically declined.In fact, when the housing price decreased, some borrowers preferred to give up the mortgage to lenders, especially the value of house is lower than the loans (Klein, 2009). In other words, banks only can receive these mortgages instead of the loans. As a result, huge loss derived these banks collapse. Furthermore, mortgage lender also can resell theses mortgage to enthronement bank. However, some of them had hided 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 may be modified to become some advantages to attract others. This fraud and sharp 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, they 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 sort in sub-prime borrowers. Additionally, they had stable Jobs to ensure the possible of repayment. Namely, banks may not consistently suffer such a huge blow.Furthermore, in order to earn great profit, some agents had lent more than 20 times cash than the value the companys secu rity 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 transfer risk, blind hunting of interests had brought some huge hazard. Sometimes, if an agent is indeed regarded as a selfish man, it will damage the benefit of his or her corporation.Even though it may be average that agent should some underlying 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 hold in whether this decision is beneficial for the company, such as creative accoun ting which is seriously malignful the profit of corporation.Furthermore, managers may not want to spend capital on long-term research and development, because it can reduce 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 problems which contribute to the 2008 global financial crisis are ignored. 3 Implication in article 3. 1 Stewardship can put off financial crisis In Shoals article, he argues that stewardship theory which can be alliterative to replace the agency theory can remit the problem between principals and agents (Shoal, 2005). Stewardship theory does not advocate personal 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 line up 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 fast linked with personal profits. According to Hernandez (2008), employees can feel more responsible and fulfill their obligations in stewardship theory.Because the interest has become consistent, the conflicting goals may not exist. Compared with agency theory which monitoring is necessary between shareholders and agents, shareholders and staff can cooperate in a harmonious environment. Furthermore, stewardship is also beneficial for re alizing the interactions between sales effect 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 accepted he stewardship theory instead of the agency theory 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 modify shortcomings in order to resell a higher price. Even though the agenc y 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 art object 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 economic bubble that a government continually slash interest rates or dramatically reduce interest rates. However, American government had constantly decrease the interest rate thirteen times from 2001 to 2003.As a result, it caused the boom of American real estate. In addition, the application condition 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 range of decreasing rate. Excessively fast decline the interest rate or oversize 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 indirect 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 hold dear financial market and prevent huge loss.While the dominant economic system is free marker, governmental 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 foundation of the agency theory is to maximize the value of shareholder, Shoal (2005 81) convincingly points out that it is incorrectly 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 inter national financial crisis, he was still aware 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.