The assignment calls for, “Analyse the key social, political and economic factors impacting upon specific business sector as a result of globalization”. At the turn of the century, the US economy was suffering a problem based at least in part on the bursting of the so-called “dotcom” bubble. There were signs of economic slowdown and this was not satisfactory to just elected US President George Bush. He called upon his economic advisors, and they explained the theories of monetary economics developed by Milton Friedman. (Friedman, 1971) His chairman of the Federal Reserve responded enthusiastically and pushed reserves into the US banking system and pushed interest rates down. Mortgage rates fell, home building boomed, and the prices of US real estate soared. So was born the US housing boom. At the same time, US mortgage banks were purchasing the newly created mortgages as rapidly as the banks and mortgage brokers could churn them out and guaranteed payment of what could generously be called mortgages of questionable quality. These were combined into packages to collateralize securities, which were in turn sold to banks looking for high yielding “safe” investments. Similar things were going on in other Western economies like the UK, which had it own housing bubble and mortgage crisis. The results are a series of serious problems in the world banking industry and financial market.
The pressure to maintain employment rates and economic growth in the US put the entire global banking system under strain. The growth of the manufacturing segments of the Asian economies with their low labor costs and other advantages created huge outflows of money from US and other Western banks into Asian banks. With these dollars they even purchased some of the mortgage backed securities alluded to above and their European counterparts did the same.
Eventually, it was discovered that the emperor really had no clothes. The securities given high credit ratings by the rating agencies while they turned their eyes away from the emperor’s nakedness were virtually worthless in that they could not be sold at any price. US banks, while acting in their rolls as investment banks under the liberalized US banking law had billions of dollars worth of this paper on their shelves and no market. The resulting “write downs” of assets resulted in major depletion of bank equity accounts as profits earned over the years were absorbed in a period of months. The banks outside the US suffered the same problems plus a few of their own, and the global banking industry was suddenly stampeding toward financial disaster. When US banking authorities made the ill advised decision to allow the collapse of Lehman Bros, a 150 year old US firm, banks around the world were afraid to lend to each other, let alone clients. No one wanted to lend to anyone, and the credit markets “froze.” The panic was worldwide and not localized to the US or any other single economy.
The refusal to lend meant that auto buyers had difficulty financing their purchases and auto sales collapsed. The already unprofitable US auto companies Ford, General Motors and Chrysler all are on the edge of bankruptcy with their hundreds of thousand of workers out of work and unemployed. This problem is not limited to the US companies; Japanese giants including Toyota and Honda will have problems. If they have problems Nissan will have similar problems, but French auto company Renault Is the effective owner of Nissan. Volkswagen profitability has been marginal for years. The recent up tick will probably disappear rapidly as even BMW profits fell. The European and other auto companies will all have problems. Even more disastrous for the financial system, there is the potential loss of billions more on loans to the auto companies. This is still further compounded by auto loans to customers and the situation of the US auto company pension funds. Chronically under funded, these pension funds are another card in the collapse of the financial house of cards. In addition to the hundreds of thousand of unemployed auto workers and workers for part suppliers there will be millions of pensioners whose pensions are worthless and whose savings have been destroyed by falling real estate and stock prices.
This implies that US retail sales will collapse which will in turn cause thousands more Chinese manufacturing companies to close their doors as their razor thin margins collapse into losses. The giant export driven economy of China, the new growth driver of the world economy, will falter and this in turn will have repercussions on the developing nations that supply the raw materials for the great Chinese expansion. At the same time the oil rich economies of the Middle East that are providing investment capital worldwide will suddenly find that their cash flows are curtailed and the jewel cities like Dubai and Abu Dubai have their own real estate collapse. The banks of the Middle East and the sovereign wealth funds will also have problems. The short lived commodity bubble that drove oil prices to $150 per share is already collapsing, and this will bring still more losses and problems to the international banking system. If there is a bright side to this demonstration of the linking of the International banking system to world industry it is that with the coming global recession perhaps the emission of green house gasses from US auto exhausts and Chinese factories will slow, and global warming will be delayed a few years.
On the government side, the billions of pounds invested by government in “bailing out banks” is a critical element in the world banking and political system. The US refusal to “bail out” Lehman Brothers was effectively the trigger that froze the international credit markets. It was a crucial factor in the decision by the UK government of the necessity to move and stabilize the UK banking system with £100 billion pounds of “equity investment” in UK banks. The huge dollar reserves of the Middle East and China hang over the head of the entire international financial system like the sword of Damocles because the US dollar is the reserve currency for the world banking system. If the Chinese or the Middle East decides to significantly reduce their holding of dollars, the value of the dollar relative to other currencies would fall precipitously and the result would be a worldwide panic even worse than the current frozen credit markets.
The above recital of problems could easily be expanded, but the discussion above seems to demonstrate the “key social, political and economic factors impacting upon specific business sector as a result of globalisation” The global political relationships will be demonstrated in coming months as a new president that seems to have a clearer idea of the realities of international relations assumes leadership of the United States.
Recommendations for banking companies in view of the problems and opportunities of globalization
It is clearly presumptuous for a project such as this to make recommendations to solve and even profit from the scenario presented above. This said, just such an attempt will be made. What is clear is that as the world moves into the 21st century a new social and economic order is developing. Until there are fundamental changes in the system of world government and finance it will be difficult to bring the problems under control and a single industry, even one as powerful as the banking industry cannot be as an island standing against the flood. The model of laissez-faire capitalism is clearly broken, even if the concept of capitalism remains valid. Governments must work together to institute limits on the freedom of entrepreneurs to conduct “anti-social” activities like some of those described in the preceding section.
An example is the suspension of the Glass-Steagall Act in the United States that separated commercial and investment banking. This was at least in part the cause of the so-called “sub-prime lending” in the credit markets. It is an example of government regulation designed to control practices that could lead to questionable behavior by some participants. This is not true socialism or government control of the banking industry, only an attempt to prevent abuse. Robert Kuttner in The American Prospect Online argues that there is a case against the particular version of globalization “imposed by the world's financial elites. The brand currently ascendant needlessly widens gaps of wealth and poverty, erodes democracy, seeds instability, and fails even its own test of maximizing sustainable economic growth.” (Kuttner, 2002)
It is essential that governments of at least the major economic powers form a confederation of some sort that can establish controls on the multinational corporations in general and especially those in the financial sector. The viability of the largest bank is Switzerland UBS has been questioned, and it has been forced to seek additional equity (Blackden & Aldrick, 04/0) and assistance from the Swiss government. (Aldrick, 10/1) At the same time, Hong Kong Shanghai Banking Corporation, generally known as HSBC, has become a major US bank with branches across the United States. It is headquartered in London and has operations in 85 countries and 9,500 offices. The bank had total assets of US$2.55 trillion and equity of US$134 million or about 5% of assets. It is also experiencing problems involving losses at US subsidiary sub-prime lender Household. The organization has been troubled by the poor performance of its stock on exchanges for some time. (Griffiths, 01/1) So far, at least, HSBC has avoided the necessity of a “bail-out” like so many of its international peers.
The United States has announced a US$700 billion bail out fund for banks to absorb “toxic assets” and provide equity investment. The fund was announced with great fanfare and as this is being written, the rules are being changed. This does not change the reality of the crisis that required the fund, only how it will be used.
What all this implies is that small local banks are not viable in the long term and the giant international institution is the only long-term viable banking system. At the same time, many nations from Australia to Ireland to the US have guarantees of deposits at banks located in their country. At least part of the plan in the US involves the government taking equity positions in banks. In the UK Gordon Brown announced a £400 billion in fresh capital that would be used to purchase preference shares in eight large banks. This raises the specter of nationalization of the banking system even if it is not an immediate threat. It was the opinion of BBC’s business editor Robert Peterson that, "What Gordon Brown and central banks have done today should stave off economic Armageddon - but it's probably too late to save us from months, or even years, of sluggish growth." The banks included in the scheme, which includes credit guarantees, and other features in addition to the purchase of the preference shares are, Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered. The complexity of the UK plan is clear in the following diagram. BBC News (2008)
Source: BBC
Nationalization of the banking industry by country is not an attractive option and internationalization of the banks by a worldwide super government or super governmental agency is an unattractive option.
What remains will require years to fully implement and require international cooperation on an unprecedented scale. There is no strategy that will permit any single institution to effectively deal with the situation. It will require a re-engineering of the world banking system. The first step will require either a strengthening of the United Nations from its current impotence or more likely, a new form of the Group of 8 or Group of 20 leading nations. They in cooperation with the World Bank and the IMF would have to come up with a set of banking regulations that would be uniform and effective on a worldwide basis. This would probably involve the introduction of a new currency, probably backed by gold, which would serve as a reserve currency if the individual nations insisted on the right to create their own currencies. In time, an international currency would probably emerge. This would not prevent a nation from having its own fiscal and monetary policy, but it would provide a standard or benchmark, and prevent indiscriminate creation of reserves such as the US practiced in the 1990’s and the beginning of the 21st century.
With this change and guarantees of customer deposits in commercial banks crisis such as the one that is currently underway could be if not averted, at least controlled and mitigated. Probably a unified international banking system controlled by a unified central banking control would emerge. It would continue to be based on a fractional reserve system and participants would continue to compete, but on a more level and controlled playing field. The objective is not nationalization or “worldization” of the banking system. It would have as part of its objective improved access by developing countries to credit facilities. It would also prevent the giant multinational financial institutions from competing by offering unsound products or services and thus undermining the viability of the world financial system.
There is no business strategy that any bank and particularly a smaller institution could, “…utilize to deal with the threats and opportunities of globalisation.” The major institutions can begin to define local strategies that will fit their operations more seamlessly into local cultural norms. For example, banks can devise alternative financing vehicles to own and lease homes to Islamic clients that are proscribed by the Koran from earning or paying interest. They can also possible devise deposit accounts that would somehow benefit the Islamic depositor without paying interest. This is simply customer centric marketing used creatively.
The smaller institution has no place in the 21st century banking environment. It cannot compete in terms of cost of funding or in terms of working with multinational clients. Even smaller businesses will increasingly purchase and/or sell products internationally. Wal-Mart will not in the foreseeable future force out the smaller fashion oriented clothing store that will be buying from oriental manufacturers. Even these stores will need and look to a bank for advice and help in doing business internationally. By giving increasing autonomy to its branch managers and district managers the multinational banks will be able to offer the local services and help to small local businesses that now look to the friendly local banker.
References
Aldrick, P. (10/16/2008). UBS: Swiss government comes to rescue of proud industry. Telegraph.co.uk. Retrieved November 19, 2008 from
BBC News. (2008, October 8). Rescue plan for UK banks unveiled. Retrieved November 19, 2008, from
Blackden, R., & Aldrick, P. (04/01/2008). UBS chairman to quit as bank seeks £7.6bn. Telegraph.co.uk. Retrieved November 19, 2008 from
Friedman, M. (1971). Monetary History of the United States. Princeton NJ (for National Bureau of Economic Research: Princeton University Press.
Griffiths, K. (01/11/2007). Troubled HSBC seeks help from PR agency. Telegraph.co.uk. Retrieved November 19, 2008 from
Japan-101 Information Resource. (2005). Japan's First Contact With the West. Retrieved November 8, 2008, from
Kuttner, R. (2002). Globalization and poverty'. Retrieved November 19, 2008, from The American Prospect Online Web Site:
Romer, P. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, 94(5), 1002-37.
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Smith, M. K., & Doyle, M. (2002). Globalization. In (Ed.), (p. ). Infed: . Retrieved November 8, 2008, from
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