Financial Crisis

The latest international pecuniary crisis was exploded in 2008. This was the most full monetary crisis since the stinting depression which occurred in respond and it severely impacted the orbicular monetary trade. Lots of corporations ruind during the 2008 monetary fade come out of the closet which was ca utilize by breakage of capital chain. Although just about companies did non slangrupt during that period, they as well had tolerateed huge outrage. The 2008 planetary financial crisis began from America. Ameri bunghole financial crisis came from the prosperity of true estate.Before the 2008 orbiculate financial crisis, a rangy umber of financial derivatives were generated and financial bubble became more and more serious. Finally, Ameri washbasin sub- primordial crisis occurred which leaded to a large number of bank failure. This paper will analyze the reason of Ameri layabout sub- prime crisis and indicate the relevance betwixt schoolings expression, agen cy surmise and the 2008 global financial crisis. This essay will argue that agency supposition contri simplyes to the 2008 global financial recession. 2 Review of the literature 2. confidence hypothesis Agency surmisal has set forth a relationship between principals and agents. It also an crystalize this relationship through a contract that one or more persons (the principal(s)) engage an some other person (the agent) to perform any(prenominal)what service on their behalf which involves delegating many decision making authority to the agent denser and Neckline, 1976308, citied in Lehman and Continue, 2013). 2. 2 Bad theory and human race morality and pry orientation After the collapse of Enron, schooltime (2005) strongly argues that pedigree 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 appends in management practices weed be found in the theories of management. Additionally, management practices which atomic number 18 condemned argon enhanced by these theories and ideas (Shoal, 2005 75). Moreover, calling school cig atomic number 18ttenot address the issues of moral and moral principle. Clansman, Setback and Heckler (1998 77, citied in Shoal, 2005) take on that management studies is regarded as a branch of the cordial sciences.Namely, the issues of business studies raft be study and resolved in method of social sciences. However, Ghosted (2005 77) strongly argues that people use scientific way o explore enactment so that they possess ignored the moral and ethics of valet. Be slip there are some underlying basic diversities between physical sciences and business studies, some theories of physical sciences are not suitable for business studies. Furthermore, the parts 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 indispensable 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 hardly trust their leaders and do not realize that they should strictly maintain personalised integrity.Additionally, counterbalance though Friedman (1953, citied in Shoal, 2005) ac cognizeledges that the duty 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 deal out their corporation (Shoal, 2005). Furthermore, shareholder value minimization is the fundamental of the agency theory. However, Shoal (2005 81) strongly asserts that they are not relevant and points out that these query and analyses are built on incorrect assumption, which meaner they are unrealistic.Moreover, Chicago Agenda extreme fierceness laws and rules and against human intentionality and indicates that ethic and morals which are only 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 effectively 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 legion(predicate) economists regarded the global financial crisis as the most serious global finance disaster since sass. Compared with only 11 ba nks was bankruptcy during 2003 to 2007, at least one hundred sixty 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 tightlipped 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 do to borrowers who are perceived to pose a high credit risk, a good deal 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 administration took some steps to prevent economic downturn, such as step-down stakes rate, cutting tax, decreasing the cost of sub-prime etc.Even though there were high(prenominal)(prenominal) risks that some of sub- prime borrowers cannot re even out currency punctu ally, the sub-prime mortgage had stick an passing phenomenon in that period, because this kind of debits can get more return receivable to the higher(prenominal) amour rate. In addition, secondary market had Thus mortgager can easier receive 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 electred to demoralise a ingleside 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 wherefore 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 rate to assess the default risk, here is no experience tha t the bell 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 rate, increasingly sub-prime borrowers gave up repaying currency to banks. Consequently, even though lenders had sold these mortgages, it cannot top the loss. In other words, the income gained by selling houses was not enough to trigger off 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, agency theory and financial crisis In recent years, agency theory is widely apply in lots of corporation and regarded it as the fundamental theory of incorporate governance. Agency theory has played an important role in handed-down conceal systems. Moreover, in this theory, shareholders use the method of supervision and reward to contro l mangers and employees. It is the foundation of agency theory to maximize the value of shareholders. Principals need to make out agents whether they focus 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 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 various(a) decisions. Thus some primary issues should be think 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 match to principals ideas. Lehman and Continue, 2013). Shareholders are interested in semipermanent strategies which can sustainable adopt their corporations. In other words, in long-term strategies, shareholders value, such as pers uade 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 long-term strategies, but also can get profit in a short time. It is why leaders Just pay attending to currently profit and overlook long-term development.For example, they whitethorn use low-level raw 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 accommodate price is higher than the price of mortgages, borrowers will adjudicate their best to repay the debt, because they do not w ant 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, modify currency to borrowers, even though they are sub-prime borrowers, it is hardly to get molest 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, specially when the price of house dramatically declined.In fact, when the housing price mitigated, some borrowers like to give up the mortgage to lenders, especially the value of house is rase 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 investment bank. However, some of them had hided some cult ivation 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 seduce 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 management 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 sharpness to consider their reedit, because they do not want to be classified in sub-prime borrowers. Additionally, they had stable Jobs to ensure the possible of repayment. Namely, banks whitethorn 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 security 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 careen risk, blind pursuit 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 reasonable 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 check whether this decision is in effect(p) 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 reduce the short-term interest (Lehman and Continue, 2013 2). Therefore, even though it seems submit 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 circumvent financial crisis In Shoals article, he argues that stewardship theory which can be alliterative to replace the agency theory can postpone 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 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 closely linked with personal profits. According to Hernandez (2008), employees can feel more responsible and fulfill their obligations in stewardship the ory.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 realizing the interactions between sales power 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 competency 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 pr efer to lend currency for prime borrowers while jell the kernel 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 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 regimen dapple it can effectively decrease the probability of financial crisis that using the stewardship theory replaces the agency theory, it is not enough. Therefore, t he power of governance 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 reduced 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. likewise 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 regulatings 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 protect 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 sust ain 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 international financial crisis, he was still aware(predicate) 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.