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Abstract
The objective of the current research was to examine the changes in financial language and social development since financial tsunami, 2008, in the context of the United States and to report on the role and use of financial language in the proliferation of financial globalization and its eventual climax in the culmination of financial tsunami. The research was undertaken from a linguistic perspective to assess the role of financial language in contributing to social developments. Examining the linguistic characteristics of the financial language was another objective of the research. The research undertook the process of secondary and desk research supported by the case study of bankruptcy of Lehman Brothers, a prominent investment banking institution in establishing the association of financial language in the development and decline of the role of innovative financial products and services in the economic boom prior to 2008 and the financial tsunami in 2008.
The study concludes that the proliferation of financial globalization was greatly helped by the development of financial language and with the expansion of financial globalization, the financial language has to undergo a process of transition. The study found the influence of several factors in the use of financial language such as familiarity with the financial system, cultural differences, general mistrust of people on the functioning of the financial institutions, differences in income and varying education levels of parties dealing with each other. The research observes that though some of the phrases and terminology of financial language have resemblance to some of the linguistic features, financial language cannot be considered a full-pledged language. Nevertheless, financial language can be considered as a global language, as it meets the requirements of a global language.
Introduction
World history has witnessed several spells of dynamic and integrated global growth. At the same time, there had been many instances where the growth spells had ended because of financial instability and geopolitical disorders. There are examples of disturbances in British and French economies because of social, military and monetary chaos resulting in French and the American Revolution. Even greater damages to the entire social and economic systems were caused by the aftermath of World War I and the subsequent financial crisis resulted from the Great Depression. The most recent instance was the multi-trillion dollar US-centered securitization debacle began to unravel in June 2007 (Engdahl, 2008), resulting in a Financial Tsunami towards the mid to end of 2008. The worst-ever financial crisis next only to the Great Depression ravaged the worlds largest economy ripping apart all the financial control mechanisms and safeguards meant to protect the financial system in the country. The meltdown has led to shock waves across the world, with economy after economy gasping for breath to survive this financial tsunami (Mohanty, 2009).
Alan Greenspan, the erstwhile official of the Federal Reserve narrated the crisis as one, which occurs over 100 years, considering its large impact not only on the US economy; but also on almost all the developed and developing economies. The analysis of the previous financial disasters reveals that the great wave of financial crisis overtopped one after the other economic sectors. In the recent crisis, the financial volatility started at the first instance in the housing sector. Later the crisis extended to banking and other financial systems. Finally, it affected the real economy in its entirety. The impact of the crisis has been felt both on the private and public domains and the blow on the private sector forced them to make heavy demands on public sector finances to save the economy from collapsing. The wave of the crisis surged across the borders of developed economies including United States and stated swamping other developing economies providing substantial impediment to economic growth of all the affected nations.
The financial crisis of 2007-2008 thus is the most substantial one affecting the United States economy heavily after the Great Depression. During the first year of the crisis, it was anticipated that the crisis would be affecting the developed markets only. The dramatic economic events that took place in October 2008 made it a true global phenomenon, which enveloped both developed and emerging economies, affecting the respective financial markets substantially and resulting in slow down of the economic growth and economic recession of a high magnitude. The irony is that neither lack of proper institutional designs nor failure of macroeconomic policies caused the crisis as prescribed by the standard crisis theory (for a discussion on crisis theory see Flood & Marion, 1999); but poor assessment of risks and less than transparent inter-linkages between financial institutions caused by faulty financial innovations. Traditional crisis models may not have the ability to provide greater insights into the current crisis (Allen & Babus, 2008).
In the context described above, the central aim of this thesis is to examine and report on the changes in financial languages and social development since financial tsunami 2008. The setting for the thesis is United States being the originator of the crisis and the one severely hit by the crisis. Therefore study of the topic within the context of United States will provide greater insight into the changes and will do more justification to the study. Before dealing with the central focus of the study, it becomes essential to create a foundation on general history of global finance so that there will be clarity on the reading of the subsequent chapters.
This chapter is structured to have sections presenting discussions on development of global financial markets, origin, definition and development of financial language and factors influencing the use of financial language. Under this chapter, the research questions for which the study will strive to find answers will be framed based on the theoretical framework, which will be discussed in one o the sections of this chapter.
Background: General History of Global Finance
Impact of the Great Depression on Stock Market in the United States Period 1929-1939
Bernanke (1983) argued that any disruptions to the financial system are likely to have its negative impact on the real economy, since such disruption leads to increased cost of credit intermediaries. The impact of disruptions to the banking system has been examined a number of subsequent studies Calomiris & Mason, (1997), Calomiris & Mason, (2003) and Carlson & Mitchener, (2009). Retrospectively, the stress on the financial market caused by the bank failures may be assumed to have been prevalent during the Great Depression and such stress would have added to the severity of the depression during the period. Great depression was an economic crash that rocked the Americas, which disrupted the economic activities in Europe and other developed nations of the world during the period from 1929 to 1939. Great depression existed for a longer duration and was the strongest economic shock that devastated all the advanced economies of the world.
Although the economic conditions in the United States have been affected by the impact of an economic downturn much earlier, the major collapse of New York Stock Exchange during late 1929 marks the beginning of the period of Great Depression.
Though the U.S. economy had gone into depression six months earlier, the Great Depression may be said to have begun with a catastrophic collapse of stock-market prices on the New York Stock Exchange in October 1929. During the next three years stock prices in the United States continued to fall, until by late 1932 they had dropped to only about 20 percent of their value in 1929. Besides ruining many thousands of individual investors, this precipitous decline in the value of assets greatly strained banks and other financial institutions, particularly those holding stocks in their portfolios (Wright, 2005).
Great depression forced a number of banks to declare insolvency. By the year 1933, 44 per cent of the banks (11,000 banks out of total 25,000) operating in the country became insolvent, wiping of the investments of millions of people into nothing. The failure of so many banks, combined with a general and nationwide loss of confidence in the economy, led to much-reduced levels of spending and demand and hence of production, thus aggravating the downward spiral (Lance, 2008). The after effects of failure of so many banks caused a significant reduction in the confidence on the economy, which in turn resulted in reduced consumer spending and demand for products and services. Heavy reduction in demand led to corresponding reduction in production levels, which aggravated the economic downtrend. A combined effect of all these on the economy was the output falling drastically, leading to massive unemployment in the country. In real terms, the manufacturing output in the United States had fallen to 54 per cent of its original level as of 1929 and about 12 to 15 million workers remained unemployed, which was approximately equivalent to 25-30 per cent of the eligible workforce.
The nucleus of the issue was identified as the vast discrepancy between the industrial capabilities of the nation and the capacity of the public to utilize the produced goods and services. There were spectacular improvements in the production designs at the time of World War I, which increased the production of goods and services in the United Stated, well in excess of the boundaries of the ability of the salaried people and growers of the United States to procure and consume them. The investible surplus of a majority of citizens of the country grew to a level where any prudent channelization was not possible, resulted in the savings and investments drawn into speculative activities either in realty assets or in stocks. The downfall of stock exchange can therefore be construed as the major factor, which led to the crash of the speculative stock market activities.
Aftermath of World War II on Global Financial Markets period 1940-1945
World War II can be considered as instrumental in overcoming the ill effects of Great Depression. Governments of different nations prepared their responses to improve their economies with sophisticated systems of financial regulations. The key initiative was the Bretton Woods Agreement entered in to in the year 1944. In the conference held at Bretton Woods (New Hampshire), attended by representatives from 44 nations entered into this agreement, where the values of national currencies were fixed against United States dollars. Under this agreement, the US dollar was equated to one ounce of gold having a value of US Dollars 35. Prior to this agreement, a gold exchange standard was maintained requiring the countries maintain gold reserves equal to the value of their currencies. The objective of this arrangement was to take guard against the economic volatility affecting the countries, since the practice of backing up with gold reserve led to boom-bust models in the economies. In the area of global trading, the objective of Bretton Woods agreement is to ensure international economic stability, through the mechanism of preventing currencies jumping national borders. Another objective of the agreement was to prevent speculation in the international currency market.
Member countries signed to this treaty, concurred on maintaining the values of their respective currencies, with a smaller protection for the dollar and on keeping gold for a like amount as reserve to back up to the agreed margin. Because of this agreement, US dollar acquired the status of the benchmark for exchange rates and became the standard as it can be exchanged to gold. This agreement marked the move of the economic power from the hands of the European countries to the United States. As an initiative to restore stability in the global market place, the agreement restricted the member countries to indulge in any devaluation of their currencies to facilitate their foreign trade. Even though the policies promulgated by the Bretton Woods agreement were short lived, the agreement made United States to emerge as the global economic power. Post World War II prosperity led to enormous trading volume in the international foreign exchange market and there were massive movements of capital across geographical borders.
This prosperity led to the destabilization of the currency conversion factors set in the earlier agreement. Subsequently the need for a new system to meet the demands of this growth and to provide the platform for better global trading arose.
The meeting at Bretton Woods also proposed the establishment of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The IMF was entrusted with the responsibility to provide short-term lending to countries to manage exchange rate fluctuations and short-term trade imbalances and the World Bank would provide long-term financial assistance to countries for promoting economic development. These institutions were established with the objective of preventing the reoccurrence of another devastating economic event like the Great Depression.
Thus, in the aftermath of World War II, the United States emerged as the great winner and the new hegemonic power in the world; more than that, despite the new challenge represented by Soviet Union, it was a kind of lighthouse illuminating the world: an example of high standards of living, technological modernity and even of democracy (Bresser-Pereira, 2010).
Recovery and Development of Global Financial Markets Period 1945-1955
This period marks the start of the global economic recovery and the start of the Cold War between the erstwhile Union of Soviet Socialist Republics (USSR) and the United States. The developments that took place in the attitude and actions of USSR convinced American leaders that communism posed a permanent threat to the American model of democratic and competitive capitalism. The after effects of WW II created extremely bad economic and social conditions in Europe with shortage of energy and reduced production capacity. In order to remedy the economic situation and prevent the leaning of the European countries towards communism, the Truman administration proposed the European Recovery Program known as the Marshall Plan in 1947 aimed at economic and political reconstruction of Europe. The program took off in April 1948 and ended in 1952. The offer of European Recovery Program (ERP) was made to all European countries including the USSR with the condition that their markets were to be opened to the world economy on a gradual basis. However, USSR declined the offer and forced the Eastern European countries under its control to decline the offer.
The Marshall Plan made a transfer of $ 12.5 billion to 16 European states excluding Finland and Spain but including Turkey. Major portion of the aid, which was in the form of goods like raw materials for production and wheat including a small part as dollars were transferred to the UK and France and other states received a small proportion of the total aid. The economic impact of the aid was small as the value of aid received by the nations except UK and France represented only a fraction of the GNP of the receiving states. Nevertheless, the Marshall Plan had some qualitative impact in providing (i) the needed raw materials for the European industries, (ii) food much needed by workers in key sectors like coal mining and (iii) providing confidence to the European investors, which was badly needed at that point of time.
In the post war era, the transnational oil majors entered into long-term contracts for supply of oil and promoted several joint ventures, which were interconnected with each other.
For other industries, however, pent-up consumer demand at home, the scarcity of similar demand in war-ravaged Europe and elsewhere, the lack of convertible foreign currencies, the risks attendant upon overseas investments as illustrated by the experiences of two world wars, restrictions on remittances, and the fact that a new generation of chief executive officers with less of an entrepreneurial spirit and more of a concern with stability and predictability than many of their predecessors, all served to limit foreign investment in the years immediately after World War II (New American Nation, 2009).
The amount of capital invested in production by transnational companies rose from $2.4 billion in 1946 to $5.71 billion in 1954; but a majority of the investments were in the form of plough back of earnings by the companies that existed. The multinational companies had to face the situation of the host governments blocking repatriation of scarce currencies. The countries blocked the repatriation for tax and other reasons, which did not have any direct relationship to the increasing demand from the consumers. There were no significant improvements in the investments made in other industries such as public utilities (New American Nation, 2009).
The US government regulations applied restrictions on the capital outflow to other countries, especially for investment in the production sector. The government in an unusual move combined overseas economic decisions with the countrys foreign policy frameworks. With the Cold War intensifying in the decade following the WW II, US government implemented policies that restricted commercial transactions and capital flows to the countries under the control of Russia. The Export Control Acts of 1948 and 1949, for example, placed licensing restrictions on trade and technical assistance deemed harmful to national security (New American Nation, 2009). When the Korean War (19501953) was in progress, the government imposed further stringent restrictions. These controls were extended to dealing in all types of goods and services with China.
However, the financial status of US Corporations was so bad that they would not have invested substantially in the countries, which were under Russian influence in the absence of these controls. The economic sanctions against the communist bloc countries contributed to aggravate the gloomy economic atmosphere in the global scenario, which acted as a restraint on the inflow of foreign capital. Even the UK was keen on entering the prospectively larger markets of China. However, the country had to delay its plans, as it did not recover fully from its economic disaster, which also affected the inflow of foreign capital into the country discouraging the investors largely.
The period that followed the WW II witnessed the presidents Truman and Eisenhower aimed at recovering the private sector in the European countries. The governments encouraged increased trade and direct foreign investments for speeding up the recovery. The objective of Marshall Plan, with its outlay of around $ 12.8 billion meant to fuel the recovery of the economies in Europe during 1948-1952, was considered to promote a secure association among the public and private enterprises in a combined respect. Eisenhower worked on the principle of fuelling the global economic growth by liberalization measures covering cross border trade and personal investment in the foreign countries rather than extending different forms of government-sponsored financial assistances. During the tenure of his presidency between 1953 and1961, the president made changes to his policy of trade not aid to one of trade and aid . He also shifted his focus from the Western European countries to the Third World developing economies, which according to him were more vulnerable to communist expansion. Despite his conviction on the communist expansion, he strongly believed that international commerce and foreign direct investments had a major role to play in ensuring global economic recovery, growth and move towards prosperity.
Overview on Establishment and Growth of Traditional Financial Market Period 1955-1985
In the aftermath of the Great Depression, governments took up the responsibility of managing the economies and this situation prevailed even in developed countries. There were significant changes taking place in the global context. During the late 1960s, the balance of payments deficit of United State increased and at the same time, the financial position of European countries became stronger with increasing surplus. However, the European nations were reluctant to revalue their currencies. This situation depicted the intrinsic demerit of a global reserve system in which the national currency of one country plays a major role in the determination of exchange rates of many other currencies. Even though, the system of fixed exchange rates and capital controls were abolished, the dollar standard for other currencies was still maintained. The countries were allowed to decide whether to float their currencies or not. Major countries concurred on holding dollar reserves in the United States.
The restrictions on cross-border financial transactions were removed largely which led to an increased capital flows across countries including to developing economies. As real interest rates were low in the period of high inflation of the 1970s, international borrowing from private sources, lending banks in particular, became an attractive external financing option for governments in many developing countries, especially middle-income countries, compared with aid flows and multilateral bank lending which were often subject to restrictive policy conditions. Since the flow of foreign capital were influenced by economic cycles, there were significant changes in the borrowing conditions at the end of 1970s which adversely affected many of the developing countries, which ended up with debts which were unserviceable.
The debt crisis was perceived as another failure in the development effort and was considered the result of unsound fiscal management in failing to create dynamic export sectors to maintain the debt-service to export ratios within manageable limits. These events fuelled the adoption of a diametrically opposite approach with respect to global economic development. This philosophy gained prominence during 1980s and 1990s. This philosophy called for a radical change in the role of the government in managing economic development, as governments were viewed as poor managers of public finances. This approach called for the development policies to be keen on the macroeconomic stability with the functioning of more deregulated markets and private initiatives.
The private initiatives were recommended not only in productive activities but also n the provision of social services. It was considered that the market reforms would be conducive to get the appropriate prices and encourage the businesses and households to improve upon their efficiencies and invest in a better future. The market-oriented, export-led strategies helped a number of developing countries in Asia to achieve sustained and rapid economic growth during 1980s. These development policies involved inter alia, agrarian reforms, investments in human capital, selective trade protection, directed credit and other government support for developing industrial and technological capacity while exposing firms gradually to global competition (Department of Economic and Social Affairs, 2010).
Many of the developing countries faced the repercussions of the debt crisis and they have to resort to the financial assistance from the IMF and World Bank under the strict conditions regarding adjustments in fiscal and monetary policies of the respective government prescribed by these institutions including market-oriented policy reform measures. Trade liberalization and capital account liberalization were the key ingredients of the reform measures prescribed by IMF.
Status of Global Financial Markets after Cold War Period 1985-1995
After the collapse of the Bretton Woods system of fixed exchange rate system, a new global financial environment emerged in different stages. The economic crisis started in the beginning of 1980s led to different structures of business organizations and the enterprises merged with each other for greater efficiency and market power. Bankruptcies were also on the rise. These revised structures in the institutions and enterprises in the financial environment resulted in the generation of a new set of financial institutions and agencies in the form of investment banks, stock and insurance broking firms and several other financial intermediaries. The emergence of these financial intermediaries made the commercial banking functions combined with the functions of the investment bankers and stock broking firms.
Even though these agencies and institutions had a powerful role to play on the emerging financial environment, they did not participate in the promotion of enterprises in the real economy. The activities of these institutions, which largely remained unregulated, focused mainly on transactions of speculative nature undertaken in the areas of commodity futures and derivatives. They were also involved in the manipulation of currency markets. There was the development of the concept of off-shore banking encouraging legal and illegal monetary transactions resulting large accumulation of private wealth. In the absence of proper international regulatory regime and with the financial deregulation-taking place, secret ant-social organizations entered into the management and administration of financial institutions including banks.
The 1987 Wall Street Crash
Another major incident, which shook the US economy, was the largest fall in the stock values in the New York Stock Exchange on October 19, 1987 (usually referred to as Black Monday). The drop in the stock prices overshot the collapse of the stock market in the year 1929, which marked the beginning of the Great Depression. In the Wall Street, crash took place in the year 1987; US stocks lost 22.6 percent of their value largely during the initial hour of trading on October 19, 1987. The repercussion of the plunge on Wall Street echoed through the global financial markets leading to the steep fall in the values of stocks traded in the stock markets of Europe and Asia.
The Institutional Speculator
The 1987 Wall Street crash had the effect of wiping of the weaker agencies, institutions and intermediaries from the financial system enabling only those who are strong and fit to survive in the system. The stock market crash led to a substantial concentration of financial power in the global financial environment. This major transformation in the global financial system gave rise to institutional speculator category of financial intermediaries. These institutions gathered the necessary power to overshadow and often undermine the genuine business interests. These institutional speculators used different and innovative financial instruments to siphon the wealth from the real economy and accumulated their personal wealth. They were in a position to determine the future of entities trading in the stock markets. Without any role to play in the development of new entities in the real economy, they possessed the strength of driving even large conglomerates into the direction of financial breakdown and ultimately to insolvency.
In 1993, the Bundesbank of Germany through its report raised an alarm that trading in derivatives could potentially trigger chain reactions and endanger the financial system as a whole (Chossudovsky, 2008). With his commitment to financial deregulation during early and mid 1990s, the Chairman of the US Federal Reserve Board Mr. Alan Greenspan had warned, Legislation is not enough to prevent a repeat of the Barings crisis in a high tech World where transactions are carried out at the push of the button (Khor, 1995). According to Greenspan the efficiency of global financial markets, has the capability of transmitting mistakes at a far faster pace throughout the financial system in ways which were unknown a generation ago& (Greenspan, 1997). However, there was no revelation about the unprecedented accumulation of private wealth amassed because of the mistakes occurring in these speculative transactions.
The magnitude of the speculative transactions could be understood by the increased volume of currency trading, which surpassed the global official foreign exchange reserves, which were calculated to be in excess of US$ 1200 billion. It was reported that the institutional speculators were controlling privately held foreign exchange far in excess of those held by the central banks of the countries.
Impact of Technological Development on Stock Market Period 1995-2000
Global economy has undergone a significant transformation with the technological revolution during the mid 1990s. Innumerable innovations in computerized transaction processing, software tools, telecommunication aids and the proliferation of Internet have facilitated the creation of an information economy. Latest developments in technology have a large impact on the functioning of the stock markets in that technology enhances the information availability to the investors and ensures the growth in their wealth.
Another important occurrence during the period 1995-2000, when there was the introduction of enhance technological applications in the global financial system was the Financial Meltdown happened in 1997. Exactly ten years after the great crash of Wall Street, stock markets around the world plummeted because of turbulent trading in the stocks of the respective countries. The Dow Jones index registered a decline of more than 7 percent. This fall marked the 12th-worst one-day fall in the records of the New York Stock Exchange (Chossudovsky, 2008).
With the rapid technological development happened in the entire global financial system, major stock exchanges functioning in different countries around the world are interconnected. Trading was possible around the clock depending on the time zone of the respective stock exchanges as all the exchanges were interconnected through instant computer link-up to record the transactions on a real time basis. Due to the availability of the technological support, the volatile trading in the US stocks on Wall Street spilled over into the stock exchanges of Europe and Asia. Thus, the entire financial system was infused by the volatility of the transactions in the New York Stock Exchange. Stock exchanges all over Europe sustained substantial reversals. The Hong Kong stock exchange had crashed by 10.41 percent on the previous Thursday ( Black Thursday October 24th) as mutual fund managers and pension funds swiftly dumped large amounts of Hong Kong blue chip stocks (Chossudovsky, 2008). The fall in the stock values in the Hong Kong Exchange Square continued limitlessly at the opening session of trade on Monday with a 6.7 percent fall followed by a 13.7 percent decline on the next day (Chossudovsky, 2008).
Developments, Challenges and Crises of Global Financial Market covering Post 2008 Financial Tsunami Period
There were several factors responsible for the onset of the financial crisis during 2007-2008. In general the macroeconomic policies implemented in the United States and the rest of the industrially advanced nations, were the main contributing factor for the crisis. Economic policies with respect to fiscal adjustments resulted in a reduction of saving volumes in the United States. Even the country allowed a not so stringent monetary policy to be in force for a longer period. In Japan the mix of monetary and fiscal policies distorted the global economy and financial system (Truman, 2009).
Easy monetary policies followed by many other countries including the Asian countries contributed their part to the global meltdown. The impressive accumulation of foreign exchange reserves by many countries also distorted the international adjustment process, including but not lim
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