Economics, Management, and Financial Markets Volume 6(2), 2011, pp.

810815, ISSN 1842-3191

THE EFFECTS OF THE GLOBAL ECONOMIC CRISIS ON THE MARKET ECONOMY

CONSTANTIN ZAHARIA constantin.zaharia@ucv.ro GEORGE CRISTINEL ZAHARIA george-cristinel.zaharia@ucv.ro NCOLAE TUDORESCU nicolae.tudorescu@ucv.ro IOANA ZAHARIA ioana.zaharia@ucv.ro University of Craiova ABSTRACT. The paper generates insights about the linkages between the market economy and the global financial crisis. Grote reflects upon the general role that technology can and should play in organizations. Friedland stresses that the current financial crisis began with the problems in the subprime residential real estate market: accumulating losses on US subprime mortgages have triggered widespread disruptions in global financial markets. As Moosa puts it, through malpractice, the rating agencies played a major role in the materialization of the subprime crisis in 2007. Mellor says that the financial crisis has exposed the social and political underpinnings of the financial system. Keywords: market economy, global financial crisis, financial system

1. Introduction Grote discusses organizations attempts to handle safety risks by means of safety management within the framework of uncertainty management, and argues for incorporating the capability for coping with uncertainties into the organization by furthering coordination and integration of self-regulated units. Moosa asserts that Basel II was a catalyst for the problems experienced in the structured credit markets, and provides the wrong kind of regulation, ignoring liquidity and leverage. Basel II has underestimated some important risks and overestimated the ability of financial institutions to deal with them.
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2. Disruptions in Global Financial Markets Ulrich holds that we have to use the logic of the market system as an efficient means for achieving a socially and ecologically sustainable form of progress, we have to use economic efficiency consciously with regards to the vital-political standards, and we should perceive socially and ecologically motivated standards as a precondition for the legitimacy and as a horizon of the meaning of a truly efficient and life-practically reasonable economic development. Economic rationality should be seen as a magical triangle between efficiency, meaning orientation, and justice (efficiency is subordinate to the other angles for inherently logical reasons). Ulrich states that the adequate participation of all members of society in the domestic product that has been generated collectively and through divided labor should be achieved through contemporary economic citizenship rights and cultivated life projects. Civilizing the market economy requires an epochal cultural and political learning progress.1 Grote establishes links between organizational routines and management of uncertainties, which should prove useful in resolving the dilemma of concurrent stability and flexibility, and discusses implications for building and handling organizational routines within a framework of systematic rules management. Routines develop in organizations because they reduce complexity and uncertainty and increase stability, managerial control, and legitimacy. Grote reflects upon the general role that technology can and should play in organizations. Technology changes organizations, but it is also deliberately chosen and changed by organizations. Electronic communication systems can have democratizing effects given a number of technical as well as organizational prerequisites.2 Friedland stresses that the current financial crisis began with the problems in the subprime residential real estate market: accumulating losses on US subprime mortgages have triggered widespread disruptions in global financial markets. The market for structured finance of subprime residential mortgage-backed securities (MBS) has virtually collapsed. Interest rates were continuously below 3 per cent from September 2001 to May 2005. Market participants understated default risks, concentration risks and market and liquidity risks. One transaction of subprime mortgages can give rise to a chain of CDSs. significant reductions appear are in the best interest of lenders. Loan modifications have involved lowering of the interest rate or extension of the loan terms. Modification of mortgages through bank ruptcy is the most cost-effective. Friedland claims that the financial services industry has failed to implement loan modification on a sufficiently wide scale to stem the tide of the crisis. Consumer advocates document a litany of abuses by mortgage servicers. There is an increasing likelihood of recession from spillover effects of the crisis.3
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3. The Procyclical Nature of the Banking Industry Sllner writes that a firms stock of human capital exerts a positive influence on economic performance and innovation. A diverse human capital pool is important in a business environment which is shaped by competitive advantages arising from innovative activities. There is positive relationship between a firms human capital diversity and the probability of innovation. Firms exhibiting a diverse human capital structure among their employees are more likely to innovate. A firms stock of knowledge, embodied in its human capital resources, determines the creation of innovation.4 Grey contends that human relations theory bears the same footprint of formal or instrumental rationality as that in scientific management. Organization theory is often indistinguishable from theories of managing. Management traverses the systematic control of nature and the systematic control of society. The rise of management is inseparable from the rise of people management.5 Moosa claims that the global financial crisis has demonstrated the procyclical nature of the banking industry. The resulting risk-sensitive capital requirements enhance the procyclicality of the banking system. Banking is a procyclical business: banks tend to contract their lending activity in recessions and expand it in booms, boosting the amplitude of the business cycle, and making recessions more severe and booms more inflationary. Risk-sensitive capital requirements increase when the estimates of default risk are higher, and vice versa. The procyclicality of Basel II results from the calculation of capital ratios on the basis of risk-adjusted assets. As Moosa puts it, through malpractice, the rating agencies played a major role in the materialization of the subprime crisis in 2007. Basel II has enhanced a certain faith in rating agencies, allowing them a free hand and a significant contribution to the crisis, and discriminates against small banks, less sophisticated banks and internationally inactive banks (small banks may feel that Basel II puts them at a competitive disadvantage vis--vis large banks). Preoccupation with Basel II and its complexity hurts financial institutions during the crisis: it is not a risk management exercise and banks were concerned more with compliance than with actual risk management.6 Dye et al. point out that Maslows work informs a vast range of business problems from customer relations management (CRM) to motivation. People develop different dominant needs, with some who are driven to dominate and others who feel the need to be dominated. Dominance needs may be to some extent socially influenced by cultural factors. Man can be emancipated through consciousness-raising and self-actualization. Leaders emerge because of their apparent decisiveness. Time and space serve to shape organizational theory. Dye et al. claim that management theorists and practitioners should take into account that the desired state of psychological well-being is self-actualization. Management
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theory has ignored potentially great contributions that focus on the psychological welfare of people.7 4. The Social Underpinnings of the Financial System Bonnafous-Boucher and Porcher posit that stakeholder theory ratifies the institutionalization of the firm (stakeholders prefigure an open, or fragmented, society largely dominated by corporations). Stakeholder theory and the theory of civil society can be interpreted as theories of business. Stakeholder theory is an exploratory theory of the history of capitalism and liberalism, mirrors salaried patrimonial capitalism, covers all parties influencing or being influenced by the firm, and describes what managers should do with respect to their stakeholders and when they contract with other, what would happen if they would apply the stakeholder management. Stakeholder theory is a theory of the public good, reconsidering the firm as an object capable of being analyzed using tools other than those native to management science.8 On Tavana et al.s reading, AHP assesses the consistency of the managers pairwise comparisons. Tavana et al. investigate the usefulness of the TQI in different health care settings: the findings may be attributable to a normalization of the expectations of actual quality management that are then reflected in the weights assigned to ideal quality management. Clinical employees either fail to grasp the basic philosophy of quality management or they choose to neglect it for more traditional approaches. There may be a connection between perceptions and actual quality management (perceptions can be a powerful determining factor of reality). Quality programs can be structured in a way that overcomes the resistance to externally imposed TQM programs. A voluntary process built on assessment input from health care professionals can achieve the desired outcome of acceptance rejected in broad participation.9 Mellor claims that the financial crisis of 200708 has revealed both the instability of the global financial system and the importance of the state as lender, borrower and investor of last resort. The crisis raises many questions about the way the financial system operates under late capitalism. The crisis reveals moneys social and political base. The recent financial crisis has revealed how the productive economy is dependent on the functioning of the money system. The commercial dynamics of capitalist finance created the crisis in the first place. The subprime crisis was a trigger of the financial crisis. Central to the crisis were a debt-driven housing bubble and a bloated financial market. Interest rates are not effective instruments to control a runaway financial system. Mellor says that the financial crisis has exposed the social and political underpinnings of the financial system. A financial crisis reveals the limitations of unregulated speculation. Crisis is
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endemic to the financial system. The money system is fragile under the control of profit-driven market forces. Public responsibility for securing the financial system has been made transparent during the financial crisis. Public support is not limited to regulated banks: it extends to the whole of private finance. The public nature of money has been demonstrated in the financial crisis.10 Zhao and Bryar say that the management of knowledge in businesses is an important and necessary factor for organisational survival. The effectiveness of quality management process to achieve quality improvement and increased productivity is enhanced if KM concepts are effectively integrated into the process. Organizational excellence can be achieved through incorporating KM concepts into the TQM process whilst interacting with environmental changes. Management by facts counts on organisational capability of obtaining, processing, disseminating and use of data and information. TQM should address environmental changes and deal with them through improving knowledge management capacities and skills. Zhao and Bryar suggest that TQM and KM principles can be implemented synchronously (there is an inherent synergy about them). A knowledge based TQM approach should facilitate the introduction of KM principles gradually engaging and turning them into a complementary management process.11 Boeckh insists that the last crisis was caused by excessive money and credit inflation. The policy reactions to a huge financial and economic crisis have the unintended consequence of creating the next one. One of the most important roles of central banks is to act as a lender of last resort in a financial crisis. According to Boeckh, risk aversion erodes as the most recent crisis fades away and prosperity returns. Both lenders and borrowers were equally responsible for the current crisis. The total government borrowing requirement increases sharply after a major financial crisis. The financial crisis of 2008 was a manifestation of the failure of the American economic and political systems.12 Dahlgaard et al. say that TQM is a vision which the firm can only achieve through long-term planning. More and more firms are coming to realize that TQM is necessary just to survive. The aim of the new concept of TQM is to ensure that history does not repeat itself. The annual quality audit is an essential part of the TQM vision. Management and employees must be aware of, and deal with, the many defects/problems in the internal processes and with their causes. European companies have a long way to go before the TQM vision becomes a reality. A basic point behind the creation of customer satisfaction is leadership (basic aspect of leadership is the ability to deal with the future). Leadership is a necessary condition for TQM. The aim of TQM leadership is to build the TQM pyramid. Clear leadership and vision are the most important critical success factors of TQM. Job rotation is a
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necessary condition for implementing TQM. The implementation of the TQM process is one of the most complex activities that a company can undertake (it requires cultural change for everybody).13 5. Conclusions Friedland adds that the proximate cause of the financial crisis is the mortgages themselves and the gratuitous manner of vetting the recipients, securitization and derivatives. Dahlgaard et al. insist that continuous improvements require leadership which is the foundation of TQM. The best way of overcoming the organizational quality problem is through the practice of TQM. The level of quality will be improved by investing in the so-called quality management costs.
REFERENCES 1. Ulrich, P. (2010), Civilizing the Market Economy: The Approach of Integrative Economic Ethics to Sustainable Development, Economics, Management, and Financial Markets 5(1): 99112. 2. Grote, G. (2009), Management of Uncertainty: Theory and Application in the Design of Systems and Organizations. New York-Dordrecht: Springer, 5130. 3. Friedland, J. (2009), The Subprime and Financial Crises, International Journal of Disclosure and Governance 6(1): 4057. 4. Sllner, R. (2010), Human Capital Diversity and Product Innovation: A MicroLevel Analysis, Jena Economic Research Papers No. 27. 5. Grey, C. (2009), Studying Organizations, 2nd ed. London-Thousand Oaks, CA-New Delhi: Sage, 4362. 6. Moosa, I.A. (2010), Basel II as a Casualty of the Global Financial Crisis, Journal of Banking Regulation 11(2): 95114. 7. Dye, K. et al. (2005), Maslow: Man Interrupted: Reading Management Theory in Context, Management Decision 43(10): 1375-1395. 8. Bonnafous-Boucher, M. and Porcher, S. (2010), Towards a Stakeholder Society: Stakeholder Theory vs Theory of Civil Society, European Management Review 7: 205216. 9. Tavana, M. et al. (2003), Total Quality Index: A Benchmarking Tool for TQM, Benchmarking: An International Journal 10(6): 507527. 10. Mellor, M. (2010), The Future of Money: From Financial Crisis to Public Resource. London-New York: Pluto Press. 11. Zhao, F., and Bryar, P. (2001), Integrating Knowledge Management and Total Quality: A Complementary Process, paper presented at the 6th International Conference on ISO 9000 & TQM, University of Paisley. 12. Boeckh, J.A. (2010), The Great Reflation: How Investors Can Profit from the New World of Money. Hoboken, NJ: John Wiley & Sons. 13. Dahlgaard, J.J. et al. (2007), Fundamentals of Total Quality Management Process Analysis and Improvement. London-New York: Taylor and Francis, 15220. 815

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