TheGlobal Business Environment – Fall 2013 Homework 1: The Great Recession and “The West and the Rest”

Expose your narrative on the Great Recession. Do you see a relation with a possible bug(s) in one or more of the six killer applications listed by Ferguson? Write a 1-page essay, single line, 12pt, in your best English.

Global Business Environment – Fall 2013 Homework 1: The Great Recession and “The West and the Rest”

One of the apps Ferguson suggests as having propelled Western Civilization over the rest is consumerism. This analysis begins with what I believe to be a bug in this app. Consumerism is mentioned by Ferguson as a tool which enabled Westerners to express their individuality, opinions, and ideas. Though this begins with jeans and pop music, the true importance of this app greatly exceeds these two topics. In the long term, however, consumerism began to morph into a way of life, in which consuming could, even if arguably, become a main source of personal fulfillment and even happiness. I believe the financial deregulation in which the Great Recession finds its inception, has its root here: in a society where consuming claimed progressively a larger portion of importance in people’s minds. However, like every accident, this was not the exclusive reason behind the problem: there is a myriad of wrong turns, this being one of them. The deregulation signed off by President Bill Clinton in the 90’s is where I consider the problem to begin. The Gramm-­‐Leach-­‐Bliley Act blurred the borders that separated the different types of financial institutions. What this led to was both a period of deregulation and an official establishment of a new kind of institution which was in its substance a bank, although formally it wasn’t recognized as such nor was it regulated as such. The bug that was already in Western society’s core, had now found room to spread like a cancer: the limits to the financial institutions were now reduced to an insufficient bundle of measures, while those in the financial sector were eager to make bigger deals, and take bigger chances. Simultaneously, the bug also spread into the demand’s side of the market: many people whose financial situation would not allow them to buy a house, are now receiving yes’s instead of no’s from the financial institutions that they turn to. We can also argue that many people did not need a house: this apparent need was a direct consequence of the bug aforementioned. Regardless, these conditions created the perfect habitat for new financial instruments to flourish: complex securities with increasingly lower liquidity values, which were sold to investors as safe ventures. It matters to mention that the complex net of banks is now more complex than ever, and with the United States being the world’s leading economy, a significant portion of its structure is based on American financial institutions. That, and the shaky foundation in which all this was built, meant that even the tiniest shock in any part of the structure had the potential to tear the whole system apart. The chain reaction that began to destroy the system starts with borrowers not being able to fulfill their contractual obligations; this activated mortgages which were now packed in extremely complex securities, sold to multiple investors. These securities now had a real value diametrically different from their net value: the housing bubble had burst, and with it, the securities it allowed to exist. Institutions were now faced with packages which had no real value, and whose investors they could hardly trace. This is where the public’s perception of the crisis began. The bankruptcy of then world-­‐class institution Lehman Brothers was the tip of an iceberg that, at the time, hid a much bigger picture. This was the largest and most widespread financial crisis since the Great Depression, and its effects are still immensely visible today: the Eurozone is

facing its greatest challenge to date while America is facing huge government debt and unemployment rates. The consumer society app that once served as a catalyzer for Western predominance transformed into a bug, strong enough to destroy an already fragile system from the inside out.

Miguel Cansado Carvalho TAL48_12186