Management lessons from the great recession

The great recession was a major global economic problem that affected the entire world economy, characterized by various systemic imbalances and was sparked by the outbreak of the late-2000s financial crisis. In retrospect, there were numerous governance and management flaws that added to the reasons for the recession, which, if had been avoided, would have decreased the intensity of the recession.

The initial steps causing the recession was taken in 1999, when the Glass-Steagall act was repealed. This act had been introduced after the great depression, and separated the deposit taking business from investment activities, since it was recognized that one of the major causes of the massive bank failures was the fact that banks, in addition to their typical banking functions, had engaged in financial and other types of investments This step, taken by the Clinton administration, led to banks getting involved in investment activities, and numerous complex derivative products emerged as an outcome. These products were too complex for the understanding of the common man, and hence numerous problems were to emerge. Most people didn’t know the risks associated with each product, and hence the risk management strategies employed were flawed.

The Fed also had issues of improper governance, and the then chairman, Alan Greenspan, was guilty of inaction for a long while, before he was forced to take appropriate action. Alan lacked the foresight that is required for a person in this level of governance. There were issues in the Fed’s policy as well, which had not been corrected for years together.

The credit rating companies in the US were also responsible for the improper ratings they gave to sub standard loans. The rating companies didn’t have a system to ensure the credit worthiness of such complex derivative products, and hence the ratings didn’t reflect the truth in many cases.

Adding on to all this was the fiscal mismanagement by the Bush government. The excessive spending on the Iraq war meant that the US treasury was depleted. In addition to this, Bush wished to introduce tax incentives, as the elections were nearing. This mismanagement of the US treasury aggravated the already deteriorating situation, and the nation was dragged into a state of deep recession.

From the experiences of the Great recession, one gets to understand the importance of stress management as well. The US government and the Fed were subject to a lot of stress and pressure, and they had to introduce numerous changes and policies in order to contain the recession, and prevent it from worsening. They were able to do partial justice to this aspect of their job, and hence, were able to prevent the recession from growing into one of the magnitude of the Great Depression