Recent Financial Meltdown Research Articles

Can Lebanon's Economy Be Saved? A Plan for Revival

AbstractThe recent financial and economic meltdown in Lebanon is the result of 30 years of social, economic, financial, and fiscal mismanagement, amplified by the Covid‐19 pandemic and further exacerbated by the Beirut port explosion. Lebanese citizens’ trust, as well as the international community's trust in the government, have unfortunately been destroyed. Consequently, Lebanon's sole option is to rebuild confidence in the government and public institutions by implementing economic reforms and to seek an IMF program to pave the way for additional financing from other international sources. The most important confidence‐building step is a clear financial and economic plan that has the support of all key stakeholders. This article presents a road map for a reforms‐driven, export‐led growth strategy for Lebanon. Ultimately, the goal is to jump‐start the economy and put it on a path of sustainable, inclusive, and equitable economic growth. Such growth should be grounded in a small, open‐economy model and driven by low tariffs, a flexible exchange rate regime, and a dynamic export sector built on competitive and comparative advantages. This plan partially builds on proposals and recommendations provided by previous economic plans and policy notes.

Finance on Trial

AbstractIn the context of the recent financial meltdown, the financial industry has frequently been accused of being indifferent to the irregular practices of its members or even to be criminogenic. But how do actors of the financial industry respond to such accusations and defend themselves? How do they justify their actions when facing legal charges as well as public blame? This article elucidates these questions through a rare ethnographic case: the first criminal trial of a trader involved in the manipulation of Libor, which took place in London in 2015. Tied to at least $300 trillion contracts, Libor is a benchmark that plays a key role in the financial industry. The paper offers a sociological framework to capture the justifications of financial wrongdoings, arguing that they are structured around three elements: (a) a conception of rules; (b) a narrative; (c) a form of responsibility. I distinguish three justifications: the one of the maker, of the interpreter and of the user. I finally discuss how these justifications contribute to the general tolerance towards white-collar crime.

The Confidence Trap: A History of Democracy in Crisis from World War I to the Present by David Runciman

The Confidence Trap: A History of Democracy in Crisis from World War I to Present, by David Runciman. Princeton & Oxford, Princeton University Press, 2013. xxiii, 393 pp. $29.95 US (cloth). David Runciman's The Confidence Trap is a racing narrative of travails of and confounding logic of its resilience. The premise for this illuminating reflection comes from key points in Alexis de Tocqueville's reading of America's democracy. These include democracy and its rivals, democracy and fate, and democracy and Tocqueville's reading contrasts with views of philosophers and writers such as Plato, Thomas Paine, and Charles Dickens. Plato holds a generic view of and underscores its ignorance, folly, and vanity in ways deny class content of society. Paine, himself a radical champion of democracy, underscores democracy's attribute of transparency as opposed to monarchy and other autocratic systems. Dickens dismisses America's as hypocritical. Runciman drives home these points and paints a distinctive account of Tocqueville's insightful appreciation of in ways mark him as best guide to in crisis. Tocqueville is not enamoured of Paine's interpretation of as transparent. He argues democracy never truly reveals itself. There will always be a gap between perception and reality in a society founded on democratic principles (10). Tocqueville also notes is prone to for two reasons. First is evidence world's destiny is democracy, insofar as republican value no one was born to rule over another holds sway (11). Second, knowledge of as ultimate destination engenders a faith in its eventual triumph despite its situational instability. Tocqueville espouses distinction made by John Stuart Mill regarding oriental fatalism and modified The former is the belief higher power has mapped out in advance everything will ever happen to us while latter is the belief we are products of our circumstances and there is nothing we can do to change that (15). The latter is true of America's fatalism. Tocqueville recognizes well crisis means a dangerous moment and portends dangers for democracy. In main, democracy muddles through war and revolutionary change, its confusions ineradicable and its progress inexorable. It never fully grows up. And it leads to where we are now (33). Armed with Tocqueville's cant, well laid out in introductory section of this work, Runciman readily navigates trajectory of in last century and first decade of present. He focuses his analytical lens on major crises, spanning his scrutiny from WWI and ascent of Adolf Hitler to leadership of 1933 Germany, to Nikkei burst, India's crisis of 1990s, and recent financial meltdown. …

The Financial Premium in the US Labor Market: A Distributional Analysis

Using both cross-sectional and panel data, this article revisits the evolution of the financial premium between 1970 and 2011 with a distributional approach. I report that above-market compensation was present in the finance sector in the 1970s, but concentrated mostly at the bottom of the earnings distribution. The financial premium observed since the 1980s, however, is largely driven by excessive compensation at the top, a development that increasingly contributes to the national concentration of earnings. Furthermore, the analysis suggests that the financial premium for top earners remained robust in the early 2000s, when deregulation slowed down, and in the aftermath of the recent financial meltdown. These findings are inconsistent with the account that the earnings differential is driven by unobserved skill difference and demand shocks but supportive of the institutional account of rising inequality.

Globalization, Financial Crisis and Contagion: Time-Dynamic Evidence from Financial Markets of Developing Countries

Financial integration among economies has the benefit of improving allocation efficiency and diversifying risk. However the recent global financial crisis, considered as the worst since the Great Depression has re-ignited the fierce debate about the merits of financial globalization and its implications for growth especially in developing countries. This paper examines whether equity markets in emerging countries were vulnerable to contagion during the recent financial meltdown. Findings show: (1) with the exceptions of India and Dhaka, Asian markets were worst hit; (2) but for Peru, Venezuela and Columbia, Latin American countries were least affected; (3) Africa and Middle East emerging markets were averagely contaminated with the exceptions of Kenya, Namibia, Nigeria, Morocco, Dubai, Jordan, Israel, Oman, Saudi Arabia and Lebanon. Results have two important policy implications. Firstly, we confirm that Latin America was most prepared to brace the financial crisis, implying their fiscal and monetary policies are desirous of examination and imitation. Secondly, we have confirmed that strategic opening of the current and capital accounts based on empirical evidence for a given region/country as practiced by India is a caution against global economic and financial shocks.

The Financial Premium in the US Labor Market: A Distributional Analysis

Using both cross-sectional and panel data, this article revisits the evolution of the financial premium between 1970 and 2011 with a distributional approach. I report that above-market compensation was present in the finance sector in the 1970s, but concentrated mostly at the bottom of the earnings distribution. The financial premium observed since the 1980s, however, is largely driven by excessive compensation at the top, a development that increasingly contributes to the national concentration of earnings. Furthermore, the analysis suggests that the financial premium for top earners remained robust in the 2000s, when deregulation slowed down, and in the aftermath of the recent financial meltdown. These findings are inconsistent with the account that the earnings differential is driven by unobserved skill difference and demand shocks but supportive of the institutional account of rising inequality.

Comparison on Stability between Islamic and Conventional Banks in Malaysia

Islamic banks were relatively unaffected during the recent financial meltdown. This has raised the possibility that financial institutions, operating on Islamic principles are more stable compared to their conventional counterparts. This motivates us to undertake to examine relative stability between Islamic and conventional banks. Z-score and NPL are used as proxies for bank stability. Computation of Z-score and NPL suggest that on average Islamic banks are relatively more stable than their conventional counterparts. Standard panel data analysis suggests that factors affecting both Islamic and conventional banks stability are similar, except for the degree of diversification in income. Stability is not a function of income diversification for Islamic banks but it is in the case of conventional banks. This explained why during recent crisis, when various sources of bank income was adversely affected, Islamic banks remained stable as opposed to the conventional banks.

Student attitudes to socially responsible business: a case study of mine workers in Chile

PurposeGiven the proliferation of United Kingdom (UK) media headlines around the recent financial meltdown and the subsequent allocation of blame to government, bankers, the Bank of England and the Financial Services Authority, it is clear that there is disquiet amongst the public as to how the crisis has been handled. Business schools, both in the UK and worldwide, have been accused of failing to address issues of governance in their curricula. Can the assumption be made that current curricula will have prepared students to evaluate this key concept critically? This paper seeks to address these issues.Design/methodology/approachTaking a case study approach, this work sets out to explore the attitudes of a cohort of 43 final‐year undergraduate students studying in a UK business school. It focuses on an analysis of their written work on the sourcing of copper from Chile and its procurement by the UK Royal Mint for coinage.FindingsThe findings indicate that students valued the inclusion of corporate social responsibility in its widest context, and would welcome earlier inclusion within their curricula.Originality/valueThis is a timely point in their academic studies, as the students are preparing for study at Master's level or for the job market. The coursework required research into the production process of raw material at the copper mines in Chile, as well as the ethical decision‐making process of a UK governmental agency. Although this is a small‐scale study, it does offer some interesting insights into student perspectives. The paper concludes with recommendations for future curriculum development.

The Economy in an Evolving Twenty-first Century Paradigm: Society at a Crossroads

The process of European integration, and the state of the eurozone in particular, seem to be in crisis. However, it is not only the European dream that appears to be challenged. Although there have been a number of success stories in newly developed countries, the global system is facing the issues of poverty, corruption and global warming in addition to the recent financial meltdown and slowing of the world economy. One wonders if we are witnessing a major world crisis that suggests the need for major and fundamental change. There may well be a general misalignment between the technology that humanity has managed to create and the speed of innovation on the one hand, and the rate of social and economic adjustment on the other. The developments in Information and Communications Technology (ICT) are of particular relevance here. These developments are creating a new reality and also leading to major steps forward in personal awareness and empowerment. This is leading to the emergence of the ‘person’ as distinct from the ‘individual’. The person is more aware, more conscious, more committed and more opinionated. The person's creativity and communal role in society are central to the evolving twenty-first century paradigm, and this raises the question of how society should be organised and how the economy should be structured. This leads to a number of issues related to policy formation and regulation, organisational dynamics and the underlying principles of economic theory. It also puts into perspective the need to take a more community approach to social organisation and political life, emphasising ethics and governance. The fundamental issue is closely tied to leadership that needs to be both inspired and inspirational. The twenty-first century paradigm offers the potential to re-dimension democracy to make it more genuinely participative. Europe may have the potential to lead the way if the necessary leadership is available. However, piecemeal solutions will not allow Europe to overcome the current impasse.

The Role of Corporate Value Clusters in Ethics, Social Responsibility, and Performance: A Study of Financial Professionals and Implications for the Financial Meltdown

This article delves into a potential mindset that may be responsible for the recent financial meltdown. Research relating to this mindset from different perspectives is reviewed. The findings from this literature review are used to create a conceptual framework for the empirical, ethical, and corporate social responsibility study of financial professionals. Data were collected from a survey of the professional membership of a large national association of financial professionals. This article reports the results of the analysis of data relative to the relationships among the four constructs—financial professionals’ perceived organizational value clusters, ethics, corporate social responsibility, and corporate performance. The findings indicate that organizational core values significantly affect corporate ethics, social responsibility, and financial performance. We propose that organizations in the financial industry can move toward being more ethical and socially responsible by adopting organic core values (e.g., democratic, open, trusting, enterprising, creative, stimulating) and moving away from mechanistic values (e.g., structured, regulated, procedural, authoritarian, closed, callous). We also found the adaptation of organic core values does not require the organization to suffer a loss in financial performance.

Globalization, Financial Crisis and Contagion: Time - Dynamic Evidence from Financial Markets of Developing Countries

Financial integration among economies has the benefit of improving allocation efficiency and diversifying risk. However the recent global financial crisis, considered as the worst since the Great Depression has re-ignited the fierce debate about the merits of financial globalization and its implications for growth especially in developing countries. This paper examines whether equity markets in emerging countries were vulnerable to contagion during the recent financial meltdown. Findings show: (1) with the exceptions of India and Dhaka, Asian markets were worst hit; (2) but for Peru, Venezuela and Columbia, Latin American countries were least affected; (3) Africa and Middle East emerging markets were averagely contaminated with the exceptions of Kenya, Namibia, Nigeria, Morocco, Dubai, Jordan, Israel, Oman, Saudi Arabia and Lebanon. Results have two important policy implications. Firstly, we confirm that Latin America was most prepared to brace the financial crisis, implying their fiscal and monetary policies are desirous of examination and imitation. Secondly, we have confirmed that strategic opening of the current and capital accounts based on empirical evidence for a given region/country as practiced by India is a caution against global economic and financial shocks.

OTC Emissions Derivatives as Facilitators of Market-Based Climatic Regimes in the Wake of the Financial Meltdown

The underlying premise of international and domestic climatic regulatory regimes that employ cap-and-trade schemes to curb emission levels of greenhouse gases is that a market-based approach is the most cost-effective strategy to achieve a benign environmental system that enables sustainable development. The scarcity in emission allowances under those schemes is designed to impose increasing compliance costs on participating nations and business entities that would gradually facilitate transformations to economic equilibriums with lower intensities of greenhouse gases. However, the participants in these nascent and rapidly evolving “carbon markets” are increasingly exposed to exceptionally high and enduring price volatility of the newly created regulatory-based commodities. Unless such volatility could be hedged efficiently, it would constitute mounting regulatory-related compliance costs that could endanger the economic stability of viable industries. Ultimately, such volatility could project negatively on the cost-effectiveness of market-based regimes in the battle against climate change. The overall regulatory burden could be alleviated, to a degree, by linking the schemes to domestic and international project-based flexibility mechanisms, under which GHG mitigating projects are issued fungible offsets. However, the origination of mitigating projects is also dependent on custom made and long term risk mitigating solutions against regulatory, origination, and operational risks and against price volatility in the carbon markets. Over The Counter derivatives have been the strategy of choice, thus far, to overcome these price volatility-related setbacks and uncertainties. Their continuing utilization and development are essential for a cost-effective and winnable battle against climate change, especially given the increased cost-sensitivity in the current economic climate. However, OTC derivatives face increased skepticism and an uncertain future in the wake of the recent financial meltdown. They are blamed for generating unprecedented systemic risk by amplifying the ramifications of the subprime crisis to full-scale financial meltdown. In addition, they are blamed for facilitating excessive speculation in the energy markets in the midst of the crisis, which slowed down economic recovery. This article delves into a consequent inherent tension. The reliance on the carbon markets to facilitate unprecedented transformation entails the employment of potent risk management for fulfillment of their potential as the most cost-effective strategy for a winnable battle against climate change. However, the recent financial meltdown yielded general mistrust vis-a-vis innovative financial technology. In particular it motivated regulators to prevent reoccurrence of OTC-related financial meltdown and, ironically, to protect the integrity of the nascent carbon markets. This article sheds light on the associated vibrant debate over the future financial and climatic regulatory regimes and points to a desirable “center of gravity” that efficiently balances conflicting risks and challenges.

Securitization Technology as a Bridge to Fund GHG Mitigating Projects in the Wake of a Financial Meltdown

The Kyoto Protocol’s project finance-based compliance mechanisms were devised to efficiently retool the global economy to be less greenhouse gas intensive and to facilitate sustainable development. By mitigating and reversing the accumulation of heat-trapping gasses in the atmosphere, these projects were to lower the frequency and severity of adverse climatic scenarios. While mitigating project finance activity has grown substantially since the Kyoto Protocol came into effect, it ultimately failed to reach the scale and environmental integrity needed to meet the recent precipitous increase in emissions of GHG. In response, there has been an urgent call for scaling-up investments in mitigating projects, while improving their environmental integrity. However, not only does structuring of mitigating projects involve traditional project financing risks, it is further limited by the uncertainties and hurdles of the newly created carbon markets and by dwindling financial resources in the wake of the financial crisis. Consequently, project sponsors and lenders could practically look only at the lowest hanging fruits, frustrating the urgent need to scale-up the investments in quality mitigating projects. However, while urgently needed projects are not being originated because they are too risky on a stand-alone basis, a significant portion of their risks is of idiosyncratic nature. Hence, a portfolio of weakly correlated mitigating projects could increase the spectrum of the financially feasible projects. Moreover, retaining only part of the financial exposure could increase that spectrum even further. Consequently, the aggregation and monetization advantages in securitization technology could potentially fund additional and better quality projects and contribute to the needed scaling-up of project origination. However, the viability and social desirability of securitization technology are highly questionable in the wake of the recent financial turmoil. While prior to the crisis securitization has been regarded as an agent of change, by facilitating major desired transformations, its contribution to the accumulation of toxic assets by “too big to fail” financial institutions evolved into unprecedented systemic risk and culminated in a financial debacle. This Article delves into this inherent tension between the need to employ the most powerful financial technologies to fund mitigating projects and the fear of fueling a “carbon bubble” and its associated systemic risks. It sheds light on the potential of securitization technology to bridge the needed investments in mitigating projects and the unrivalled deep pockets of the capital markets. It explores possible securitization structures to achieve this goal and discusses groundbreaking securitization transactions in this sphere. It then analyzes the viability of securitization technology in funding mitigating projects by assessing the applicability of key lessons from the recent financial meltdown. It suggests that evolving regulatory frameworks, both in the financial sector and in the carbon markets, could align the interests of structuring banks and investors and prevent reoccurrence of highly criticized practices and devolvement of their related risks. It concludes by arguing that although the private sector would ultimately structure and fund the bulk of the decarbonation process in the global economy, partnership with international financial institutions is of paramount importance, at least until the private sector recovers from the recent financial debacle and the carbon markets are more conducive for long term investments.

Financial Adaptation to Climate Change via Public Interest Weather Derivatives and Catastrophe Bonds in the Wake of the Financial Meltdown

Anthropogenic climate change is rapidly becoming one of the most pressing and troublesome sources for systemic risk in the global economy. The potential impacts on developed and especially developing economies necessitates the employment of cutting edge and specifically tailored financial solutions to transfer various climatic risks to those in the capital markets who could bear them most economically. In the wake of the recent financial meltdown, however, risk transferring financial technology faces increased skepticism and suspicion with respect to its capability to reduce systemic risks. Rather, financial engineering is blamed for increasing systemic risks, as evidenced by the contribution of collateralized debt obligations (CDOs) and credit default swaps (CDS) to the evolution of the subprime crisis and the collapse of major financial institutions. Given the structuring similarities between catastrophe bonds and CDOs on the one hand, and between Over-The-Counter (OTC) weather derivatives and CDS on the other, two main questions must urgently be addressed: (1) whether the root causes for the recent financial crisis also apply to and call into question climatic risk shifting technology, and (2) what inherent drawbacks, if any, in Cat bonds and OTC weather derivatives should be addressed in order to lower the likelihood of a “climate bubble.” Shedding light on these key questions will contribute to the debate surrounding the future regulatory landscape of risk shifting financial technology in general, and that of climatic risk transfer in particular.

Are Emerging Markets Relevant for Portfolio Diversification?

In the recent financial meltdown, along with the slump in developed markets, emerging markets also declined sharply, bringing into doubt their ability to provide diversification benefits. One of the stylised facts of volatility is its negative correlation with the equity market, which in conjunction with the launching of securities for trading volatility, leads to the emergence of a new asset class for portfolio diversification. From the perspective of investors in the US, this study investigates whether a domestic portfolio along with exposure to an alternative asset class like volatility index (VIX) fares better than investing in emerging markets. The results show that for the minimum variance portfolios, there is a significant increase in Sharpe ratio when VIX is included, instead of the emerging markets to the domestic portfolio. Adding VIX is bene-ficial, as the magnitude and direction of its correlation is not only predictable but also stable. While the emerging markets correlations with developed markets are positive and increasing thereby diminish-ing the diversification benefits. Hence, US investors in pursuit of risk reduction have an alternative investment opportunity in volatility-based contracts.

Boom–bust cycles: Leveraging, complex securities, and asset prices

AbstractRecent history suggests that many boom–bust cycles are naturally driven by linkages between the credit market and asset prices. Additionally, new structured securities have been developed, e.g., MBS, CDOs, and CDS, which have acted as instruments of risk transfer. We show that there is a certain non-robustness in the pricing of these instruments and we create a model in which both their role in the recent financial market meltdown, and in which the mechanism by which they exacerbate leverage cycles, is explicit. We first discuss the extent to which complex securities can amplify boom–bust cycles. Then, we propose a model in which distinct financial market boom–bust cycles emerge naturally. We demonstrate the interaction of leveraging and asset pricing in a dynamical model and spell out some implications for monetary policy.

Reinventing Marketing to Manage the Environmental Imperative

Marketers in the past have based their strategies on the assumption of infinite resources and zero environmental impact. With the growing recognition of finite resources and high environmental costs, marketers need to reexamine their theory and practices. They need to revise their policies on product development, pricing, distribution, and branding. The recent financial meltdown has added another layer of concern as consumers adjust their lifestyles to a lower level of income and spending. Companies must balance more carefully their growth goals with the need to pursue sustainability. Increased attention will be paid to employing demarketing and social marketing thinking to meet the new challenges.

Post-credit crisis: what new concepts are needed? Which old notions or practices should be abandoned?

The recent financial meltdown in the US mortgage markets and the ongoing budgetary crises in Europe suggest that we are at an economic and ethical crossroads. What has caused the problems? Do we need to rethink in some fundamental way our ethical notions and some of our practices? These questions clearly are not separable, for, as I shall argue, some of our ideas about corporate responsibilities, technological innovations, and nation states’ ability to regulate corporations have been a cause of the recent problems. Key ethical notions need to be rethought.

Are the Emerging Markets Relevant for Portfolio Diversification?

In the recent financial meltdown along with the developed markets emerging markets too declined sharply casting doubts on their ability to provide diversification benefits. One of the stylized facts of volatility is its negative correlation with the equity market, this in conjunction with the launching of securities for trading volatility lead to the emergence of a new asset class for portfolio diversification. From the US investors’ perspective this study investigates whether a domestic portfolio along with exposure to an alternative asset class like volatility index (VIX) fares better than diversifying by investing in emerging markets. The study finds that the Sharpe ratios of both the strategies are not statistically different under a naive asset allocation strategy. But for the minimum variance portfolios there is a significant increase in Sharpe ratio when VIX is included instead of the emerging markets to the domestic portfolio. Adding VIX is beneficial as the magnitude and direction of the correlation is predictable while the emerging markets correlations are not only positive but also the size of the correlation coefficient is increasing. Hence US investors in pursuit of risk reduction have an alternative investment opportunity in volatility based contracts.

Are Real Estate Investment Trusts (REITs) an Inflation Hedge?

Given the recent debate on the empirical validity of the inflation illusion hypothesis, recent implosion of REIT prices combined with potential inflationary pressure, and a significant role of the real estate market in the recent financial market meltdown, we examine whether the observed negative relations between REIT returns and inflation can be explained by the inflation illusion. We identify the mispricing component in the REIT prices based on present value models, both linear and loglinear, and then we investigate whether inflation can explain the mispricing component. We find some evidence of the inflation illusion hypothesis for the REIT return-inflation relation for the linear models with a constant interest rate in that the inflation rates explain some fraction of mispricing components and their effect on mispricing is negative. However, when we allow for time-varying interest rates, inflation does not explain the REIT mispricing component anymore. Further, when we take into account a potential asymmetric effect of positive and negative inflation on the mispricing components in REIT prices, which is an important implication of the inflation illusion hypothesis, we find that REIT prices are not easily compatible with the inflation illusion hypothesis. Therefore, we find only very limited evidence for the inflation illusion hypothesis. To see whether behavioral factors such as consumer sentiment can better explain the mispricing components in REIT prices, we use the consumer sentiment index in lieu of inflation in the regression of the mispricing components. We find that when we include both the inflation rate and the consumer sentiment index in the regression of the mispricing components, the consumer sentiments tend to explain the mispricing component while inflation loses its explanatory power. Therefore, we find some evidence that behavioral factors such as consumer sentiment could have contributed to the mispricing in the REIT prices.