Social Causes of Financial Crisis

The term financial crisis is applied to a wide range of situations in which some financial assets
lose a significant part of their nominal value. The most common explanation of financial crisis is
that it was caused by excesses which lead to a boom and an inevitable bust. Last financial
crisis, the biggest after Great Depression, officially started with Lehman Brothers bankruptcy,
triggering collapse of confidence in banking markets in 2008 across US and West Europe,
forced rescue of banks with huge bad debts across US and West Europe. (Moran, 2013) On 10
September 2008 Lehman Brothers announced a $3.93bn third-quarter loss after $5.6 billion of
write-downs on toxic mortgages. It marked the first loss in 14 years. Thus, this paper aims to
demonstrate that financial crisis issue is one provoked basically by humans due to their greedy
wish to achieve more and more wealth, financial crisis being the effect. Although financial crisis
becomes a cause for unemployment, loss of household income, market share of companies and
even exit from the market, poverty and so on, it was first triggered by humans.
Where are we now?
The effects of the financial crisis are still being felt, five years on. During 2007-2009, it could be
counted 8.8 million jobs lost, and $19.2 trillion lost household wealth (2011 dollars) on in U.S.
(Bureau of Economic Analysis, 2012).
From 2007 to 2010 rich countries saw the ratio of their gross sovereign debt to GDP spike from
74% to 101% on average. British public debt jumped from just 44% of GDP to 79%, while
Americas leapt from 66% of GDP to 98%. Greeces soared by 40 percentage points, to 148% of
GDP (see chart 1). Greeces deficit was so high that when the government revealed it, the
admission set off a crisis of confidence in public finances in southern Europe, and thus in the
viability of the euro itself. (The Economist, 2013).

How it begun?
Economists who study this topic could find an explanation for each cause they considered before
the crisis because there is no just one reason but a combination, like a zigzag of more for such a
global problem.

Firstly, some of them consider the intervention of the states in helping banks to step over an
important cause, arguing on Community Reinvestment Act and Ownership society. One of the
solutions that could be finding in this case is to let the market develop by itself, with less
implication from the state. (Taylor, 2009) Government responses to crisis created potential
moral hazard going forward $700bn bailouts of US financial institutions = an implicit guarantee
that will cause greater risk taking in the next phase (Liikanen, 2012) The government help was
not a humanitarian aid but one based on interest, pointing out the social influence.
Secondly, deregulated markets involving poor regulations of the market, operated by bankers
attracted with big bonuses pushed the limits to an excessive level of risk.
Collateralized Debt Obligations (COD) are structured financial instruments that purchase and
pool financial assets such as the riskier tranches of various mortgage-backed securities, having as
main problem to extend AAA papers in order to meet demands from particular investors.
Underlying social processes at play, stages which triggered the economic fall where in the
beginning the lend of money by mortgage issuers to people who would like to have a new house
or to move in another one. The issuer sold the pool of mortgages to a bank. After that, the bank
built an even larger pool from a range of mortgage issuers and sells the pool (or the risk on the
pool) . The pool is split into Tranched securities with lower and riskier tranched
commanding higher returns. (Financial Crisis Lecture, 2013) (Hirsch, 2008) (Harvey, 2010) It
is believed that there is a link between deregulation of western capital markets, and the growing
political strength of financiers, to the collapse of communism at the end of the 1980s. Thus it
can be seen that the economic growth and financial stability has close rates for countries Spain
and Italy. Even though Poland is part of those countries, the regulations of the financial system
did not allow it to fall into recession, being by far the dominant economy in central and eastern
Europe (Lanchester, 2010) For instance, explanations of the financial crisis are rife with the
idea that, in all sorts of realms, people stopped holding one another accountable. Mortgage
brokers did not vet borrowers, credit-rating agencies rubber-stamped junk-laden mortgage
solutions with AAA ratings, and federal regulators refused to establish transparency in the
quickly growing yet murky market for over-the-counter derivatives. If a main reason to
understand the crisis is to prevent another, then knowing when accountability broke down
and, just as important, when it did not could go far in helping both industry and government
build more crisis-proof social structures. (Kiviat, 2013)
Another social reason is the lack of rationality in taking political and economic decision. Driven
the obsession of a false theory about market efficiency, every decision maker was taking the
riskiest decisions. It is said that US and UK are the best democracy that money can buy. With
regulators who either did not do their job or they did it of the wrong sort, the crisis evolved in an
institutional one, which asked for reconfiguration of all big economic institutes. Although
financial elites knew what they are doing were irresponsible, the politicians were suborned,
revolving door between banks and politics. Thus, they created financial fragility and unexpected
consequences. (Moran, 2013)
Neoliberalism Economy
The influence of neoliberalism economy is found in expansion of corporations, applying pressure
on small firms. Entering the markets with low prices, it satisfies the needs of communities.
(Terrence McDonough, 2008) Globalization damage small communities and healthy local
businesses, entering on market with small prices by keeping low paid labour, unhappy workers
and using unhealthy substances to substitute the more natural and expensive ones. Trying to open
Mont Pelerin Society, Friedman stated: With central planning in the ascendancy world-wide
and with few avenues to influence policymakers, the society served to bring together isolated
advocates of liberalism as a "rallying point" (Milton Friedman, 1989)
For Humans Against Humans. Social Behaviour.
It could be therefore considered that it is a social crisis triggered by humans against humans, as
Europeans find themselves paying the price of a crisis caused by unbridled speculation. Workers,
through no fault of their own, are paying a very high price for the reckless and greedy excesses
of the business world especially the banks; unemployment is soaring, precarious work and
poverty are spreading, purchasing power is falling, and public debt is increasing. The negative
are listed below: Repossessions, tent cities, bankruptcy, cutbacks in government spending,
unemployment, increase in child poverty, malnutrition and rickets, riots (Financial Crisis
Lecture, 2013)

IMF Who stole emperors clothes?
The way to Hell is full of good intentions states a popular saying which is perfectly applicable
in this case. International Monetary Fund is the aid when a country cannot pay its expenses.
Wearing kind intentions, the IMF's and World Bank's structural adjustment policies (SAPs)
ensure debt repayment by requiring countries to cut spending on education and health; eliminate
basic food and transportation subsidies; devalue national currencies to make exports cheaper;
privatize national assets; and freeze wages. (Global Exchange, 2011) This can be easily argued
with Romanias last tranche of money. Since the country applied for IMFs loan, the wages in
public sector lowered by 20% also diminishing the funds allocated for logistic and research,
Romania reporting good news for IMF. (Fund, 2013) The social aspect comes from 2 sides: on
the leaders side, U.S owns 18% from IMFs assets and Germany, Japan, France, UK and US
have 38%. Nevertheless, the loans are not designed by countries but by bankers from central
banks. On the other side, workers suffer from lowering labor costs and difficulty in competitivity
on market place for small businesses and farmers, providing help for multinational companies.
(Global Exchange, 2011)

Speculative Mania. Who wins?
With an unemployment rate in USA of approx. 10%, the highest level for last 30 years. But the
top 1% of households (the upper class) who owe 35.4% of all privately held wealth reported
growth in their incomes. Being an unhealthy society, one of the type the winner takes it all.
One of the guilty factors is US Government, which allows CEOs to be incentivized with stock
market, irrespective of their performance, leading to getting rid of employees if the company
needs cuts down. On the other side, labor has failed to completely adapt to the new environment,
which replaced inefficient labor with technology and information management. (Lieberman,
2011)


CEO vs. Workers pay: Rates of increase

Source: (Domhoff, 2013)

Ofgem said the 'Big Six' British Gas, Npower, Scottish & Southern Energy (SSE), Scottish
Power, E.ON and EDF - made a combined 1.2 billion in their household supply businesses last
year, up 75 per cent on 2011 and five times higher than 221 million in 2009. (Hawks, 2013)
Goldman generated $658 million from lending and debt market transactions. That was nearly
triple the $222 million the firm made in the same area a year ago. Goldman, however, declined to
detail how much of those revenues were from collecting interest payments, and how much was
from bond trading. (Gandel, 2013)

What will be? Could we find sustainable solutions?
All things considered, recovery will fail unless the financial oligarchy is broken thus things could
move forward. A government still doing business on its own interest with banks will not succeed to
improve financial market. It is not efficient to sustain forever financial banks which cannot survive
a recession. They should write their assets to their true value and raise private capital within 30
days, or be taken over by the government. The government would write down the toxic assets of
banks taken into receivershiprecognizing realityand transfer those assets to a separate
government entity, which would attempt to salvage whatever value is possible for the taxpayer
(as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The
rump bankscleansed and able to lend safely, and hence trusted again by other lenders and
investorscould then be sold off. (Johnson, 2009)

Conclusion
Financial crisis was triggered by social factors, as human behaviour with effects against unguilty
people, for the wish of more wealth and power. Another social aspect is the saying rich get
richer, poor get poorer , underlying the tremendous effects on middle and low class, with
previous acknowledgement of financial elites, believing too much in a false theory of efficiency
markets without strict regulators. Even though IMF seems like aid for countries in need, what
they actually do is to serve the interest of the countries who own it by imposing the debtors to cut
wages and public expenses. In a neoliberalism economy , the emperor remains naked , with poor
labour and without perspective as country but as 1% of the nation.












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