financial crisis
Financial Crisis – Dynamics and Causes
A financial crisis has happened with regular intervals throughout the last century, it happens again in the year 2008, and probably will happen in the future in much the same way. There is no fundamental differences between such crises in our time and former crises, except perhaps that they occur faster, occur more frequently, but fortunately also heal faster.
THE TYPICAL SITUATION BEFORE THE CRISIS
The crisis often occurs after a long period of economic growth, high employment and high activity. The situation for companies and individuals are typically as follows:
- The economic activity in the whole society is very high after a long period of growth, but is beginning to decline.
- Stocks are traded for historically high quotes after a long period of rise of 300% or more, they have reached an all time high level, but they are beginning to decline again.
- The prizes of real estate properties are also high after a long period of growth, 300% or more, but they also are beginning to decline after an all time high level.
- Companies are often over-established after aggressive investments for borrowed money. The investments have not yet shown profitable, but the companies estimate great profits from the investments because they think the general growth will continue uninterruptedly.
- Also the average individuals have high debts after having invested massively in their homes and in luxury objects. They have some beginning problems with payment on their debts, but think these problems soon will go away with an anticipated further rises of personal income.
THE INITIAL STAGES OF THE CRISIS
The crisis usually has a slowly developing initial face. During this face the situation can reverse and the economy recover without great damages. In this initial period one can observe the following process:
- Steadily more companies realize that their massive investments do not pay back with the expected revenues and they have problems paying on their loans. They abruptly reduce further investments and begin selling off assets.
- Steadily more individuals also realize they have a too great debt to handle with their private income. They reduce their consume and sell off properties and luxury objects.
- Companies are getting steadily less orders, are selling less and have less to do because of reduced consume and investments.
- Earnings of companies and individuals are declining and many are downright loosing money.
- The stock market values are sharply declining, often 20-30%.
- The property prizes are sharply declining, often 20-30%.
THE FURTHER STAGES LEADING TO A FULL-BLOWN CRISIS
At some time there can be a critical turning point leading into the development of a full blown crisis that it is impossible to recover from in an easy way. This turning point occurs when a certain percentage, for example 10%, of individuals and companies realize that they do not have enough income to handle their debt, and that sell-off of properties and stocks will not nullify the debt. The full-blown crisis has these properties:
- The activity and earnings of companies are abruptly declining.
- Many companies experience massive losses.
- The number of companies and individuals with debt trouble is abruptly rising.
- The number of bankruptcies is abruptly rising.
- The unemployment level rises abruptly.
- Banks get into serious squeeze due to customers unable to pay on their debts and due to the decline in the value of properties serving as security for the loans.
- The troubled banks have to rise the interest rates by many percent to counteract the losses. But this act only increases the problems for other banks, individuals and companies and accelerates the crisis.
- A high percentage of the banks get unfunctional and bankrupt
- Now there will be massive sell-offs of properties and stocks. The sell-offs are exerted by individuals trying to free themselves from some of their debts and by banks trying to stop losses on loans.
- The stock market cracks down by an new 50% or more driven by the massive sell-offs.
- The real estate market also cracks down a new 50% or more due to massive sell-offs, but usually somewhat slower than the stock market.
THE CHARACTERISTICS OF AN ULTIMATE CRISIS
The ultimate stage of the crisis is seldom reached, because the governments will at some point take control of the financial systems and secure a minimum functionality.
In the ultimate crisis the production of goods and services in the society has fallen 30% or more and continue to fall. Investments or building activities have totally halted. There is mass unemployment, 30% or more.
The financial system has nearly totally collapsed, and is only able to support the daily payment for food, energy and other necessities. The production facilities and organizations of the society have fallen apart 30% or more due to lack of maintenance, which means that the society is not able to recover in a short time.
THE END OF THE CRISIS
Before the crisis can end, all sell-offs to pay back on loans must be fulfilled. Then every actor in the society has to accept their losses. Debts that actors are not able to pay back must in some way be nullified. Then all the pieces remaining of the former companies must be fixed together again into new functional units. Then the society can slowly rebuild its strength.
THE CAUSES OF THE CRISIS
An important cause of the crisis are over-optimistic companies and individuals during the foregoing period of economic growth. They tend to believe that the general growth will continue forever without interrupting periods of economic decline. They also tend to overestimate themselves and think they will be a winner in the competition against other companies or persons, not a looser, not an average performer, but the winner.
This optimism, which is a general human property, make all actors borrow massive amounts of capital and invest them in homes, luxury objects and expansion of their business. This expansive behaviour tend to accelerate for quite a long time untill in meets the wall.
Another cause are executives in banking companies tempted to lend out as much money as possible to the borrowers, regardless of the consequences for the bank and the borrowers, because this behaviour gives the executives an enormous short term personal gain.
HOW TO AVOID FINANCIAL CRISES
Future crises can only be prevented by hindering financial institution lending out more money to anyone that the borrowers can pay back in a comfortable way. This can only be done by governmental regulations that set clear criteria that must be fulfilled when a certain amount of money is lent out.
Also banks must be forbidden to establish employment contracts for their executives that reward them directly for the amount of mortgages they establish.
Even When Financial Giants Topple You Can Survive The Financial Crisis
While universally known financial giants continue to smash on the deck with resounding thumps, the financial world reels in mayhem. Scenes of perplexity and lack of self-confidence not seen since the Great Depression in the early 1930’s, nightly fill our television screens. This is not the point in time to panic and let your emotions to take over control.
So What are the Real Facts?
· The giants of the finance world that have been brought to their knees, through over-borrowing and being unable to pay it back. They might be weeping in their caviar, but when 18 billion becomes just only 3 billion, who is counting, except the filthy rich?
· Many ‘average’ business owners are cringing under their bed covers quivering in fear.
The present circumstances have been likened to economic Darwinism, where it is the survival of the fittest. You can either let yourself drown in doom and gloom, or think survival. You have a choice.
The major key to survival is how you manage your money. Okay, that sounds like the same old stuff, but in this new regime you need to rethink everything. You can survive the financial crisis, but it may be necessary to make a few changes along the way.
· First and foremost, Normal 0 MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman";} do not panic. Don’t react to the situation and don’t let your emotions rule you. Work this one from the head, not the heart.
· Secondly, you need to urgently assess the universal situation for yourself, not simply accepting everything the media hype is pushing at you. They will report the stories the way that sells copy. Remember they are the experts in Bad News. Do your own research.
· Globally we have become a consumer society on a grand scale, so take a long hard, unbiased look at your personal circumstances and re-evaluate coldly and calculatingly. Cut down on expenses wherever you can. Streamline where you can for more efficiency and less wastage. Spend money wisely and save it wherever you can.
It is time to break the wants list away from the needs lists. Don’t give up on your dreams, but they are something you have to work into.
Every day you are inundated with a thousand and one different methods to spend your hard earned cash as quickly as possible, particularly if it involves anything to do with credit – where only the banks win! It’s time to realize that credit is a product the same as any other form of goods or services. It is constantly being sold to you.
Yes, in many areas people are losing jobs, but that can happen in any economical state. Be prepared to diversify. So what if you have done the same job for the last hundred years? You have other talents, some you are not even aware of. Adjustment is the real key to your survival. Search for new areas you could break into. Seek out what areas are still forging ahead.
When reporting from the World Knowledge Forum in Seoul, South Korea, marketing professor, Jean-Claude Larréché said "It’s not the creative entrepreneurs but the large companies that are being challenged. Creative companies will survive in any condition".
"An enormous amount of opportunities", said Sir Richard Branson, "Will begin to emerge as a result of the current world economic down turn, but companies need to be nimble in order to move quickly and decisively to realize these opportunities".
This is not the time to creep away in fear, or try burying your head in the sand and expect it to all go away. This is a time to take optimistic action. Find out what your options are, plan carefully and step forward boldly. When things get tough, the tough get going.
The Financial Crisis and Emotional Intelligence – What it Teaches us About Our Romantic Relationships
You may be wondering why I am discussing the financial crisis in a newsletter about relationships! Don’t worry, I have not lost the plot… what is happening at the moment in the world of banking can be related back to some fundamental emotional problems and the way that we try to compensate for these through materialism. We can therefore learn a great deal about our relationships and how to avoid the equivalent to the credit crunch in our personal lives.
The problems we have seen in the financial world have affected us all. We will all pay a price for the imbalances that have been allowed to develop around excessive amounts of unsecured borrowing. In short we have been living way beyond our means and the system has caught up with us. Somehow we thought that wealth and material success would make us happy. Perhaps we thought that a bigger and better house or flashier car would be the answer. We haven’t notice it, but the developing word has been paying a price for our greed for many years and now we must also face up to reality.
We can use the Psychology of Vision model to understand what has gone wrong – in fact it has been predicting the sort of problems we are facing now for years. We can understand them as an example of Independence. As individuals we become Independent to avoid being Dependent on other people for our success and happiness. Underlying this is a subconscious decision to never rely on another person again so that we cannot be let down and hurt as we were in the past. This fear of dependence comes from our earliest experiences in our original families whenever bonding is disrupted. In such situations we often take on guilt and develop low self-esteem for having failed significant people in the family – usually our parents and siblings.
Rather than feel our guilt and sense of failure we decide to avoid such close relationships with people and at the same time suppress our emotions so that we can never feel that dependent again. In work and life we will begin to replace the intimacy and love within close relationships with money and material goods. We try to control others to bring us the material success that we want and to make sure that our fear and guilt is never triggered through failure. Everything we do to achieve success involves things outside us rather than trying to find contentment within – this is the crux of the problem and has led to the credit crunch.
Any early successes as an Independent just encourages us to greater Independence – it seems to be the strategy for happiness. The more we get, in terms of money, power and influence, the happier we conclude that we will be. This is what has happened in a collective way in our society. We have used our material wealth to distract us from the inner quest – both emotionally and spiritually. We have assumed that we can succeed without emotionally meaningful, intimate relationships and have used materialism to distract us from the need to heal our fears and insecurities. The economic growth in the last 10-15 years has allowed us to maintain the illusion that we can borrow and spend our way to happiness.
This Independence has created some very unpleasant behaviours. Our Independent ego’s can be terribly selfish and greedy. We may criticise the bankers for their obscene bonuses, but the truth is that many of us have invested in what was a burgeoning housing market or searched out the most lucrative investment returns. I have had to eat humble pie myself as I find my savings frozen in an Icelandic bank! The reason we can act in such a greedy way is because Independence destroys empathy. With our emotions suppressed we stop feeling the consequences of our selfish behaviour and actions. We stop caring about other people and just look after number one. This is how the banking industry took such ridiculous risks – they had become blind to the consequences of their actions and in any case knew that somebody else would bail them out if it all went wrong. Of course for every winner in a commercial deal there is always a loser. Most of us would rather not think about the people who suffer. Even the plant has taken a hit – our rampant industrialisation may have made our lives more comfortable but the environment is picking up the bill.
So what does this teach us about our relationships? Independence always creates problems for us. As we separate and create an emotional distance in our relationships we stop feeling the full range of our emotions and when we do this we lose empathy. The worst thing of all is that we become blind to the people around us and their problems – we may not notice that our partner is hurting and needs our help. Instead we will make everything about us. We will look for external gratification and seek every more exciting rewards at work and in our personal life – but fail to address the growing problems in our relationships.
Ultimately though we cannot continue with such Independent behaviour forever – it catches up with us with stress and burn-out or the mid-life crisis catches up with us. In the Psychology of Vision model we reach the Dead Zone. Our relationships begin to fail and we are thrust back into our feelings of Dependence that we had defended so vigourously. The parallel in the financial and commercial world is exactly what we are seeing now. The pack of cards that is built around Independent corporations comes crashing down and we stare failure in the face. The very fear that drove us into Independence is now realised. This is the problem with an Independent strategy – it brings about the very thing that it is supposed to protect us from. In our relationships we become afraid of intimacy and the full expression of our emotions – both positive and negative. At best, we end up living half a life and cannot feel the joy and freedom that true partnership can bring. At worst we see a credit crunch in our relationships – not this time about money, but about a bankruptcy of love.
Let us hope that the current problems in the financial world are an opportunity to move to more Partnership and cooperation. Everything that happens to us both good and bad can be seen as a learning opportunity. We can re-build the banking sector as an industry that is emotionally intelligent and really cares about people. It would be in service to the people of the world rather than in competition with it. Perhaps this is somewhat idealistic give the egotistical track record of man, but at least we can choose to live in Partnership within our personal relationships. We can recognise the dangers of Independence and move towards people with open hearts. By feeling our emotions and communicating and healing our fears we can form much better, sustainable relationships, which then become a model for the people around us and for business.
Most of us are facing financial worries with the credit crunch. This article discusses the causes of these problems and compares them to our romantic relationships. By making parallels it provides us with some pointers to how we might improve our relationships.
