Scenario of the world economy changed very rapidly after Second World War. In the post world war scene, United States of America emerged as a dominant economic power where as the United Kingdom and France lost their leading roles in economic activities. The pattern of economic growth also changed a lot in post war era. It was large corporations in USA, engaged in manufacturing activities, which contributed in generation of millions of stable jobs, especially in manufacturing space. These big corporations formed the center of fast and stable economic growth over the years. Economy of scale, division of labor, specialized jobs, and economic might of these corporations made these large establishments unbeatable for years. Rest of the world was just follower of this model of industrial growth of United States of America. In later half of the twentieth century Whole world seen the emergence and growth of these large industrial organizations. Few of these industrial establishments grew in size enormously and established their bases in multiple countries. (U.S. Department of State. 2009). This was a result of search for new markets and cheaper resources, so as to maximize the profits. These big corporations drove the American economy as well as world economy for whole later half of the twentieth century. But with the beginning of the twenty first century, scenario started changing and symptom also began to be visible for trouble for these large organizations. American corporations, which were mainly in the manufacturing domain, began to feel the heat of changing economic scenario in the wake of cheap labor availability in East Asian countries. (Ted Fishman. 2005). It also came to fore that owing to smaller size, newly emerging corporations of smaller size, worked with more dynamism and efficiency. Overheads of these smaller corporations were also less as compared to large organizations. Emergence of service sector as a full fleshed industry also contributed in changing service conditions, compensation methods and pension benefits. This led to changes in financial markets as well. All these factors led to a situation where established financial market, job market and investment and monetary scenario came under transition towards a new set up and became somewhat unstable in that process. Tremors of this instability are felt far and wide in every part of the world. Stock markets fell in almost every country amidst fear of mounting losses. Banks failed in many parts of the world resulting failure of insurance companies along with these. A scenario emerged in United States where industry shown a final decisive shift from manufacturing to services. It also established that era of stable long lasting jobs is over now. People have to cope up with fast changing service and retail industry, where average tenure for a job is comparatively less as compared to a manufacturing industry job.
Size and dimensions of Global Financial Crisis were unprecedented and caused failure of many large establishments like banks, insurance companies, manufacturing establishments, severe crisis in stock markets and escalation in unemployment threatening instability to whole financial mechanism in few countries. Governments of few countries had to come out with huge financial assistance packages to finance markets so as to maintain stability and seize any industrial unrest as a result. Though it was a complex web of many factors which led to global financial crisis, but few important ones can be listed as following.
Economy of United States of America shifted from being a manufacturing as base to service at focus. This resulted in restructuring or reshaping of established large corporations in few cases whereas failure of few in others. (Gerald F. Davis. 2009). This caused a panic in stock markets, where people invested heavily in these large corporations seeing their profits and growth in previous years.
Shift from manufacturing based economy to services based economy resulted in reducing availability of long term jobs as in service industry jobs average tenure for job remains substantially low as compared to manufacturing industry jobs. This resulted in newer set of service conditions emerging for labor markets. One of the primary results was portable pension. It was to facilitate the worker, who had to change job frequently on account of fast changing service industry where average tenure for a job was somewhere near 3 years in general. (Department of Agriculture. 2009). But portable pension, required professional pension fund managing companies. These companies operated in professionally and to get higher returns invested these funds in stock markets with higher returns. Formulation of multiple and sensitive nature products out of these pension funds, created chaos, once stock markets started u underperforming as these funds were actually not meant for short term investments.
When these pension funds came in stock markets through institutional investors, these created in new perspective for stock prices. Focus shifted from performance of the corporations in deciding the price of share. But in the race of profit maximizing, rates were decided not only company profitability but tradability of company shares. (Gerald F. Davis 2009). This was not a sound practice and it complicated the whole stock market scenario, once market started falling.
Financial market underwent deregulation, which let to development of few tradable instruments. These financial instruments came in to existence by securitization of mortgages and credit card debt etc. Common man having property which can be mortgaged became issuer of financial instruments. (Gerald F. Davis. 2009). At the other hand same person became investor in other type of instruments. This led to emergence of a very complex system of financial market, which was not only unclear in totality but unstable also. Inflated cost of houses was taken as basis for securitization, leading to wrong valuation of resulting financial instruments.
Businesses have become very dynamic in every sphere now days. Internet has changed the way business was done traditionally. Now companies based in California are outsourcing their jobs from a location thousands miles away in some other part of the world. Similarly a company generating services at one end of the world is selling it at other end of the world. So world economy has become more integrated in current times than ever before. It has created a scene, where economy of one country gets affected by happening in some other country. But even then some steps can be taken so as to minimize the resulting impact of such type of financial crisis in future.
Financial markets must have strong regulation, where valuation of every financial instruments is done with due deliberations. There should not be scope of inflated valuation of securities by few stake holders for their benefits. There should also be categorization of assets which can be used for securitization. For example credit card debt is not a credible asset which should be allowed to be converted in security. Pension funds management by private & professional fund managers are reality in current times. Scope and dimensions of their operations are bound to increase in future. But there must be brought a very strong regulatory mechanism, which regulate operations of funds management with prudent norms in place. These fund managers should not be allowed to invest with just an eye on maximizing the wealth of investors, but should also look for stability of the operations.
Lending operations of the banks and other financial institutions should also be kept under check. Subprime lending not only reduces the stability of the operations, but also put the financial system at risk of losses. So only credit worthy individuals or institutions should be allowed to raise debt and that even within prudent lending norms.
There must be check on the exposure limit of individual banks or other non banking financial institutions to any single business house or industrial segments. Today business world is fact changing. Any innovation in particular industrial segment may alter whole established scenario, causing losses to big corporations. In such cases, if financial institutions have large exposure to such industrial house or industry, it causes problem of stability. Some time losses may be in the tune of even causing failure of bank. To avoid such scenario, it is all the time better to take preventive step of putting ceiling caps on exposure of banking and non banking financial institutions to any single industry of industrial house.
There must strict regulations so as to govern stock markets, so as institutional investors are not in a position to manipulate prices of the stocks to their benefit. It has been observed that in few countries, institutional investors have manipulated the stock prices resulting in losses to general investor community, erasing confidence of investors in market.