The Global Financial Crisis Part II: ...And Justice for None
When the worldwide financial turmoil erupted following the collapse of Lehman Brothers and the broader subprime mortgage crisis that fundamentally led to an erosion of trust in financial markets, the Earth stood still. Having covered the genesis of the worst gamble in history in my previous post, in this sequel I shall endeavour to provide a clear-cut analysis of the global economic consequences of this blunder and hereto policy responses, as well as the subsequent polemic debates in employment law surrounding job cuts, equality of opportunity across all genders, and racial discrimination.
The global financial crisis, after boiling for a long-time under the housing bubble, manifested its deleterious effects in the middle of 2007 and through to 2008. All around the world stock markets plummeted, large financial institutions such as Lehman Brothers floundered, and governments in the wealthiest of nations were forced to step in with bailout plans in order to rescue their respective country's financial systems from certain doom. Much of the public outcry that emerged in the wake of the crisis stemmed from two concerns: that many of the individuals and entities that were being bailed out were actually the ones responsible for the disaster and ought therefore to be punished and that the global financial meltdown would impact every citizen on the planet due to the increasing interconnectedness of the world's nations as a result of globalisation.
Of course, while some financial bodies collapsed, others opted for bailouts safe in the knowledge that they were deemed ''too big to fail''. Therefore, these entities used such an argument as leverage in order to avoid justice for their sordid actions that were ultimately motivated by greed, and cost taxpayers extortionate amounts of money. For example, according to Bloomberg, despite a global credit loss of $2.8 trillion in 2009, in 2013 ordinary American taxpayers were predicted to have to spend on average $9.7 trillion on bailout packages. The situation had not been dissimilar with regards to the United Kingdom and Europe, who had initially spent around $2 trillion on said packages, with the total sum likely to have increased ever since. Thus, the ultimate accusations of injustice were warranted due to the apparent dispersal of the costs on a wide social scale. At the same time as the moral integrity of the general public was offended, sales across major global industries sank, as a result of the slump in private consumption. Due to the widespread panic over restricted access to credit as a result of the collapse of major financial institutions, households reacted vigorously to the credit crunch by significantly slashing discretionary spending as a result of reduced disposable income. A huge blow was subsequently dealt to the demand for automobiles, with car sales in the major economies depleting by 25%. General business investment also drastically diminished during the transition from 2008-2009.
Meanwhile, in order to settle public indignation, some governments had proceeded to make the situation more difficult for speculators to manipulate financial markets by banning the method of short-selling, which had been heavily employed in the run-up to the financial crisis, particularly once mortgage-backed securities began to devalue as a result of an increasing default rate. For the purpose of clarification, selling short refers to the sale of an asset that that the seller has borrowed and thus does not possess. Generally speaking, short-selling is fueled by speculation which results in the belief that said asset's price is due to decline, eventually enabling the investor to buy it back at a lower price, thus accruing profits. Although this practice is chided and short-sellers are labelled as profit-making mongers, short-selling actually plays an important role in generating liquidity for markets and ensuring that an asset is never hyped up so as to incessantly spike up its price. However, the banning of short-selling soon after the crisis broke out was nothing but an apropos move, for it did not contribute to an obstruction of decline in stock prices. For example, shares fell by more than 12% in the fortnight since the ban had been in place (source: Reuters).
Furthermore, in order to stimulate a renewal of investment, interest rates were sharply reduced close to 0 and central banks endorsed the method of quantitative easing more broadly. When this process is embarked upon, central banks aim to increase the money supply by purchasing government securities and this is usually done when certain events have debilitated the economy. That said, the unconventional nature of this method stems from its potential of leading to soaring inflation rates, although this may be seen as the unintended consequence of a desperate measure called for by desperate times. This is particularly the case when there is an increased availability of money yet there exists only a fixed amount of goods and services. Henceforth, from the examples of quantitative easing and the ban on short-selling, one may reach the argument that such measures only served to sweep the wider issue under the rug, rather than bring to justice those who relentlessly gambled away people's money. As I mentioned previously, those institutions deemed ''too big to fail'' took advantage of their bestowed position in order to avoid closure and as is the consensus among many economists and financial analysts, if such institutions are too big to fail then they need to be compartmentalised so as to avoid moral hazards in the future.
In this regard, many have come to cast blame upon lawyers, particularly those who acted as representatives of the entities that designed the dodgy mortgage-backed securities (MBSs). The main argument pinning the blame on the legal sector claims that legal council played a decisive role in determining corporations to venture into the unhinged subprime mortgage market. It was fathomable that firms were advising their tycoon clients during a time when vital decisions were being made that would have a lasting impact on financial markets, and the fact that the disclosure of legal advice is rendered impossible by the watertight attorney-client privilege raises even more eyebrows about the role lawyers played in the lead-up to the crisis. Perhaps, if one accepts that the "boom mentality" was so invasive it penetrated the righteous fabric of the legal sector, then a case could be made for lawyers as co-conspirators in the profiting from toxic mortgage-backed assets. In the boom market, everyone agrees that aggressive expansion is the way forward, even if it eschews fair competition, with lawyers undergoing their own period of "irrational exuberance". Before this frame of thought became the norm, lawyers were responsible for encouraging their clients to consider what might turn out wrong in the process of complex financial transactions due to having sparkling legal knowledge of potential drawbacks of certain activities.
In relation to this point, many people hold lawyers accountable for the outbreak of the financial crisis because structured finance lawyers lend their ears to individuals who wish to undertake securitization transactions and the type of opinion given to structured finance buyers is two fold: "true-sale" opinion and "non-consolidation" opinion, collectively known as structured finance opinion. The aim of this is to reassure investors and rating agencies alike that the structure and design of their transactions does not run the risk of insolvency. This is important because upon determining credit ratings, agencies not only consider the creditworthiness of the potential borrower but also structured finance opinions. As such, because investors purchased mortgage-backed securities based on erroneous assessment, many had jumped to the conclusion that poor legal advice from structured finance lawyers allowed such assets to become commonplace. Nevertheless, it is difficult to build a strong argument against the role of lawyers in the financial crisis due to the fact that, in what regarded advising their clients, they were not transgressing any piece of legislation. For while the sale of MBSs that included subprime mortgages paved the way for abuse by market gamblers, there is nothing inherently criminal about such transactions and they do, in fact, yield significant monetary benefits. That said, the permissive or otherwise non-existent regulations that allow for self-seeking and opportunistic behaviour ought to be subjected to further inspection and subsequent change so as to avoid the costs of such deplorable actions in the future.
While it is troublesome to successfully indict the lawyers, it is undeniable that the global financial crisis had serious implications for the adaptability of employment law to cope with worldwide job cuts. The crisis has been recognised to influence employment law vis-à-vis equal rights in the labour market as follows:
Economically tumultuous times have been seen to open the door to work-related discrimination via the endorsement of a policy of retrenchment. This may lead to a narrowing of the job market into the prioritisation of work to the 'core' of those individuals traditionally thought to partake in the labour market, in other words fostering attitudes favouring the 'male breadwinner' model. For example, ex-Trades Union Congress secretary Brendan Barber has poignantly referred to the global financial crisis as the 'equal opportunities recession'. Not to mention that austerity measures adopted by several European Union nations have equally compounded people's job prospects. For example, Portugal underwent an extensive programme that involved cuts to bonus salary payments for civil servants and pensioners, and restricting dismissal compensations. To cope with such jitters, the rhetoric of adjustable mechanisms was propagated by the World Commission, emphasising their need in both developed and developing countries, albeit the focus in such situations has always been more on the latter. In this case, it is necessary for financial donors and international institutions to provide the means via which the country in need's social fabric can be reinforced so as to make the distribution of profits garnered from globalisation fairer. Yet more often than not, measures such as the structural adjustment porgrammes (SAPs) provided by the IMF do more bad than good, often sparking civil unrest, because of the condition clauses that come with the loans that are issued. A perfect historical example is the application of such programmes by the IMF and the World Bank to Rwanda, which involved huge loans at the expense of land seizures for World Bank-funded projects that fueled the anxieties of peasants and ultimately gave way to the extremism that subsequently led to the outbreak of the Tutsi genocide in 1994. Thus, in essence, global recovery from crises of such scale should be attempted cooperatively but developed nations need to take into account the particularities of less economically developed countries rather than restructure them as they see fit.
In conclusion, the policy response to the financial crisis served no justice to those who were in need of it most: the people belonging to the lower echelons of society that had their homes foreclosed. While public outcry was followed by inimical blows to various industries around the globe, regulators and lawmakers created the facade of righteousness that the public was yearning for through, as I mentioned, the banning of short-selling, but in reality they further damaged taxpayers' financial health due to the proposed bailout packages, that had the rippling effect of damaging demand and private consumption, and merely covering up the mess made by the "too big to fail" institutions.
The global financial crisis, after boiling for a long-time under the housing bubble, manifested its deleterious effects in the middle of 2007 and through to 2008. All around the world stock markets plummeted, large financial institutions such as Lehman Brothers floundered, and governments in the wealthiest of nations were forced to step in with bailout plans in order to rescue their respective country's financial systems from certain doom. Much of the public outcry that emerged in the wake of the crisis stemmed from two concerns: that many of the individuals and entities that were being bailed out were actually the ones responsible for the disaster and ought therefore to be punished and that the global financial meltdown would impact every citizen on the planet due to the increasing interconnectedness of the world's nations as a result of globalisation.
Of course, while some financial bodies collapsed, others opted for bailouts safe in the knowledge that they were deemed ''too big to fail''. Therefore, these entities used such an argument as leverage in order to avoid justice for their sordid actions that were ultimately motivated by greed, and cost taxpayers extortionate amounts of money. For example, according to Bloomberg, despite a global credit loss of $2.8 trillion in 2009, in 2013 ordinary American taxpayers were predicted to have to spend on average $9.7 trillion on bailout packages. The situation had not been dissimilar with regards to the United Kingdom and Europe, who had initially spent around $2 trillion on said packages, with the total sum likely to have increased ever since. Thus, the ultimate accusations of injustice were warranted due to the apparent dispersal of the costs on a wide social scale. At the same time as the moral integrity of the general public was offended, sales across major global industries sank, as a result of the slump in private consumption. Due to the widespread panic over restricted access to credit as a result of the collapse of major financial institutions, households reacted vigorously to the credit crunch by significantly slashing discretionary spending as a result of reduced disposable income. A huge blow was subsequently dealt to the demand for automobiles, with car sales in the major economies depleting by 25%. General business investment also drastically diminished during the transition from 2008-2009.
Meanwhile, in order to settle public indignation, some governments had proceeded to make the situation more difficult for speculators to manipulate financial markets by banning the method of short-selling, which had been heavily employed in the run-up to the financial crisis, particularly once mortgage-backed securities began to devalue as a result of an increasing default rate. For the purpose of clarification, selling short refers to the sale of an asset that that the seller has borrowed and thus does not possess. Generally speaking, short-selling is fueled by speculation which results in the belief that said asset's price is due to decline, eventually enabling the investor to buy it back at a lower price, thus accruing profits. Although this practice is chided and short-sellers are labelled as profit-making mongers, short-selling actually plays an important role in generating liquidity for markets and ensuring that an asset is never hyped up so as to incessantly spike up its price. However, the banning of short-selling soon after the crisis broke out was nothing but an apropos move, for it did not contribute to an obstruction of decline in stock prices. For example, shares fell by more than 12% in the fortnight since the ban had been in place (source: Reuters).
Furthermore, in order to stimulate a renewal of investment, interest rates were sharply reduced close to 0 and central banks endorsed the method of quantitative easing more broadly. When this process is embarked upon, central banks aim to increase the money supply by purchasing government securities and this is usually done when certain events have debilitated the economy. That said, the unconventional nature of this method stems from its potential of leading to soaring inflation rates, although this may be seen as the unintended consequence of a desperate measure called for by desperate times. This is particularly the case when there is an increased availability of money yet there exists only a fixed amount of goods and services. Henceforth, from the examples of quantitative easing and the ban on short-selling, one may reach the argument that such measures only served to sweep the wider issue under the rug, rather than bring to justice those who relentlessly gambled away people's money. As I mentioned previously, those institutions deemed ''too big to fail'' took advantage of their bestowed position in order to avoid closure and as is the consensus among many economists and financial analysts, if such institutions are too big to fail then they need to be compartmentalised so as to avoid moral hazards in the future.
In this regard, many have come to cast blame upon lawyers, particularly those who acted as representatives of the entities that designed the dodgy mortgage-backed securities (MBSs). The main argument pinning the blame on the legal sector claims that legal council played a decisive role in determining corporations to venture into the unhinged subprime mortgage market. It was fathomable that firms were advising their tycoon clients during a time when vital decisions were being made that would have a lasting impact on financial markets, and the fact that the disclosure of legal advice is rendered impossible by the watertight attorney-client privilege raises even more eyebrows about the role lawyers played in the lead-up to the crisis. Perhaps, if one accepts that the "boom mentality" was so invasive it penetrated the righteous fabric of the legal sector, then a case could be made for lawyers as co-conspirators in the profiting from toxic mortgage-backed assets. In the boom market, everyone agrees that aggressive expansion is the way forward, even if it eschews fair competition, with lawyers undergoing their own period of "irrational exuberance". Before this frame of thought became the norm, lawyers were responsible for encouraging their clients to consider what might turn out wrong in the process of complex financial transactions due to having sparkling legal knowledge of potential drawbacks of certain activities.
In relation to this point, many people hold lawyers accountable for the outbreak of the financial crisis because structured finance lawyers lend their ears to individuals who wish to undertake securitization transactions and the type of opinion given to structured finance buyers is two fold: "true-sale" opinion and "non-consolidation" opinion, collectively known as structured finance opinion. The aim of this is to reassure investors and rating agencies alike that the structure and design of their transactions does not run the risk of insolvency. This is important because upon determining credit ratings, agencies not only consider the creditworthiness of the potential borrower but also structured finance opinions. As such, because investors purchased mortgage-backed securities based on erroneous assessment, many had jumped to the conclusion that poor legal advice from structured finance lawyers allowed such assets to become commonplace. Nevertheless, it is difficult to build a strong argument against the role of lawyers in the financial crisis due to the fact that, in what regarded advising their clients, they were not transgressing any piece of legislation. For while the sale of MBSs that included subprime mortgages paved the way for abuse by market gamblers, there is nothing inherently criminal about such transactions and they do, in fact, yield significant monetary benefits. That said, the permissive or otherwise non-existent regulations that allow for self-seeking and opportunistic behaviour ought to be subjected to further inspection and subsequent change so as to avoid the costs of such deplorable actions in the future.
While it is troublesome to successfully indict the lawyers, it is undeniable that the global financial crisis had serious implications for the adaptability of employment law to cope with worldwide job cuts. The crisis has been recognised to influence employment law vis-à-vis equal rights in the labour market as follows:
Economically tumultuous times have been seen to open the door to work-related discrimination via the endorsement of a policy of retrenchment. This may lead to a narrowing of the job market into the prioritisation of work to the 'core' of those individuals traditionally thought to partake in the labour market, in other words fostering attitudes favouring the 'male breadwinner' model. For example, ex-Trades Union Congress secretary Brendan Barber has poignantly referred to the global financial crisis as the 'equal opportunities recession'. Not to mention that austerity measures adopted by several European Union nations have equally compounded people's job prospects. For example, Portugal underwent an extensive programme that involved cuts to bonus salary payments for civil servants and pensioners, and restricting dismissal compensations. To cope with such jitters, the rhetoric of adjustable mechanisms was propagated by the World Commission, emphasising their need in both developed and developing countries, albeit the focus in such situations has always been more on the latter. In this case, it is necessary for financial donors and international institutions to provide the means via which the country in need's social fabric can be reinforced so as to make the distribution of profits garnered from globalisation fairer. Yet more often than not, measures such as the structural adjustment porgrammes (SAPs) provided by the IMF do more bad than good, often sparking civil unrest, because of the condition clauses that come with the loans that are issued. A perfect historical example is the application of such programmes by the IMF and the World Bank to Rwanda, which involved huge loans at the expense of land seizures for World Bank-funded projects that fueled the anxieties of peasants and ultimately gave way to the extremism that subsequently led to the outbreak of the Tutsi genocide in 1994. Thus, in essence, global recovery from crises of such scale should be attempted cooperatively but developed nations need to take into account the particularities of less economically developed countries rather than restructure them as they see fit.
In conclusion, the policy response to the financial crisis served no justice to those who were in need of it most: the people belonging to the lower echelons of society that had their homes foreclosed. While public outcry was followed by inimical blows to various industries around the globe, regulators and lawmakers created the facade of righteousness that the public was yearning for through, as I mentioned, the banning of short-selling, but in reality they further damaged taxpayers' financial health due to the proposed bailout packages, that had the rippling effect of damaging demand and private consumption, and merely covering up the mess made by the "too big to fail" institutions.
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