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Financial Crisis of 2008 and Consumer Behavior Essay

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Updated: Jun 21st, 2021

Introduction

Although the main cause of the global financial crisis that began in 2007 was the bursting of the housing bubble, economists largely agree that the ensuing recession was the outcome of a combination of several factors. Prime amongst these was the adoption of liberal financial policies and weak regulatory controls on financial institutions. In addition, financial institutions took major risks in not providing for appropriate safeguards for the loans they gave to borrowers.

They did not take appropriate precautions in verifying their credentials and creditworthiness. According to Dudovskiy (2013), a major cause of the recession was the inability of financial regulators to tighten regulatory controls and to check the dishonest practices of financial institutions. Such laxities on the part of regulatory bodies motivated financial institutions to provide home loans at extremely low rates of interests, which resulted in excessive borrowing and created a situation in which the loan money was either misused for other purposes or the borrowers were unable to repay the hefty mortgage installments. Because of the heavy demand for funding, banks were unable to provide loans to all applicants (Rampell, 2009).

This situation led financial institutions to devise the system of subprime mortgage loans, which entailed offerings of mortgage bonds to investors with the objective of generating the maximum capital. Credit ratings and credibility of borrowers were not checked properly and it was obvious that such practices would increase the number of default cases (McKay, 2011, p.1). It is in this context that economists hold the Federal Reserve responsible for the recession of 2008 because it failed in effectively regulating and checking the risk taking behaviors of banks and financial institutions. The recession of 2008 not only proved to be a disaster for national economies and businesses, but also impacted the lives of people.

The recession had led to the increase in prices of most commodities in addition to impacting exports adversely and creating trade barriers. In combination, all these factors played role in reducing the buying power of the consumer drastically. People had to compromise on their shopping because their real incomes declined and they had to buy lesser quantity of goods and services (Crotty, 2009). This paper makes a detailed analysis of the background and causes of the economic recession of 2008 and examines how it changed the shopping behaviors of consumers.

Background

According to the National Bureau of National Research (2014), “a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales” (p.1). In effect, economic recession is understood as a difficult period, during which economic growth is very low on account of lean performances of sectors such as manufacturing, imports and exports. Such a situation is also characterized by a high rate of unemployment (Leamor, 2008).

It is thus clear from the definition of recession that it is characterized by a severe financial crisis, when individuals, businesses, and governments face immense hardships in finding solutions towards reviving the economy. The financial crisis began in the US but soon spread across the entire world taking businesses and entire economies in its grip (Ravallion, 2009).

Very soon, the destructive elements and adverse impacts of the American economy had spread much further than the housing sector. In particular, the banking sector was the hardest hit, which is apparent from the fact that in 2009 alone, 176 banks had to close down in America. Consequently, most businesses were unable to get the required funding and could not maintain their inventories. In addition, they were unable to pay their creditors and workers. Even though interest rates had declined to almost 0%, credit markets showed no signs of revival. Major auto industries such as Chrysler and General Motors were unable to cope with the financial pressures and had to approach the government for help. They were fortunate in getting government assistance by way of bailout. However, the recession was in full bloom in 2009 and stock prices tumbled to record lows (Havermann, 2014).

In the US, the casualties of the recession were the banking sector, insurance companies and big and small companies involved in mortgage lending. Foreign economies also got caught in the crisis and many major economies such as those of China, Japan, Germany and the UK had no option but to adopt the same lines of action as adopted by the US Federal Reserve and major American corporations (Leamer, 2008). An immediate outcome in Europe was that its real estate sector crashed, while China and Japan had to suffer tremendously on account of a steep decline in their manufacturing and export sectors as the demand from America and Europe was almost entirely wiped out (Stiglitz, 2008; Garnaut, 2009).

Similarly, less developed nations also lost a great deal on account of reduced demand for their exports. At the same time, massive investments made in the past by foreign companies had become a trickle after 2008, thus putting a stop to the developmental activities that had begun in creating employment and infrastructural development in different sectors. Given that no developed economy was prospering, it was apparent that there was no engine to pull out the global economy from the severe recession that had already engulfed the entire world. Dolphin & Chappell (2010) have held that under the circumstances, economists as well as governments were convinced that a recovery would be very painful and time consuming.

The Effects of the Economic Recession

The recession led to negative impacts on individuals, businesses and national economies. For instance, industrial productivity and the Gross Domestic Product declined in most economies of the world. In fact, the US economy was the worst hit because it experienced a negative growth rate in its GDP. In this context, Barrell and Hurst (2008) have written about severe issues such as high levels of consumer borrowing and the ultimate end of consumer spending, which combined in creating disastrous consequences for people and the entire economy.

It has been argued by Yuill (2009) that the financial crises had created challenges for shopping centers, and they were forced to make difficult choices in closing down their establishments in view of lack of business viability. It has been claimed by several economists that the overall economic environment was such that most economies of the world had been impacted negatively (Fox, 2009). Most private businesses did not have orders for their products and hence there was no basis for them to continue with their productive activities. It was obvious that in such circumstances individual businesses as well as big corporations were sailing in the same boat (Tropeano, 2010).

However, it can be said that in addition to adversely impacting the performance of the private and public sectors, the economic recession gave a major blow to the satisfaction levels that individual consumers derived from their spending. Their purchasing power was now reduced considerably and they had to make compromise by way of lesser purchases of goods and services. Another option was to buy low quality products at lower prices.

Change in Shopping Behaviors

Research by Engemann and Wall (2010) has indicated that the shopping behavior of people can be defined as the manner, in which they act while making purchases for the goods and services needed by them. According to Bell and Lattin (1998), shopping behavior of consumers is best determined by collecting data on shopping patterns of consumers and then arriving at information about the average quantity of goods and services that are purchased by them during each visit to the store.

The data allows shopping establishments to recognize the needs of consumers and to frame marketing and sales strategies in countering the strategies of their competitors; ultimate objective being to get larger numbers of consumers to their store. It is known that prior to the recession consumers purchased goods and services in keeping with their normal consumption patterns. Such patterns also permitted distributors of goods and services to continue with their normal distribution strategies and to find ways of innovative distribution systems in order to improve efficiency in a highly competitive environment.

Prior to the recession, consumers had demonstrated behavioral patterns whereby they visited shopping centers as a part of their regular routine to buy goods for daily needs. As per research carried out by McKenzie and Schargrodsky (2005), many people visit shopping centers on a regular basis in order to fulfill their social needs of meeting people and discussing social issues with them. Many consumers find it very convenient to do their shopping and to meet their friends at the same place. However, after the recession, the purchase patterns of consumers changed dramatically in view of reduced purchasing power. In the process, the social interactions of these people were also cut drastically. In addition, consumers had to change their preferences and opt for cheaper goods as they could no longer afford the high prices of their previously preferred high end luxury brands (Verick & Islam, 2010).

A clear impact that emerged from the recession in terms of consumption patterns was the preference of consumers for cheaper goods and services. In addition, the impact of the recession was also reflected in terms of a steep decline in sales volumes for many companies that sold consumer goods.

Chappell (2009) has shown that during the period 2007 to 2009 there was a considerable decline in sales and marketing activities. Such outcomes occurred because in order to keep up with their expenses on food consumers had to compromise by reducing expenses on non-food items. It can be said that during the recession, the proportion of consumers’ incomes spent on food was increasing at a constant pace. At the same time, change was also apparent in the context of the quality of goods purchased by consumers. A distinct characteristic of consumption patterns during this period was the frequency with which consumers visited economy centers such as dollar and dime stores where they could buy inexpensive products.

How the Financial Crisis Changed People’s Shopping Behaviors

It is quite apparent that the recession led to reduced income for the public at large. Under such circumstances, they were bound to alter their shopping behaviors. Nevertheless, it is now recognized that the impact of the recession on the shopping behaviors of people was more indirect than direct. Anon (2009) has argued in this regard that the recession created a direct impact on the hiring and recruitment patterns of companies.

Given that the recession had reduced the profitability of must companies, they were bound to hire less and to lay off workers in larger numbers. Lesser employment opportunities entail lesser purchasing power for consumers, which mean lesser expenditure on purchase of goods and services (International Monetary Fund, 2010). Such patterns also implied that the economic recession led to a steep decline in the wealth holdings of people because in the absence of regular flow of incomes they had no option other than digging into their savings. At the same time, in view of enhanced competition amongst retail outlets, more attention was paid by store owners to impact the behavioral patterns of shoppers. It is obvious that in order to attract more customers, store owners would try to find ways of reducing prices to the maximum.

Lichtenstein (1993) has held in this regard that the most significant marketplace cue in catching the attention of customers is the price, which is the most important amongst all factors in determining if the consumer visits the shopping center. It is thus correct to say that a change in any product’s price will definitely lead to a change in consumers’ shopping behaviors (Bivens, 2009).

Conclusion

The economic crisis of 2008 was the direct outcome of the bursting of the real estate bubble. The sub-prime crisis led to a severe debt crisis, which in turn caused several financial institutions to go bankrupt. Consequently, it became very difficult for businesses to get credit to continue with their production activities, while many could not afford to maintain inventories. The government did save a few banks from going bankrupt but with a larger number of large corporations seeking government bailout, the Federal Reserve expressed its helplessness in providing relief to such companies from the taxpayer’s collections, particularly during a time when financial resources were shrinking rapidly and markets were disintegrating at the slightest indication of financial hardships.

There was an overall decline in production as the recession created a chain impact on all business activities across the world. There was a decline in the demand for most products, which led to the decline in productivity, the decline in disposable income and the overall decline in the demand for goods and services. This was a vicious circle that took all activities within its grip and caused all people and nations to suffer. In view of the reduced disposable incomes in the hands of the public at large, there was bound to be reduced spending on goods and services. Behavioral patterns of people changed in regard to visiting shopping centers. In addition, it became evident that consumers preferred to buy cheaper products as they could not afford to buy the heavily priced goods. Therefore, a clear link is established between the economic recession and the shopping behaviors of people.

References

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