Having worked in a privately-owned equity firm for five years before joining my family business recently, the global economic crisis has changed my perception in various matters relating to business, economics, and investment. The financial crisis started being felt in the year 2007. It has been commonly known as the credit crunch, the most significant recession since the 1930s, and other names. The most considerable trigger factor for it was the liquidity shortfall in the banking system of the United States of America. Many negative ramifications have been felt at the onset of the global financial crisis. The collapse of large institutions has been experienced, and the bailout of some of them was imminent. Stock markets experienced a nose-diving in their prices and their performance index hitting the lowest low. This could be attributed to the fact the focus was drawn from investment expenditure to consumption expenditure. Even as all these have come to pass, for me, and how I wish others to, vital lessons have been imprinted on my financial intellect.
Initially, I was of the opinion that it would call for low policies and a long period of time to bring down a critical business. Since then, though, my thinking has been changed. Failure of essential companies was witnessed as economic activity slackened. This included mostly those in the financial services sector as central banks had to be bailed out of the financial quagmires haunting them. The American dream called for people to stay in good houses, have good cars, have happy families, and live wealthily. In the quest to achieve this, mortgage companies went on a rave to sell-out houses with repayment due in awhile. As a business, I have learned that not every mortgage could be beneficial. In fact, several of them have significant shortcomings. As a firm, a proper evaluation of the mortgages and the terms thereof is essential to measure the actual long term effect on the sustainability of the business.
My attitude towards the capitalization of firms was also influenced. I have now got to a point where I do not necessarily look at firms’ success in terms of their capitalization but by the activity of the capital that is in place. Growing up for me was interesting as I would much desire to work with firms that had the highest equity standings in the market. However, the happenings of the global economic crisis have made me focus more on the return on equity as opposed to the level of equity as such. In our business, for example, we have got to a point where we have given much emphasis not on the level of our equity but on how much return our equity is able to offer.
On a grand scale, I had placed over-reliance on the financial institutions in terms of them providing me with financial advice. At the onset of the global economic crisis and the fall of several financial institutions, my perception of the accuracy of the data that they provide has begun being influenced in the negative. I no longer view them as the ultimate sources of my financial advice. Instead, currently, I juggle the information from research firms, economists, partners, friends, and other entrepreneurs about the trends in the market, where to invest, and when. This is a new position that I, together with my business, have taken following the happenings of the economic crisis and the fall of some of the financial institutions which in themselves are to provide this financial advice anyway.
My perception of the stock market was that it was one with the lowest risk profiles and risk-averse investors need to consider it any day. However, at the onset of the meltdown, it hit me that it was equally a loss bound market, and significant for that matter. This perception that I did build was informed by the lowered investor confidence in the stock market and the resulting flight of capital from the market.
Our business was previously going in for loans and other financial instruments with very lax requirements. This is not to say that currently, we do opt for those financial instruments that are so stringent but that my perception of stringency in terms of offering credit has been changed. As a firm, we have to vet properly all the applicants who need items on credit from us. We currently, to a great extent, look at the capacity and collateral that our customers offer before we can get into credit arrangements with them. The view is two way. We also do not simply jump into credit facilities because the restrictions appear to b bearable. Instead, the hidden, unseen ramifications of our facilities are informing our credit borrowing. This was reinforced by the fact that between 2001 and 2003, the rates of interest had been lowered from 6.5% to 1.0%. This was a contributor to the economic crisis.
From my economics point of view, my perception was that by lowering the rates of interest, it would be possible to attract more borrowing and hence investments that are bound to expand the level of growth of the economy. I used to relate to the prices that our firm does offer. A lowering of prices would attract more customers and hence a heightened activity in our business. This, however, is not the case anymore. This is because the occurrence of the economic crisis led to a decline in the rates of interest with a significant focus on reducing deflation. This was later not to happen and consequently changed my perception about lowering the prices of my products. I now have to be absolutely sure, having carried out market research, that by my lowering of prices, automatically, sales revenues will hike.
My perception of external sources of finance for an organization has been influenced. I currently do not advocate so painstakingly for external sources of finance for the business. This is because, during the economic crisis, there was a growing deficit in the current account of the US balance of payments. The Americans went ahead to borrow much from abroad, and this caused the bond prices domestically to rise. This, in effect, led to the interest rates sky rocketing. I now feel that in as much as offshore borrowing has advantages to it, proper consideration has to be accorded to domestic lending first. As an institution, I try much to focus on the internal source of finance first before getting into the other external sources of finance. Lately, for example, I consider plowing back of profits to be more convenient than entering in a finance lease as a source of finance. As a business, I got to realize that stringency in according credit could well imply that the loan is not as bad as it seems. This stringency is meant to ensure stability in the financial institutions and the economy at large, which in essence affects me as a small business entity.
My perception of credit sales seems to be undergoing an overhaul after the happenings of the global economic crisis. This is because subprime lending is a significant contributor to the global financial crisis. More mortgages and loans were given out to persons who had a poor credit rating. As a firm, I find it challenging to be totally sure who is creditworthy in the firm and who is not. The rate of default in the products sold on credit may make me suffer much more than the benefits that I am to get from the credit offer. As a firm, instead of using resources to expand, my perception is that I will be incurring much to cover up for the cases in default. My previous thinking was that as more loans are given out, investments are bound to grow further and hence the growth of the economy. However, the lending, as I now view it, should be given selectively to firms that are able to not only repay but also put the funds to fair use.
My attitude towards business partners, customers, and other stakeholders in business has changed since then. Trust is essential in place, but currently, I think care before trust is also vital. One previous trading with a partner should not warrant me to accord them my utmost faith as it were. This is because another cause of the global financial crisis, which at great length started in America, was increased predatory lending. These loans would state that the rates of interest would be 1% but, in essence, be made adjustable. The results of such rates were that the loans would be overpaid. This was majorly carried out by unscrupulous businesses. With this knowledge, it just hit me that not every company out on the street, offering attractive rates on loans should be approached. As I lay down my capital structure planning, I will only focus on reputable institutions that have been rated and recommended by at least a firm of my caliber.
Dynamicity in an institution is quite essential. This is a lesson I have learned thanks to the causes of the global economic crisis. During the periods when the effects were beginning to be felt, the regulatory framework was so sluggish and could not keep up with the pace at which financial innovation was moving. Currently, as an individual, I believe that one needs to continually look at what environment I am surrounding them analyze how well they can cope in the background without having to suffer much in the course of life. This is the same case for the organization. My view is that they each need to have a center of research that will continuously keep in check movements in the macro and micro constituents of the environment. Although I initially knew that proactively establishing policies and regulatory frameworks in an organization is essential, the magnitude of the systems had not been keenly reflected. Wrong policies have the effect of causing a ripple down impact on all aspects of the organization.
My personal perception of financing has also been affected. I feel that households need to keenly approach their consumption. Families need to focus more on investment consumption, even if they do have white-collar jobs. In America currently, the consumption trends are veered towards commodities that are not able to produce other goods or services. My view is that if each household could identify an investment opportunity, invest in it, spend five years growing it, then find total financial freedom after that, that would be better compared to the current trends. Households are not willing to forgo current consumption for future incomes. They instead do this and end up in much debt. This was one feature of the housing bubble in the global economic crisis.
Thinking about it, these houses were not being used for the production of other goods and services, and therefore the point is that the economy remains at less than full employment. Financial innovation, which refers to the development of new financial products, which are meant to increase the diversity of investments, was also to blame for the global economic crisis. Examples of these innovations include adjustable rate mortgages, subprime mortgages, and credit fault swaps were examples of such designs that resulted in the situation. The negative repercussions caused by the innovations have caused a mind to change in me. Initially, I was of the opinion that inventions have to be taken up by organizations for prosperity. Later I have come to the understanding that innovations need to be approached with caution.
Lately, I was thinking about venturing into online trading of currencies. This was because a friend told me that it could make up to a thousand dollars in a day. On second thought, I remembered the happenings of the global economic crisis. One other cause of the crunch was the incorrect pricing of risk. I thought about the danger posed for me to get these thousand dollars and tried to price it. There was a possibility I could also lose a thousand dollars in a day. That sealed it for me. I was not going to venture into it anyway. Prior to the economic crisis, participants in the market did not aptly measure the risk attached to several financial instruments and therefore linked the wrong levels of interest rates. AIG represents one of such firms that did insure debts held by other institutions whilst utilizing credit swaps. Unfortunately, the firm had not attached the correct levels of risk to such a venture; hence the hit it faced due to high default rates. My risk pricing attitudes have changed since then. The insurance concept had also changed when I realized that the vulnerability of insurance companies to bankruptcy was not as far fetched as I used to perceive it.
My personal attitude towards economic forecasting has just changed, like my attitude towards weather forecasting changed several years ago. Who is telling the truth and who is not? This is the big question to be answered. I currently feel that much of the forecasts that we have are so subjective with hidden agendas behind them. Some people are most likely to give projections with speculative motives behind them so that they could benefit from the gains arising. My renewed view of points was facilitated by the poor economic forecasting that was also blamed for the financial crisis. Varying arguments about the recession were brought about by the heterodox economists. On the other hand, the mainstream economists could not predict it; they simply spoke of a great moderation happening. This aspect has made me view business prospects in a different light. Not all the economists’ projections are close to reality. I have come to believe that all considerations brought about by all the staff that is involved in the firm should be placed into care.
In conclusion, the happenings of the global economic crisis to be have brought invaluable insights that I would forever live to appreciate. As a business person, I believe that the management of my business will call for the utilization of all the available information in the market and other sources like the sources and effects of the global economic crisis. I also believe that for an economy to develop, it takes a sum total of all the practices by the firms that constitute the economy. Lessons that we learned from the crunch should help us together with the generations to come to avoid reckless ways that could well bring the globe to depression, let alone a recession.