Impact of The Global Crisis3

The Impact of the Global Crisis on International Marketing
IMPACT OF THE GLOBAL CRISIS ON

INTERNATIONAL ECONOMIC
DEVELOPMENT
By: Dwight B. Perez, Ph.D. in Development

Studies (candidate)
2009
1
ABSTRACT
In the main, this study will examine the economies of the United States, Italy and Russia
in the light of the global crisis and its impact on international economic development. As such,
the following specific research questions will be answered in the study:
1. How did the economy develop during the financial crisis in USA, Italy and Russia as can
be viewed through main economic indicators? and
2. What is the impact on international marketing in terms of the economic indicators of
selected countries such as the United States, Russia, and Italy?
The findings show that the subprime crisis in the United States resulted to the financial
disaster in the stock market in the United States as well as around the world as indicated by
country and regional stock indices as shown in the charts of this study. The resulting stock index
in the markets throughout the globe is proof that the U.S. financial crisis had a tremendous
impact on the global economy.
In addition, the impact of the U.S. financial crisis caused the GDPs and other macro-
economic indicators around the world to decrease indicating that these countries were affected
heavily due to globalization In comparison, the United States as of 2008 had the highest GDP
which is almost USD 14 trillion while Italy had almost USD 2 trillion and Russia with USD 1.7
trillion dollars. As the United States spurred the world global economic crisis including Russia
and Italy, their economies are also affected.
Macro-economic tools such as monetary policy as well as fiscal policy were used as the
main weapon in fighting the economic crisis of their respective countries. As the monetary
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policies did not work during the Great Depression as the banking system collapsed, the U.S.
government utilized fiscal policy and Keynesian theories through massive government spending
to create employment and industrialization until the country recovered from the crisis. Russia
also utilized government spending and fiscal policy to recover from its 1998 economic crisis and
made economic reforms such as privatization, corporate governance, and shareholder and
investor right protection. They also developed structural reforms in terms of developing
bankruptcy procedures and also formulated efficient business incentives for investments in the
country.
They also implemented a tax reform to address in reducing tax burden on companies and
introduced a more fair and business friendly tax system to encourage business development in
the country. The banking system was also restructured to be more sustainable and meet the real
sector needs in terms of payments and credits which resulted to economic recovery for the
country.
Italy also utilized macro-economic tools and initially its policy was heavily Keynesian
with the government controlling most of its businesses especially in undertaking to recover from
its economy after World War 11 with the help of financial aid from the United States. Eventually,
the country developed its small and medium scale industry by providing financial incentives and
support until it became the foundation of the country’s economy.
During the current economic crisis, the United States came up with a USD 700 billion
bailout measure to save major financial institutions from breaking down and the government
intervened and invested heavily in the shares of private corporations. It also increased the ceiling
for deposit insurance to encourage people to deposit in banks and also increased the interest rates
for deposits. This is also what Russia did in their banking system as well as in Italy.
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Governments around the world were consolidating their financial institutions and banks as
a result of the current economic crisis.
Generally, the impact on international markets indicated a continuation of the economic
recession in these countries until the end of 2010 with negative macro-economic growth rates for
the respective countries and by the end of 2010, an economic recovery can be expected at
minimal levels.
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TABLE OF CONTENTS
Contents Page/s
Chapter 1 Introduction 7
Background of the Problem 7-12
Statement of the Problem 13
Research Objectives 13
Importance and Rationale of the Study 13-14
Structure of the Study 14-15
Chapter 2 Review of Literature 16
Introduction 16
Economic Systems 16-17
The State and Macroeconomic Theory 17-24
Market Failures and the Role of Government 24-25
Macroeconomic Concepts 25-26
International Strategic Market Planning 26-29
The U.S. Financial Crisis and Its Impact to World Markets 29-39
Chapter 3 Methodology 40
Theory Construction 40-44
Quantitative, Descriptive, and Qualitative Research Methods 44-46
Data Gathering Method 47-50
Validity of Data 51
Originality and Limitations
Chapter 4 Research Findings, Analysis, and Discussion 52-107
Chapter 5 Conclusion and Recommendations 108-117
References 118-122
Appendices 123-141
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Chapter 1
INTRODUCTION
Background of the Problem
The bankruptcy of Enron in December 2001 shocked the business world since prior to its
bankruptcy, it was just recently declared a top performing company. Its bankruptcy was a result
of too much debt and high risk investments. However, its disaster was not mainly due to the fault
of the company but by other factors such as regulations (Niskanen, 2002).
Although Enron declared bankruptcy on December 2, 2001 as a result of too much debt
and risky investments, the problem is not with Enron, it is a symptom of a greater problem that
must be addressed. The issue that must be confronted is related to the vast amount of wealth
being transferred from the public to private corporate managers through financial markets and as
such government should find a control mechanism to prevent similar problems that can occur in
the future. It is also worth noting that auditing firms who monitored the financial transactions of
these firms were not able to notice or prevent the financial catastrophe (Niskanen, 2002).
The Enron fiasco was just the “tip of the iceberg” and served as symptom of the bigger
financial crisis that would be happening to the United States and throughout the world. The
subprime mortgage crisis was a major factor that caused the United States economic crisis. The
crisis started with the housing bubble with the rates of defaults on subprime and other adjustable
rate mortgages starting to accelerate. About 1.3 million of houses were foreclosed during 2007
which increased to 79 percent from 2006 (RealtyTrac Staff, 2008).
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The ones that were responsible for the credit risk as borrowers defaulted on their
payments such as the major banks and other financial institutions around the globe reported
losses of around U.S. $379 billion as of May 21, 2008 (Onaran, 2008). The lenders had
forwarded the mortgage payments rights to third-party investors through mortgage-backed
securities (MBS) and collateralized debt obligations (CDO). Many of these corporate and
institutional investors possessing these MBS or CDO suffered tremendous losses as the value of
the mortgage assets decreased. In addition, this is compounded by the major decline of the stock
market in the U.S. as well as in other countries (Onaran, 2008).
In addition, the subprime crisis affected the growth of the U.S. economy since fewer or
more expensive loans decreased investments which are a major factor in stimulating the
economy (Bernanke, 2008). Furthermore, the downturn in the housing market resulted in the
significant decrease in new home construction and housing prices and these caused downward
pressure on growth (Bernanke).
The U.S. economic crisis triggered by the subprime bubble was initially considered as a
domestic problem. However, other institutions around the world were affected such as the Bank
of China which is the number two bank in China. This bank announced in August 2007 that it
holds US $9.7 billion dollars of US subprime debt (Shaw, 2007). Also, in January of 2008, the
South Korean stock market fell due to the “selling spree” of shares of U.S. mortgages (Arirang
News, 2008). The International Monetary Fund (IMF) reported that the global loss due to the U.S.
subprime mortgage crisis is estimated at US $945 billion (Finfacts Team, 2008).
Furthermore, the collapse of financial giants of Freddie Mac, Fannie Mae, American
International Group (AIG) and other major banks and financial institutions in the United States
affected other financial institutions and corporations around the world.
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Based on information and data by timeline from the World Bank (2009), the financial
crisis escalated in the United States and Europe during 2008. This began with the take-over of
Bear Stearns by J.P. Morgan in March and ending in September and October with several big
financial institutions under major financial predicaments (World Bank, 2009)..
On September 7, 2008, the government of the United States seized control of Fannie Mae
and Freddie Mac. These are financial institutions which own or guarantee about one half of all
the assets mortgaged in the country. During 2007, these companies financed about four in five
U.S. mortgages.
The following week, Lehman Brothers filed for bankruptcy setting a record as the highest
in the history of the United States involving assets valued at $639 billion. Merrill Lynch was also
purchased and was taken over by the Bank of America for $50 billion with government funding
involved (World Bank).
The government of the United States also took control of American International Group
(AIG) with an emergency bailout loan of $85 billion.
In Britain, its largest mortgage lender, HBOS, was bought by Lloyds TSB for $18.9 billion.
In Russia, the government promised to help with $120 billion to financial markets and banks
(World Bank).
The U.S. Treasury formulated the Troubled Asset Relief Program (TARP), this is a major
program which made it possible for the government to purchase up to $700 billion of mortgage-
backed securities.
The government of the United Kingdom nationalized the mortgage bank Bradford and
Bingley with a loan package of $90 billion.
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During the week of September 28, the largest bank failure in United States history
happened with Washington Mutual collapsing with assets valued at $328 billion. A financial
bubble also happened in Belgium and Holland as their governments each tool 49.9 percent of
equity in the operations of Fortis, a major banking and insurance company. Each government
invested $16.4 billion in capital (World Bank).
A week later, the Dutch government seized control of the company in the Netherlands by
investing $23.2 billion to purchase its assets.
The operations of Fortis BENELUX countries were purchased by the French commercial
bank, BNP Paribas.
The government of Germany in conjunction with commercial banks and federal regulators
gave a $50 billion guarantee to Hypo Real Estate. This estate company is the largest commercial
property lenders in Europe. A week later, this amount was increased to $68 billion.
Again, going to the U.S. crisis, Citigroup offered to buy out Wachovia. This bank is
ranked fourth largest in banks assets in the country with $812 billion. However, during the week
a better bid was made by an American bank Wells Fargo and the deal was accepted.
Going back to the global financial crisis in other countries, France, Belgium, and
Luxembourg infused $9.2 billion into French-Belgian bank Dexia and the government of Iceland
bought a three-fourth equity stake with Glitnir, the county’s third largest bank. The funds
infusion was valued at $864 million (World Bank).
In Sweden, their central bank announced that it will lend $700 million to Kaupthing, and
Icelandic bank. Ireland also made unlimited guarantees on retail, commercial and interbank
deposits which covered $575 billion of liabilities which followed similar measures made in
Austria, Denmark, Germany, Greece, Iceland, Italy and Portugal. The governments of Sweden,
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the United Kingdom and the United States also increased their limits on deposit guarantees
(World Bank).
During the week of October 5, 2008, the Icelandic government gave loan assistance
valued at $683 million to Kaupthing and took over Landsbanki, the country’s second-largest
bank. Due to the crisis, the country is asking to get a $5.5 billion loan from Russia. In Spain, the
government created a $40 to $68 billion emergency fund in order to obtain control of Spanish
banks (World Bank).
The US Federal Reserve, the European Central Bank, the Bank of Canada, Sveriges
Riksbank and the Swiss National Bank made cuts for their benchmark rates by half a percentage
point. This marked for the first time coordination efforts which are unprecedented in world
history. Also, the central bank of China lowered its lending rate by 0.27 basis point which is the
second decrease in just three weeks (The World Bank).
The Icelandic government announced its decision to place Glitnir (the country's third-
largest bank) into receivership, seized control of Kaupthing Bank (the nation’s largest
The government of Britain announced a $685 billion plan to restore confidence in
financial institutions. This is to include insuring $438 billion in new bank debt and injecting $88
billion in equity capital. Also, the National Bank of Ukraine took over Prominvestbank, the
country’s sixth largest bank (The World Bank).
During the week of October 12, 2008, Austria, France, Germany, the Netherlands,
Norway, and Spain invested a total of $262 billion for bank recapitalization and $110 billion of
bank assets purchases. In addition, these government are coming with up to some $1.5 trillion in
bank debt guarantees (The World Bank).
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In the United States where the crisis started, the government announced that it will give a
$250 billion commitment out of the $700 billion bailout package to help the banking sector.
Further injections of money to rescue banks were made by governments and the
government of U.K. invested $64 billion in Royal Bank of Scotland.
The government of Holland invested $27 billion capital infusion to giant banking and
insurance group ING. The Swiss government also injected $5.3 billion in the Swiss bank UBS.
In turn, UBS used the funds to transfer some of its U.S. subprime mortgage related assets into a
kind of a government fund designed to hold $60 billion of such troubled assets (The World
Bank).
In the financial crisis in South Korea, the governments announced $100 billion in credit
guarantees for its financial sector and allow banks to draw on its foreign reserves to meet their
foreign currency financing requirements.
These timeline suggest of world economic crisis spurred by the U.S. subprime crisis with
major banks and financial institutions affected by the U.S. financial crisis. Governments around
the world came to the rescue of troubled private banks and financial institutions and nationalized
them in order to seize control and these imply that governments are learning from the problems
of financial globalization which made their financial institutions vulnerable to a crisis. By
nationalizing private banks under the control of their governments, the state is strengthened and
made them less vulnerable to private investment manipulations such as the lessons learned in the
mortgaged backed securities in the U.S. subprime crisis (The World Bank).
As the financial crisis that started in the United States triggered a global crisis, this study
will examine the economies of the United States, Italy, and Russia as case studies for financial
market regulations during conditions of the world crisis and as it affects international marketing.
11
Statement of the Problem
In the main, this study will examine the economies of the United States, Italy and Russia
in the light of the global crisis and its impact on international economic development. As such,
the following specific research questions will be answered in the study:
3. How did the economy develop during the financial crisis in USA, Italy and Russia as can
be viewed through main economic indicators? and
4. What is the impact on international economic development in terms of the economic
indicators of selected countries such as the United States, Russia, and Italy?
Research Objectives
1 To evaluate the impact of the economic global crisis on international economic development;.
2 To identify the causes of the economic global crisis, and
3 To recommend international development strategies to fight the economic global crisis.
Importance and Rationale of the Study
This paper is very important because it analyzes the impact of the global economic crisis in
the United States, Italy and Russia and the actions of their governments in fighting it. Managers,
economists and the academe have to understand why the world is having a global economic
crisis and what is the role of the U.S. economic crisis in it. By understanding the factors that
contribute to the crisis, policymakers can formulate solutions to minimize the problem or to
prevent such crisis to occur in the near future.
The rationale for this study is that the there is a need for a theoretical or conceptual
framework to analyze and synthesize the interrelationship between the United States economic
12
crisis and the global economic crisis particularly in Italy and Russia. The importance of
understanding this interrelationship has been explained in the importance of the study section.
The conceptual framework which will analyze the research questions of this study would
be macroeconomic theory. Policymakers and the academe need to understand the global
implications of the economic crisis. As such, this study is needed by managers and decision-
makers worldwide as a major contribution in formulating strategic and policy plans in both
public and private entities in their own countries.
Structure of the Study
This study will be organized into five chapters. Chapter one will present the background of
the problem; statement of the problem; importance and rationale of the study. and structure of the
study. Chapter two will review the literature particularly on macroeconomic theory as well as the
global economic crisis. Chapter three discusses the methodology of study particularly its
research design.
Part one of Chapter four comparatively and historically analyzes the economies of the
United States, Italy and Russia. The main economic indicators will be analyzed. How have they
developed (historically) and what reason was there for the general growth and what reasons were
there for the major up and downs. Short description of each in concern of how they previously
have dealt with booms and recessions. What impact did their previous decisions have (successful
or not. Short term vs. long term)?
Part two of Chapter four will present a current comparative analysis of the three countries
mentioned.
How did the economy develop during the financial crisis in USA, Italy and Russia (analysis of
main indicators). What did the three governments do to change the situation? What was their
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motivation: shot term rescue of financial markets vs. long term stability or maybe more political?
Analysis of all the decisions made from a macroeconomic point of view. Which effect did the
decisions have and what outcome can we expect in the next 5, 10 and 20 years. Was the
decisions macro economically efficient or driven by political motives?
Finally, Chapter five will conclude and recommend based on the findings of the study. As
such, the study will be structured mainly as follows:
Chapter 1 Introduction
Background of the Problem
Statement of the Problem
Importance and Rationale of the Study
Structure of the Study
Chapter 2 Review of Literature
Chapter 3 Methodology
Chapter 4 Research Findings, Analysis and Discussion
Chapter 5 Conclusions, Recommendations, and Forecast
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Chapter 2
REVIEW OF LITERATURE
Introduction
This chapter will review basic economic concepts and will also touch on state theory or
the role of government in economic development since macroeconomics is related closely to
government actions in providing solutions to market failures. Economic theories of development
will also be discussed in relation to the role of macroeconomics in providing solutions to it.
Economic Systems
The types of economic systems in the world (Samuelson, 1973, McConnell, 1969) are
classified as follows: the traditional economy, the market economy, the command economy, and
the mixed economy. However, there are also certain variations to these systems.
A traditional economy would approach its economic system based on customs and how it
was done in the past. The market economy is based on the flow of free markets and with no
amount of government regulation. The command economy is basically run by the government
and production of goods and services are also run by them.
The mixed economy is a combination of free market economy and government regulation.
The variations would revolve around the extent of government intervention involved in the flow
and production of goods and services.
Basic Market System
In an economy, the market is where producers and consumers (McConnell, 1969,
Samuelson, 1973) meet and prices are determined by the law of supply and demand. Basically,
the law of demand states that if prices are lowered, quantity demanded increases and if prices are
15
increases, demand decreases. On the one hand, the law of supply states that if the price increases
quantity of supply increases and if price decreases, quantity of supply decreases.
The equilibrium of supply and demand would determine final prices such as where there is
a surplus or shortage. In a state of surplus, equilibrium prices tend to decrease while in a state of
shortage, equilibrium prices tend to increase.
Economic Growth and Macroeconomic Theory
Many of the concepts of Wallerstein (1974) saw the United States as a major economic
power controlling the global economy. Frank (1967) coined the U.S. as metropolis and the
developing countries as satellites. The other major industrialized countries are considered part of
the metropolis in the world system. The satellites are dependent upon the metropolis and as such
it is this system which is the necessary unit of analysis.
The World System Theory is also related to state theories of development. These groups of
theories are concerned with the role of the state in socio-economic development.
Various and contrasting paradigms on the state ranging from Weberian to Marxist
frameworks will be discussed as there is revival on researchers in their interests on the study of
“the state”.
As Skocpol writes:
“A sudden upsurge of interest in “the state” has occurred in comparative social science in the
past decade. Whether as an object of investigation or as something invoked to explain outcomes
of interest, the state as an actor or an institution has been highlighted in an extraordinary
outpouring of studies by scholars of diverse theoretical proclivities from all the major disciplines.
The range of topics explored has been very wide. Students of Latin America, Africa, and Asia
have examined the roles of states in instituting comprehensive political reforms, helping to shape
16
national economic development, and bargaining with multinational corporations (Skocpol 1985,
p. 457).”
This revival of interest in state theories had become a very useful framework of analysis in
explaining societal development. “State”, as based on the definition of Max Weber (Roth 1968)
argued that states are compulsory associations claiming control over territories and the people
within them. Administrative, legal, extractive, and coercive organizations are the core of any
state. These organizations are variably structured in different countries, and they may be
embedded in some sort of constitutional-representative system of parliamentary decision making
and electoral contests for key executive and legislative posts.
Skocpol (1985) discussed that states conceived as organizations claiming control over
territories and people may formulate and pursue goals that are not simply reflective of the
demands or interests of social groups, classes or society. This is what is really meant by “state
autonomy”. Unless such independent goal formulation occurs, there is a little need to talk about
states as important actors. “Furthermore, one may then explore the capacities of states to
implement official goals despite the actual or potential opposition of powerful social groups or in
the face of recalcitrant socio-economic circumstances.
Migdal’s (1988) strong and weak states continuum also utilized World System Theory in
the sense that it views states just like Wallerstein as nation-states capabilities.
As Migdal amply explains:
“Capabilities include the capacities to penetrate society, regulate social relationships, extract
resources, and appropriate or use resources in determined ways. Strong states are those with high
17
capabilities to complete these tasks while weak states are on the low end of a spectrum of
capabilities. (Migdal 1988, pp. 4-5)”
In another school of thought, Evans’ (1989) predatory to developmental states continuum
is a heuristic tool in determining the degree of the state to effect socio-economic development.
As Evans (1989) explains:
“Some states may extract such large amounts of otherwise investable surplus and provide
so little in the way of “collective goods” in return that they indeed impede economic
transformation. It seems reasonable to call these states “predatory”. Zaire might be considered an
archetypal case of such a state…Other states, however, are also able to foster long-term
entrepreneurial perspectives among private elites by increasing incentives to engage in
transformative investments, and lowering the risks involved in such investments. They may not
be immune to rent seeking or to using some of the social surplus for the balance, the
consequences of their actions promote rather than impede transformation. They are legitimately
transformation considered as “developmental states” (Evans 1989, pp. 562-563).”
The predatory state is basically one that exploits the country’s resources for the good of a
few and not for the well being of the majority (Evans cited Zaire as classic example of such a
state) while the developmental states are those that utilized the surplus of society for the
improvement of its constituents. Evans theorized that embedded autonomy is the key to a state’s
developmental effectiveness. Embedded autonomy points to the state’s capacity of mixing two
contradictory features which is a “Weberian bureaucratic insulation with intense immersion in
the surrounding social structure. This autonomy depends on the existence of a pact between the
state’s bureaucratic machinery and the private sector to go into shared development projects for
the common good.
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State and Financial Institutions
Michael Todaro (1985) discussed the role of the state in developed countries through
monetary and financial policy caused a major impact to expand economic activity. The ability of
these developed country governments to expand and contract their money supplies and to raise
the cost of borrowing in the private sector is made possible by the existence of highly organized,
economically independent, and efficiently functioning money and credit markets. Financial
resources are continuously flowing in and out of savings banks, commercial banks, and other
nationally controlled public and private financial intermediaries with a minimum of interference
(Todaro 1985, pp. 502-503).
On the contrary, markets and financial institutions in most developing countries are highly
unorganized, often externally dependent, and spatially fragmented. As Todaro writes:
“Many LDC commercial banks are merely overseas branches of major private banking
institutions in developed countries. Their orientation therefore, like that of multinational
corporations, may be more toward external and less toward internal monetary situations. The
ability of third world governments to regulate the national supply of money is further constrained
by the openness of their economies and by the fact that the accumulation of foreign currency
earnings is a significant but highly variable source of their domestic financial resources (Todaro,
1985, p. 502).”
Thus, the orientations of foreign bank branches in developing countries are outward in
orientation and not focused for the benefit of domestic economic activities. Todaro further
explains:
“Most important, the commercial banking system of the LDCs restricts its activities almost
exclusively to rationing scarce loanable funds to “credit worthy” medium and large scale
19
enterprises in the modern manufacturing sector. Small farmers and indigenous manufacturing
and service sectors must normally seek finance elsewhere-usually through local money lenders
and loan sharks who charge exorbitant rates of interest (Todaro, 1985, p. 503).”
Thus, most developing countries operate under a dual monetary system, a small and largely
externally controlled money market catering to the financial requirements of the middle and
upper-class foreign and local enterprises in the modern industrial sector, and a large unorganized,
uncontrolled and usurious money market wherein low-income people are obliged to borrow in
times of financial need.
In terms of the state’s autonomy in banking as important, Harris (1990), contend that
successful states in Asia and in Latin America control or mostly own the banks in their countries.
He writes:
“As in South Korea and Taiwan, the control of credit gave great power to the Brazilian. At its
peak, two thirds of all loans were made by the state-controlled banks (and 40 per cent by the
giant Banco de Brasil, the assets of which were equal to the combined assets of the top twenty
private banks. The expropriation of public spending and activities was also the key factor in
sustaining high domestic demand (Harris 1990, p. 84).”
The control and ownership of banks in South Korea, Taiwan, Brazil and other Latin
American countries by the state played a crucial role in the socio-economic development of these
countries.
Economic Growth and Macroeconomic Theory
According to Rostow (1961) the stages of growth school of thought, economic growth and
development follows through certain stages as follows:
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1. The first stage would start as the Traditional Society. This is a stage wherein a society has
limited production resources and technology such as a country which is predominated by
agricultural systems and with a social structure that is slow in mobility;
2. The second stage of this growth would be the Preconditions for Takeoff. The changes in
growth are in the emergence of basic industries, increase in social capital and
improvement in the political and social structure;
3. The Takeoff. In this stage, an economy increases its rate of production and investments,
manufacturing increases, social and institutional frameworks improved rapidly;
4. The Drive to Maturity. This is a stage wherein an economy has matured in its
technological advancement and it is being harnessed to manufacture products to increase
revenues for the economy;
5. The Age of High Mass Consumption. This is a stage where the shift will be from supply
to demand. As such, mass consumption will be the focus instead of problems of
production.
As such, the basis for growth would be the development of technology and investments of
a nation in order to grow and develop as an economy (Rostow, 1961, Todaro and Smith, 2006).
The linear stages of economic growth theory have been supported by two economists
Harrod and Domar (Todaro 2000, pp. 80-83) which later formulated the Harrod-Domar Growth
Model which basically reemphasized the importance of savings, and investment in the
development of an economy. This position of emphasizing technology, and investments in a
nation’s competitive advantage have also been reiterated by Michael Porter (1990) of Harvard
University.
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The structuralist theory of Furtado (1976) also were formulated on the basis of the
underdevelopment experience in Latin America, however, his theories differs from Frank
although there were some points where their theories would meet. The basic tenets of Furtado’s
theory are as follows:
1. An underdeveloped economy is characterized not only by a low per capita income but by
certain critical structural factors such as the sectoral composition of output, employment,
and the capital stock; economic institutions, including agrarian systems; the joint effect of
the foregoing on elasticities of supply and demand.
2. Key structural features of third world economies are: (a) the juxtaposition of a traditional
largely agricultural sector using a technology with low levels of productivity and a
modern sector using much more advanced technology ; (b) the modern sector is usually
established by foreign capital engaged in the primary production for capital; (c) the
modern sector is characterized by a high degree of openness (a large part of its output is
exported and also a large proportion of its requirements for equipments and materials are
imported; and (d) underdeveloped economies themselves are not able to design and
manufacture the capital goods required by the modern sector.
3. The characteristics mentioned above inhibit the generation of an internal growth dynamic.
Meanwhile, low elasticities of supply and demand also create inherent tendencies towards
inflation and balance of payments crisis.
4. Economic development consists not only of raising per capita incomes but also in
structural transformation, i.e. the transformation of the economic structure of
underdeveloped economies so that they acquire the internal capacity to initiate and
sustain economic growth.
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5. The main constraints to economic development are those outlined above, and the unequal
distribution of income caused by the monopoly of elites in the economy. Policy
recommendations center on finding ways in which government can intervene to help
private producers change these structural characteristics via the promotion of import
substitution in individual underdeveloped countries and the establishment of common
markets among them (Furtado: Hunt 1989), pp. 123-128).
As such, it is important that governments should be strong and play a key role in making
economic policy decisions for the development of a country. According to Encarta (2009)
macro-economics is defined as:
“Macroeconomics, branch of economics concerned with the aggregate, or overall, economy.
Macroeconomics deals with economic factors such as total national output and income,
unemployment, balance of payments, and the rate of inflation (Encarta, 2009).”
Thus, macroeconomics deals with whole systems and aggregates of a country’s economic
input and output and formulates development policies based on it. When the market failed as in
the United States Great Depression, the Keynesian influence of Macroeconomics was used to
bring economic recovery to the country.
Market Failures and the Role of Government
Markets sometimes fail because of certain structural defects in the economy. As such, the
government intervenes in order to save (McConnell, 1969) the economy from further damage. A
recent example is what happened here in the United States financial markets wherein the big
financial institutions such as banks began to crumble and was threatening to affect the whole
23
domestic economy as well as globally. Thus, the Bush administration intervened and issued a
multibillion dollar bailout.
Macroeconomic Concepts
In terms of macroeconomic concepts, people (Samuelson, 1973, Friedman, 2008) should
understand that the gross national product is an important measure of the performance of the
economy, it measures total consumption, total investments, total goods and services, and net
exports. From the standpoint of production, it also measures the extent of agriculture, industry,
and services performance.
Aggregate demand is the total demand performance in the entire economic system in a
given country while aggregate supply is the performance of the production of goods and services
in the entire economy. These are important information for people since these provides them
with an idea of what is going on in the economy particularly the market for goods and services.
When the level of unemployment (Samuelson, 1973, Friedman, 2008) in an economy is
high, it is not a good indicator for the future of its citizens since employment is important to earn
income while if there is inflation prices increase and in such a situation the purchasing power of
people will decline. During deflation, prices would decrease; it might be good news for
consumers but not for producers which depend upon lucrative prices to produce their products.
There are two basic policies wherein government regulators control the flow of funds in
an economy and these are through monetary and fiscal policies. Monetary policy usually is
utilized through the central bank or the Federal Reserve wherein the flow of money is controlled
through easy or tight money policies. Easy money policy occurs when circulation of money
increases through decreasing the rediscount rate of the Federal Reserve. These encourage banks
to decrease their interest rates so that more businessmen will be encouraged to get a loan. If there
24
are more loans, money circulation increases and there will be more money for spending and
investments.
On the one hand, the Federal Reserve (McConnell, 1969, Samuelson, 1973, Friedman,
2008) can discourage money circulation through tight money policy. This is done by increasing
the rediscount rate and the banks will increase their interest rates which would result to lesser
businessmen to apply for loans. Thus, there will be a decrease in the circulation of money
available for investments or spending.
Fiscal policy is utilized when the (Samuelson, 1973, Friedman, 2008) government sees
that there is a need to increase or decrease money to circulate in the economy. Increasing the
money circulation could be done through public spending such as building infrastructures, public
employment, etc. These would result to more employment, and income resulting to more
available money for spending.
Fiscal policy can also be utilized through taxation wherein money circulation can be
controlled through higher taxes. On the one hand, higher taxes can also provide the government
with more money to spend for government projects and again increase money circulation.
Macroeconomic theory calls for the utilization of savings, investments, monetary policy
as well as fiscal policy in implementing economic change and development which will result to
the increase in aggregate output as reflected through the Gross Domestic Product (GDP) of a
country. Thus, the theoretical framework of this study will be based on it.
International Strategic Market Planning
In terms of international market planning, a company has to evaluate the external
environment as well as its internal environment.
Environment
25
The environment would consist of the political factors, socio-cultural factors, technological
factors, economic factors, legal factors, natural factors, and global factors. Political factors
should be taken into consideration such as the political situation in China considering its form of
government and it direction towards liberalization, globalization, and privatization. Socio-
cultural factors should also be considered since the cultures of the people in a country are
important determinants in the market as well as its social structure (Chandler, 1962).
Technological factors such as the state of technology in a given country and the world should
be taken into consideration. In the case of the telecommunications industry in China, the state of
technology is quite excellent and China is competing well in the world market. The development
of economic zones in the country had been able to transfer technology in the country particularly
in information technology as well as telecommunications (Ansoff, 1965).
Economic factors also should be considered in the formulation of strategy. The current
global economic crisis spurred by the United States real estate bust had given some problems to
some markets in the world. However, China’s economy remains resilient and economic
development is going well in the country. In addition, the legal factors in the country must be
considered such as the laws and regulations for business as well as the natural factors such as the
materials and natural resources in a country. Global factors such as the current trend in
globalization in China which is attracting huge foreign investments is a vital consideration in
strategy formulation (Ansoff, 1965)
Internal Environment
The company resources should be considered such as its organizational structure, human
resources, capital, managerial expertise and experience, and facilities. The organizational
structure of the company must be responsive to its strategy. In other words, if the company’s
26
strategy is towards expansion, thus, the structure of the company must also expand and designed
to meet the objectives of the plan (Ansoff, 1965)
The company’s human resources must also be responsive and be trained to meet the strategy.
They identify the classic theories of Maslow (1954) and Herzberg (1966) as being at the root of
assumptions about the nature and exploitation of human potential while McGregor's Theory Y
focuses on committment commitment and trust.
Marketing strategy is defined as the strategy of the company concerning the positioning of
company products in relation to the market and it’s competitors while a strategic plan is the
overall plan of the company with focus on its broad strategy and goals in the short, medium, and
long term horizons (Kotler, 1994). Marketing Mix is the combination of pricing strategy,
product strategy, distribution strategy, and promotion strategy of the company (Kotler, 1972).
Moreover, product strategy is the strategy of the company as to the positioning of its
products (Kotler, 1990) while pricing strategy is the strategy of the company as the price it is
going to offer to its customers (Kotler, 1994).
The distribution strategy of the firm is the strategy of the firm in relation to the placing of its
products so that it can reach its customers efficiently and effectively (Kotler, 1994) and finally,
the promotion strategy of the firm is the strategy of the firm in relation to the advertising of its
products so that its image will be well accepted by customers and market.
It is important to have a marketing strategy because the firm can incur losses if it has the
wrong marketing strategy or make profits if it has the right one. The firm can maintain or could
loss its leadership in the market with not having the right marketing strategy. The effectiveness
of marketing strategy can be measured through its market share of its products in the industry as
27
well as through its sales volume increase from previous years. Finally, profitability per product
can also be measured in terms of its revenues and cost (Kotler, 1994).
The U.S. Financial Crisis and Its Impact to World Markets
It is a controversial angle to explore, however one can conclude that the initial domino
effect started with the collapse of the credit market. The credit market was in turmoil for a
number of years, prior to the alleged failure of the economy, ironically the housing market
thrived in light of this strain. Individuals who wanted to fulfill their share of the American
Dream with poor credit were issued mortgaged loans which their ultimately could not afford,
hence the birth of the subprime mortgage market. This lack of income and credit was simply
overlooked as long as houses were still considered an appreciating asset.
The subprime mortgage crisis is a major factor that caused the United States economic
crisis. The crisis started with the housing bubble (Moyers, 2007) with the rates of defaults on
subprime and other adjustable rate mortgages starting to accelerate. About 1.3 million of houses
were foreclosed during 2007 which increased to 79 percent from 2006 (RealtyTrac Staff, 2008).
The ones that were responsible for the credit risk as borrowers defaulted on their
payments such as the major banks and other financial institutions around the globe reported
losses of around U.S. $379 billion as of May 21, 2008 (Onaran, 2008). The lenders had
forwarded the mortgage payments rights to third-party investors through mortgage-backed
securities (MBS) and collateralized debt obligations (CDO). Many of these corporate and
institutional investors possessing these MBS or CDO suffered tremendous losses as the value of
the mortgage assets decreased. In addition, this is compounded by the major decline of the stock
market in the U.S. as well as in other countries (Onaran, 2008).
28
In addition, the subprime crisis affected the growth of the U.S. economy since fewer or
more expensive loans decreased investments which are a major factor in stimulating the
economy (Bernanke, 2008). Furthermore, the downturn in the housing market resulted in the
significant decrease in new home construction and housing prices and these caused downward
pressure on growth (Bernanke).
The U.S. economic crisis triggered by the subprime bubble was initially considered as a
domestic problem. However, other institutions around the world were affected such as the Bank
of China which is the number two bank in China. This bank announced in August 2007 that it
holds US $9.7 billion dollars of US subprime debt (Shaw, 2007). Also, in January of 2008, the
South Korean stock market fell due to the “selling spree” of shares of U.S. mortgages (Arirang
News, 2008). The International Monetary Fund (IMF) reported that the global loss due to the U.S.
subprime mortgage crisis is estimated at US $945 billion (Finfacts Team, 2008).
Furthermore, the collapse of financial giants of Freddie Mac, Fannie Mae, American
International Group (AIG) and other major banks and financial institutions in the United States
affected other financial institutions and corporations around the world.
Sub prime rates have been affected directly. Almost one-third of all domestic units could
potentially witness the worth of their homes decrease, due to a nearby sub prime foreclosure, by
an average of $5,000. A portion of the public believe that getting compared rates from different
banks may be a good solution to this problem (Collins 2008). Approximately 44 million
homeowners could potentially be impacted from the overall decline in tax base and house values,
according to a new study by the Center of Responsible Lending (Collins 2008). This could end in
a lot of foreclosures and could eventually hinder the economy if enough people lose there
homes. Nearby foreclosures will be $223 billion (Collins, 2008).
29
The Durham, N.C.-based consumer advocacy group also cautions that minority
communities with bulky concentrations of sub prime borrowers could undergo harsher declines
in property values. Buyers who received most of the risky loans and are soon about to
disproportionately experience the consequences (Dymyank, 2008). This conflict has to have
solution and an educated way to make the rates work. A current congressional study estimates
that two million households with adjustable- rate sub prime mortgages could end up in
foreclosure by the end of 2009 and lose $71 billion of their housing wealth. This Joint Economic
Committee study estimates the spillover effect on nearby homeowners would be only $32 billion.
Chief executive Martin Eakes (CRL) stressed that his group's estimates are "utterly conservative"
and he expects the spillover effects will be greater $223 billion (Dymyank, 2008).
Also in the last decade, Wall Street's financial machinery took solid domination of a
housing finance industry whose simple roots date to the savings and loan industry created in the
FDR era. It created vast global networks for risky housing and questionable home equity lines.
This was a disaster waiting to happen.
The sub prime liquidity crisis was knocked significantly as well. Major losses with assets
and housing caused company to lose money or even go as far as bankruptcy. Margin calls
playing a key role in the collapse of alt-A/prime lender, American Home Mortgage Investment
Corp. here, the nation's 10th largest funder. A non-depository REIT based in Long Island,
American Home relied on $9 billion in warehouse lines of credit. It serviced $50 billion in home
mortgages, including various ones owned by Fannie Mae and Freddie Mac. However, when the
housing market declined in early 2007 and foreclosures increased sharply, sub prime lending
grabbed the notice of regulators and consumer interest groups. Many people see these higher
interest rates and restrictive terms, and therefore conclude that sub prime lending is predatory.
30
Bearing in mind the latest market failures there are absolutely a number of deceitful or cunning
lenders; although in the majority case lenders charge higher rates and fees, not in a cynical
reach for increased profits, but because sub prime borrowers are riskier than prime borrowers. A
large amount lenders offer loans only to the finest sub prime borrowers, those who nearly are
eligible for prime mortgages. Prime borrowers are very consistent clients. This is another
alternative answer on how to overcome breakdowns in the market.
The real estate market is historically difficult to predict, yet is one of the most significant
markets in our economy (Canton 2007). A deep understanding and sense of the real estate market
could potentially encourage personal gain as opposed to collapses, causing personal loss.
Collapses in the market have many negative outcomes such as harmful effects on peoples
retirement plans and mortgages subprime rates. Several companies today have been affected by
the current real estate collapse (Watts, 2008).
Basically Bear Stearns handed out high mortgage rates on over priced houses. The market
had to break considering no one was able to make payments and foreclosures were occurring
frequently. In this situation, no money is coming in at all and it’s a complete loss to for the
company that handed out the mortgage. In addition, they were getting in trouble with the same
thing when it came to sub-prime rates they were not being careful to only give qualified people
the right sub-prime rates. This essentially and immediately turned around Bear Stearns’ position
and they started losing money all due to the real estate collapse.
Sarah Rich states (Rich 2007), “that mortgages and sub prime rates are directly affected by
this new problem in the market.” Some banks have drawn up some specialist plans for this such
as the bank of commonwealth (Lim 2007). Mortgage funds have been unjustifiably drawn into
negative publicity. Surrounding the string of failed property investments and suffered losses as a
31
result, people are now faced with difficult decisions on which moves to make to benefit long
term and financially. A company called WestPoint Estate has a unique story about its troubles
with the market. Unity head of mortgages, funds management, Roy Prasad, claims they were
prompted by a current standard report which revealed that the mortgage fund sector had lost
$300 million in net retail fund outflows in the last 12 months (Rich 2007). As a result, this
corporation received a significant amount of negative media attention. The conflict being that
there was a misconception in the marketplace: that WestPoint Estate was somehow a mortgage
fund. This is just one of the many companies affected by this recent collapse. Companies within
the last year have been borrowing on the open market in terms of the first mortgage. However,
now that the US housing market finally appears as losing momentum, a large portion of
homebuilders have witnessed their share prices take a dramatic decline (Freed, 2007). This will
draw investors by the way of debenture offers, but the recent collapse cannot be just titled as
collapse of the mortgage funds. Instead they were property developers that were raising retail
investments by way of issuing debentures in the marketplace. Resulting negatively the build up
made the collapse of the market. "You can't escape the fact it has slowed down the level of flows
into the sector, and it's probably impacted more on the high yield funds than conventional
mortgage funds (Rich, 2007).”
Another company similar to WestPoint Estate is NovaStar. This company is a mortgage
firm, and this company has had direct effect from the recent subsiding to the point of termination.
The results due to this closure are approximately 170 people losing their jobs, leaving roughly 30
people to handle its mortgage portfolio management operations. In July 2007, NovaStar
announced a recapitalization deal, but market conditions prevented that deal from being
completed. From there, it went downhill. The company neglected to pay a dividend, forcing it to
32
abandon real estate investment trust status retroactive to the start of 2006. It posted a third-
quarter 2007 loss of $598 million that included charges for a variety of items of $544.7 million.
These losses were considerable to the fact that they could not recover (Finkelstein, 2008). More
recently, a management alteration had co-founder Scott Hartman leave the company and be
replaced the top positions. The decision to shut the originations business is because it could no
longer meet minimum licensing requirements because of the net worth and financial condition of
the company. It said in a Securities and Exchange Commission filing. NovaStar's business plan
at one point was to operate as a mortgage broker until secondary market conditions improved
adequately for it to enter the lending business again (Finkelstein 2008).
Other businesses were affected by the downward spiral of NovaStar. Parallel companies were
producing loans it could not buy. Giving people mortgages they could not handle and clients that
are not able to make the payments. NovaStar is a corporation that should be looked at as a
learning tool. When large companies take such a tremendous blow, it is nearly impossible to find
a strategic plan to recover. Novastar was unable recoup and make the necessary decisions to
bring the company back to speed. “Even though we have to deal with the market collapse we
have to look at why this happens and how we can keep huge mortgage firms like NovaStar
around (Finkelstein, 2008).”
According to Zuckerman, all the current economic indicators point to a Great Depression
in the present times and it could be even worse since the United States is facing a credit crunch
of epic proportions.
As Zuckerman further writes:
“I think we are facing the worst financial crunch and crisis since the Great Depression.
You have the entire banking system now that is virtually frozen. And there are, not just this
33
subprime mortgage thing, there are other things called credit default swaps where they will lose
as much money, $250 billion on. The banks are frozen. They are not making loans because they
have such huge debts that they have to take on to their balance sheets and nobody knows how to
deal with that
(http://www.tldm.org/News11/ZuckermanComparesCrisisToGreatDepression.htm).”
As such, the banking system is virtually frozen and loans are suspended since the banks
have huge debts. The worst thing about this crisis is that nobody knows where it is heading and
nobody knows how to deal with it.
As the Business and Media Institute reported on January 21, 2008:
“While the financial sector is seeing problems with tightened credit, Zuckerman’s reference to
the Great Depression could lead viewers to think that the economy is heading toward a
depression. The U.S. economy overall does not appear to be headed for another Great
Depression. For the last two quarters, gross domestic produce (GDP) has grown at a rate of 3.8
percent in the second quarter of 2007 and 4.9 percent in the third quarter. Fourth-quarter GDP
numbers for 2007 will not be released until March. Unemployment in the U.S. is also relatively
low at 5 percent
(http://www.tldm.org/News11/ZuckermanComparesCrisisToGreatDepression.htm)”.
U.S. and Other Governments Bailout Measures
The Senate of the United States has passed a new version of a multi-billion package
designed to bailout the economy from the financial crisis and the senators voted 74 to 25
(http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3119580/Financial-crisis-US-
Senate-passes-700bn-bank-bail-out.html, 2009).
As Telegraph.co.uk reported:
34
“After the collapse of six major US financial institutions and falling stock markets around the
world, George W Bush was joined by both candidates to succeed him in urging the Congress and
the public to accept the bill, which would use up to £380 billion in taxpayers’ money to buy bad
assets on Wall Street.”
(.http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3119580/Financial-crisis-US-
Senate-passes-700bn-bank-bail-out.html, 2009)
The bailout is expected to inject $700 billion to alleviate the current financial problems in
the country.
In terms of the developing countries, their government are also doing some measures to
alleviate the financial crisis but the World Bank (2009) have prepared bailout measures through
financial assistance to developing countries which were much affected by the crisis.
Stock Market Crash
Due to the housing credit crisis in the United States which was triggered by the subprime
bubble, prices of housing properties went down and mass foreclosure caused a rapid
deterioration in the financial system. The stock market in the U.S. as well as globally fell down
and this had disastrous effect on many U.S. financial giants such as Bear Stearns, American
International Group, Lehman Bros. and many other major financial institutions. In addition, the
investment banks which managed the placements of derivatives and structured notes through
mortgaged backed securities (MBS) and Collateralized Debt Obligations (CDOs), suffered
financial meltdowns when prices of mortgaged properties went down in the market due to the US
subprime crisis. Billions and even trillions of dollars were invested in structured notes and
derivatives not only in the United States but in other parts of the globe and these huge
investments affected many other financial giants in other countries.
35
In recent years, there was a rise in the prices of homes in the United States. The typical
new house in the 1970s would cost about $28,000 but house prices went up to $50,000 in 1977
(Watts, 2008).
During the period of 2007 to 2008 when subprime borrowers were not able to pay their
house mortgages and mass foreclosures of housing properties sizzled, the prices of homes began
to decline in the United States and these created a financial problem for investors and banks
which expected attractive prices for homes to rise in the near future (RealtyTrac Staff, 2008).
Since most of the mortgages were invested through derivatives such as mortgage-backed
securities (MBS) and collateral debt obligations (CDOs) and since many banks and financial
institutions were counterparties to it, many of these financial giants started to collapsed and
financial problems through the U.S. economy and even throughout the world (Moyers, 2007;
Onaran, 2008;).
The Failure of the Banking Industry
The year 2008 brought forth aggressive predictions of bank failures within the United
States. The Federal Deposit Insurance Corporation (FDIC) predicted that 500 banks would fail
by the end of 2009. (FDIC, 2008) At the end of the third quarter of 2008, this prediction seemed
plausible as the number of bank and credit failures in 2008 topped the decades previous high in
2002. However, in the first quarter of 2009, the recorded number of financial institution failures
(FI) has reached an alarming 16, which comprise of eight banks and eight credit unions.
Regulators of the Federal Depositors Insurance Corporation (FDIC) have reported total losses of:
 Total asset losses of 379 billion dollars
36
 Uninsured deposits not acquired 659 million dollars
 Dividends paid or uninsured deposits 272 million dollars
The above figures command the disquieting perspective when compared to the number of
2007, where there were only five failures, which comprised of three banks and two credit unions,
six failures in 2006 which comprised solely of credit unions, and five failures in 2005 again
comprising of all credit unions. (FDIC, 2008) At the height of the economic downturn in 2002,
the record indicated that there were twelve financial institution (FI) failures. This equates to
more than one fourth of the recorded number in the last nine years. (FDIC, 2009) Additionally,
the failure of 16 financial institutions for 2009 equates to more than half of the total collapse of
the financial institution failure in 2008, which brought forward a massive twenty-five failures. A
conclusion can be drawn that these failures rippled after the announcement of bankruptcy of
Lehman Brothers in September of 2008. When compared to the failures of the Great Depression
era the numbers are not as disturbing, there were approximately 9000 financial institution, which
failed during this period, compared to the current approximation of 39, which have failed quarter
to date. (FDIC, 2009)
The events of the Great Depression have become comparables to the events of 2008
through 2009. The comparison seems to have escalated with the interests of Ben Bernanke
Federal Reserve chair. Mark Carlson a staff economist for the Federal Reserve published a
seemingly abstruse subject, which could be useful for implementation in this economic crisis. In
his publication, Carlson investigates the possibility that the failure of thousands of banks during
the era of the Great Depression was attributed to sheer panic. (Carlson, 2008) Previous research
such as a publication by Paul Kupiec and Carlos Ramirez entitled Bank Failures and the cost of
Systemic Risk has alluded to the conclusion that banks which failed during the Depression
37
initially started out with less core capital, than banks which survived. This suggests that a
number of the failures could have been avoided if there was the absence of the contagious panic
of the depositor and the investor.This concept can be implemented to the current economy; the
most recent ‘run on the bank’ of financial institution IndyMac in July of 2008.
After the market closed on Friday July 11 2008, the FDIC pronounced IndyMac as being
insolvent. This declaration of insolvency proved to be the second largest bank failure in history.
The assets of Indy Mac totaled 32 billion dollars.
The failure of Fannie Mae and Freddie Mac also fell victim to the panic of the investor.
Shares of Fannie Mae and Freddie Mac lost more than half their value during the week of
IndyMac failure as speculation that the mortgage giants will need a government funds served as
a instigator to the poor performance of the stock. The fear was that the company would be forced
to be transparent because of the intervention, and report billions of dollars in losses, resulting in
the need to raise billions of dollars in emergency capital. This would be accomplished by equity
offerings, which in turn would dilute shares. The failure of Freddie Mac and Fannie Mae assured
that the credit crisis would reach a troubled phase.
38
Chapter 3
METHODOLOGY
Research Objectives
Theory Construction
Hempel’s methodology (Hempel, 1968, 1973) is based on the concept of empirical
science which is very applicable particularly in the physical sciences. According to this view:
“… all explanation is achieved ultimately by reference to causal or correlation antecedents.
In the case of the fields of psychology and the social and historical disciplines according to
some, even in biology – the establishment of causal or correlation connections, while
desirable and important, is not sufficient. Proper understanding of the phenomena studied in
these fields is held to require other types of explanation (Hempel, 1973: p. 179).”
As such, according to Hempel, one of the explanatory methods that have been developed
for this aim is that of functional analysis. This method of analysis has somewhat found some
problems in the area of social science because whereas in physics, experimentation can me made
in a laboratory, it is difficult to isolate variables in the social sciences and form an experiment.
Thus, the Hempellian school of thought may not be practical to use in the social sciences.
May Brodbeck’s article on “Methodological individualisms: Definition and Reduction”,
(Brobbeck, 1968: pp. 280-304) somewhat supported Hempel’s approach of scientific analysis as
applied to sociological problems. As Brodbeck would argue that to compare Indians are red-
skinned with Indians are disappearing. She opined that in the former, each and every Indian is
said to be red-skinned, while in the latter Indians as a group are said to be disappearing, that is,
diminishing in population. As such, according to Brodbeck, when a property is attributed to a
group collectively, so that the group itself is logically the subject of the proposition, rather than
39
distributively, in which case, each and every member of the group could logically be the subject
of the proposition, then we have a group property. Clearly, there is no issue about the occurrence
of group properties.
Thus, Brodbeck has a point here in terms of defining and differentiating individual
properties from group properties. On the other hand, Emile Durkheim (1968: pp. 245-254)
contend that essentially individuals were and are born with existing social structures which
influence the individual.
As Durkheim argued:
“But in reality there is in every society a certain group of phenomena which may be
differentiated from those studied by the other natural sciences. When I fulfill my obligations as
brother, husband, or citizen, when I execute my contracts, I perform duties which are defined,
externally to myself and my acts, in law and in custom. Even if they conform to my own
sentiments and I feel their reality subjectively, such reality is still objective, for I did not create
them; merely inherited them through my education. How many times it happens, moreover, that
we are ignorant of the details of the obligations incumbent upon us, and that in order to acquaint
ourselves with them we must consult the law and its authorized interpreters! Similarly, the
church member finds the beliefs and practices of his religious life ready-made a birth; their
existence prior to his own implies their existence outside of himself (Durkheim, 1968: p. 245).”
As such, Durkheim emphasized the existence of social facts and properties that already exist
as a social structure that affects the behavior of individuals. Also these structures are outside or
external to the individual.
40
In another school of thought, Ernest Gellner (1968: pp. 254-269) as written in his essay
entitled, Holism versus Individualism”, argued that certain situations encourage disposition or
balance between holism and individualism. As Gellner put it:
“To the individualist, his own position appears as true that it barely needs the confirmation of
actually carried out eliminations, whilst, he gleefully points out that in practice the holist can and
does only approach his institutions, etc., through what concrete people can do, which seems to
the individualists a practical demonstration and implicit confession of the absurdity of holism.
By contrast (and with neat symmetry) the holist sees in the fact that the individualist continues to
talk in holist terms a practical demonstration of the unworkability of individualism, and he
certainly not consider the fact that he can only approach groups and individuals to be something
which he had implicitly denied and which could count against him. Both sides find comfort in
the actual practices of the opponent…(Gellner, 1968: p. 256).”
What is at issue here is the ontological status of the entities referred to by the holistic terms.
As the notion of ontological status is not clear as it might be in the debate between holism versus
individualism, Gellner pointed to something which is important to a reductionist and which to
him is an index of existence --- namely, causation.
Gellner further writes:
“He does not wish to allow the Whole could ever be a cause and to insist that explanations
which make it appear that it is can be translated into others. That which is a mere construct
cannot causally effect that which “really exists”; this is, I suspect, the feeling of the individualist,
the reductionist. This is in conjunction with the truism that a whole is made up of its parts, that
nothing can happen to a whole without something happening to either some at least of its parts or
their mutual relations…(Gellner, 1968: p. 256).”
41
Thus, the holistic counter-argument works in reverse: if something (a) is a causal factor (b)
cannot be reduced, then in some sense it really and independently exists.
Thus, Gellner called for a balance between holism and individualism. He argued that not all
things can be reduced to individualistic terms. On the other hand, not all things can be explained
in social or group terms.
In another perspective, Watkins (1968) does not exactly agree with Gellner and even with
Hempel. As he argued:
“I am not an advocate of mechanism but I have mentioned it because I am an advocate of an
analogous principle in social science, the principle of methodological individualism. According
to this principle, the ultimate constituents of the social world are individual people who act more
or less appropriately in the light of their dispositions and understanding of their situation. Every
complex social situation, institution, or event is the result of a particular configuration of
individuals, their dispositions, situations, beliefs, and physical resources, and environment. There
may be unfinished or half-way explanations of such large-scale phenomena until we have
deduced an account of their statements about the dispositions, beliefs, resources, and inter-
relations of individuals. And just as mechanism is contrasted with the organicist idea of physical
fields, so methodological individualism is contrasted with sociological holism or organicism
(Watkins, 1968: pp. 270-271).”
From holism’s point of view, social systems constitute ‘wholes’ in the sense that some of
the large-scale behavior is governed by macro-laws which are in essence sociological in the
sense they are ‘sui generis’ and not to be explained as just regularities or tendencies resulting
from the interaction of individual behaviors. The behavior of individuals according to
sociological holism can be explained at least partly in terms of such laws. An example of this
42
sociological factor is the long-term cyclical wave in economic life which is supposed to self-
propelling, uncontrollable, and unexplainable in terms of human activity.
Watkins argued that social tendencies are the product of human characteristics, activities,
and situations, of people’s ignorance and laziness as well as their knowledge and ambition. He
also mentioned that there are two areas where methodological individualism does not work. The
first is a probability situation where accidental and unpredictable irregularities in human
behavior have a fairly regular and predictable result. The second kind of social phenomenon to
which methodological individualism is inapplicable is where some kind of physical connection
between people’s nervous systems short-circuits their intelligent control and causes automatic,
and perhaps in some sense appropriate bodily responses (Watkins, 1968).
The position of the methodology of this study is anchored on sociological holism and
macroeconomic theory. It is the position of the researcher that social and economic phenomena
can be more explained from a social systems point of view. Although, it would be agreeable, in a
sense, that collective individual behavior would form certain social tendencies (e.g., the liquidity
preference behavior of investors in the event of lower interest rates in the financial system), most
social phenomena could be explained in holistic forms such as traditions, cultures, social
stratification, laws, financial system, administrative, and political structure.
Quantitative, Descriptive, and Qualitative Research Methods
Even though the study can be explained mainly through the historical method, the writer
included also some mixed methods of research such as the quantitative, and descriptive research
methods. These mixed methods have been included because the natures of the phenomena being
studied are quite recent and still happening in the United States, Italy, and Russia.
43
The descriptive method was used to support to complement the historical method. The
phenomena being studied were just recent and still happening and so the descriptive method was
used to describe the events and facts in order for the reader to understand the situation.
In addition, the data were analyzed through charts and tables utilizing chart analysis and
trend determination. The growth rates and trends of financial and economic data were computed
so as to determine the impact of a particular variable to another.
Quantitative data uses numbers. It tends to be based on numerical measurements of specific
aspects of phenomena; it abstracts from particular instances to seek general description or to test
causal hypotheses; it seeks measurements and analyses that are easily replicable by other
researcher (Thomas, 2003).This is a good approach to be used in this research because by having
this approach the researcher could understand the phenomena being studied.
The qualitative research method, which involves the analysis of data such as words, pictures
or objects. This research method was selected because it makes use of the exploratory approach
in describing complex phenomena, tracking unique or unexpected events, understanding the
experience and interpretation of events by actors or players with different stakes and roles, and is
useful for conducting initial explorations to develop theories (Yin, 1989).
The qualitative research methodology is particular useful for purposes of this thesis because it
is characterized by an emphasis on describing, understanding, and explaining complex
phenomena. The qualitative research methodology is also the appropriate research tool to use for
studying the relationships, patterns, and configurations among factors, and the context in which
activities occur (Creswell & Plano-Clark, 2006).
The case study approach was selected as the research strategy for this thesis since it is the
ideal method to use for in-depth investigation for a phenomena or area of study. The case study
44
research strategy is useful for bringing out the details from the view point of participants through
the use of multiple sources of data (Stake, 1995).
Under the case study method, there are several other research strategies which may be used to
analyze data:
 Exploratory research strategy. This strategy is used to provide insights regarding a
particular case, in order to understanding the foundations or basis for a solution that is
sought. This strategy is especially useful at the preliminary stages of research (Yin,
1989).
 Explanatory research strategy. This method is used for causal investigations of case
studies (Yin, 1989).
 Descriptive research strategy. This strategy is used to develop a descriptive theory at the
start of the research project (Stake, 1995)
 Intrinsic research strategy. This case study research strategy is used when the researcher
has a personal interest in the case (Stake, 1995).
 Instrumental research strategy. This method is used if the case to be used is more than
what is observable to the researcher (Stake, 1995).
 Collective research strategy. This strategy is used when the researcher wants to study
multiple cases (Stake, 1995).
45
Data Gathering Method
The data collection and gathering of this study were based on searches in the internet since
it is the only way to gather data worldwide. The data comes from the following sources:
1. Office of the Comptroller of the Currency/US Department of Treasury
2. US Department of Commerce, Bureau of Economic Analysis
3. Federal Reserve System, Flow of Funds Accounts of the United States
4. Reuters data base
5. World Bank
6. Italy government agencies
7. Russian government sources
The proposed topic will mainly make use of primary and secondary sources to gather
information for the research study.
Primary research involves the study of a subject through first-hand observation and
investigation, through the analysis of literary or historical text, or the conduct of survey or
interviews. Primary sources include historical documents, works of literature or art, and
statistical data. It also includes original documents such as journals, manuscripts, memoirs,
diaries, and other unpublished works (Creswell and Plano-Clark, 2006).
By contrast, secondary research involves the examination of studies that other researchers
have already made on a certain subject. In other words, it involves data previously published by
other researchers, and other-second hand data such as books and articles (Creswell and Plano-
Clark, 2006).
46
This proposed topic can actually make use of a combination of these case study research
strategies, particularly the exploratory, explanatory, descriptive, and collective research
strategies. However, the main method to be used will be using empirical analysis utilizing
multiple regression analysis as follows:
Multiple Regression Analysis refers to a set of techniques for studying the straight-line
relationships among two or more variables. Multiple regression estimates the β's in the equation
The X’s are the independent variables (IV’s). Y is the dependent variable. The subscript j
represents the observation (row) number. The β's εj are the unknown regression coefficients.
Their estimates are represented by b’s. Each β represents the original unknown (population)
parameter, while b is an estimate of this β. The linear relationship between x and y can be
represented in a graph with height and weight as an example of the variables to be correlated:
Although the regression problem may be solved by a number of techniques, the most-used
method is least squares. In least squares regression analysis, the b’s are selected so as to
minimize the sum of the squared residuals. This set of b’s is not necessarily the set you want,
47
since they may be distorted by outliers--points that are not representative of the data. Robust
regression, an alternative to least squares, seeks to reduce the influence of outliers.
Multiple regression analysis studies the relationship between a dependent (response) variable
and p independent variables (predictors, regressors, IV’s). The sample multiple regression
equation is
If p = 1, the model is called linear regression.
The intercept, b0, is the point at which the regression plane intersects the Y axis. The bi are
the slopes of the regression plane in the direction of xi. These coefficients are called the partial-
regression coefficients. Each partial regression coefficient represents the net effect the ith
variable has on the dependent variable, holding the remaining X’s in the equation constant.
A large part of a regression analysis consists of analyzing the sample residuals, ej, defined as
Once the β's have been estimated, various indices are studied to determine the reliability of
these estimates. One of the most popular of these reliability indices is the correlation coefficient.
The correlation coefficient, or simply the correlation, is an index that ranges from -1 to 1. When
the value is near zero, there is no linear relationship. As the correlation gets closer to plus or
minus one, the relationship is stronger. A value of one (or negative one) indicates a perfect linear
relationship between two variables.ix
In order to make good use of multiple regression, you must have a basic understanding of the
regression model. The basic regression model is:
48
This expression represents the relationship between the dependent variable (DV) and the
independent variables (IV’s) as a weighted average in which the regression coefficients (β's) are
the weights. Unlike the usual weights in a weighted average, it is possible for the regression
coefficients to be negative.
A fundamental assumption in this model is that the effect of each IV is additive. Now, no one
really believes that the true relationship is actually additive. Rather, they believe that this model
is a reasonable first-approximation to the true model. To add validity to this approximation, you
might consider this additive model to be a Taylor-series expansion of the true model. However,
this appeal to the Taylor-series expansion usually ignores the ‘local-neighborhood’ assumption.
Another assumption is that the relationship of the DV with each IV is linear (straight-line).
Here again, no one really believes that the relationship is a straight-line. However, this is a
reasonable first approximation.
In order obtain better approximations, methods have been developed to allow regression
models to approximate curvilinear relationships as well as non-additivity. Although nonlinear
regression models can be used in these situations, they add a higher level of complexity to the
modeling process.
Validity of Data
The data are valid since these were taken from reliable sources in the web. Most of the
data came from valid sources such as the U.S. department of commerce, Reuters, World Bank,
U.S. Department of Treasury, Federal Reserve System, and Company Annual Reports, Italy
government websites, and Russian government websites.
49
Originality and Limitations
The data are original. The limitations are that these sources came from the web and some
of these data came from secondary sources.
50
Chapter 4
RESEARCH FINDINGS, ANALYSIS, AND DISCUSSION
The imports of the United States outpaced the exports in 1971 (see Table 1) until 2006
which led to a negative balance of trade from 1971 to 2006 (see also Figure 1). In other words as
an economic indicator in 2006 prior to the U.S. financial crisis, the country earned $1.4 trillion
but spent $2.2 trillion and had a deficit of $758 billion. As such, these deficit economic
structures are systemic of a financial shortage wherein the country spent more than it earns. As
such, the U.S. had to borrow to offset these deficits which started in 1971.
Table 1
51
Figure 1
52
Source: US Department of Commerce
The balance of the United States current account (see Table 2 and Figure 2) from 1960-
2006 showed that starting also in 1971, the country’s current account resulted in a deficit and
these continued up to 2006 wherein it had a huge deficit of $811.47 billion. Again, these
economic indicators showed a systemic financial structure for the country.
Table 2
53
The gross domestic product and the balance of trade of the United States were compared
from 1976-2006. The result would show that the there is a positive growth for the gross domestic
product during the period but the balance of trade figures were all negative during the said period
(see Table 1). The linear regression analysis results between gross domestic product and balance
of trade (see Appendix 1) showed that there is an inverse linear relationship between gross
domestic product as the dependent variable and the balance of trade (bot) as the independent
variable. The regression coefficient R2 is .76 which means that there is indeed a strong inverse
linear relation between the two variables. As such, this is empirical evidence that the balance of
trade which was always a deficit from 1976 to 2006 contributed negatively to the gross domestic
product of the United States.
54
Table 3 U.S. Gross Domestic Product and Balance of Trade, 1976-2006
Year GDP Balance of Trade

1976 1825 -6082
1977 2031 -27246
1978 2295 -29763
1979 2563 -24565
1980 2790 -19407
1981 3128 -16172
1982 3255 -24156
1983 3537 -57767
1984 3933 -109073
1985 4220 -121880
1986 4463 -138538
1987 4740 -151684
1988 5104 -114566
1989 5484 -93142
1990 5803 -80864
1991 5996 -31136
1992 6338 -39212
1993 6657 -70311
1994 7072 -98493
1995 7398 -96384
1996 7817 -104065
1997 8304 -108273
1998 8747 -166140
1999 9268 -265090
2000 9817 -379835
2001 10128 -366126
2002 10470 -423725
2003 10961 -496915
2004 11686 -612092
2005 12422 -714371
2006 13178 -758522
Source: Bureau of Economic Analysis
The linear regression chart (see Figure 2) between the gross domestic product and balance
of trade of the United States would confirm this inverse relationship.
Figure 2
55
The linear regression coefficient for Gross Domestic Product (GDP) and Balance of
Current Account (BOCA) shows a linear fit (see Figure 3) and the regression coefficient (see
Appendix 2) is 0.80 which indicates a strong inverse relationship between the two variables. In
other words, it can be confirmed that the Balance of Current Account contributed negatively to
the Gross Domestic Product of the United States.
Figure 3 Regression Chart of Gross Domestic Product (GDP) and Balance of Current
Accounts (BOCA) from 1976-2006
56
Figure 4
57
The Net International Investments Assets from 1976-2006 (see Table 4 and Figure 5)
showed a negative figure of $36.2 billion in 1986 after subtracting U.S. Owned Assets Abroad
valued at $1.4 trillion from $1.5 trillion.
These negative figures continued until 2006 and ballooned to a negative figure of $2.5
trillion. Again, this figure is not a good indication of U.S. state of the economy and structure.
This is the reason the U.S. borrowed money and run into huge debts which caused its current
financial crisis.
Table 4 Net US International Investment Assets, 1976-2006
58
Figure 5 Net International Investment Assets, 1978-2008
59
The U.S. owned assets abroad increased from 1978 to 2008 to almost $14 trillion (see
Figure 6) but it was outpaced by foreign-owned assets in the U.S which amounted to about $16
trillion. Foreign-owned assets in the country is vulnerable to being withdrawn and returned in
their home countries and as such structurally this is not a good economic indicator.
Figure 6 US-Owned Assets Abroad and Foreign-Owned Assets in the US, 1978-2008
60
Household debt from 1966 to 2006 grew (see Table 5) from $360.4 billion in 1966 to
$12.8 trillion in 2006 and most of these debts came from home mortgage which summed up to
$9.7 trillion in 2006 while consumer credit was valued at only $2.4 trillion. The foreclosures of
housing properties during the subprime crisis had a negative financial effect as most of these
debts were not paid. The decline in house prices further aggravated the problem as derivatives
and structured notes values declined and investors suffered tremendous losses.
Table 5
61
The dependent variable in the study is the Gross Domestic Product (GDP) while the
independent variables in the study (see Table 6) are Balance of Trade (BOT), Balance of Current
62
Accounts (BOCA), and Household Debts (HD). The multiple regression analysis showed that
there is a linear relationship between the dependent variables and independent variables with a
regression coefficient R2 of 0.99 which is almost one (1) (see Appendix for the multiple
regression results).
Table 6 Dependent and Independent Variables

1976-2006
GDP BOT BOCA HD

1825 -6082 4295 818.9
2031 -27246 -14335 946.7
2295 -29763 -15143 1105.4
2563 -24565 -285 1276
2790 -19407 2317 1396
3128 -16172 5030 1507
3255 -24156 -5536 1576
3537 -57767 -38691 1732
3933 -109073 -94344 1943
4220 -121880 -118155 2277
4463 -138538 -147177 2536
4740 -151684 -160655 2754
5104 -114566 -121153 3042
5484 -93142 -99486 3336
5803 -80864 -78968 3596
5996 -31136 2897 3784
6338 -39212 -50078 3983
6657 -70311 -84805 4221
7072 -98493 -121612 4541
7398 -96384 -109478 4863
7817 -104065 -113567 5190
8304 -108273 - 5494
140,726
8747 -166140 -215062 5920
9268 -265090 -301630 6417
9817 -379835 -417426 7008
10128 -366126 -384699 7659
10470 -423725 - 8471
459,641
10961 -496915 -522101 9463
11686 -612092 -640148 10581
12422 -714371 -754848 11796
13178 -758522 -811477 12817
63
The multiple regression plot (see Figure 8) shows that there is a linear fit between the
dependent variable Gross Domestic Product (GDP) and the independent variables as there is a
liner fit through the predicted Y.
Figure 8 Multiple Regression Chart of Gross Domestic Product and Predicted Y
The linear regression between Gross Domestic Product (GDP) and the Household Debts
shows a linear fit (see Figure 9) and the regression coefficient R2 is 0.96 (see Appendix ) which
is again very strong.
Figure 9 Linear Regression Chart for U.S. GDP and HD
64
As the Nominal Gross Domestic Product of the United States (see Table 7) grew at an
average of 6.9 % from 1960-1969, total Credit Market Debt Outstanding grew by 7.3% with
Public sector debt growing by 3.4% and Private sector debt grew higher at 9% for the same
period. The private sector for the period mentioned was 97.5% of total GDP and it remained to
grow by leaps and bounds until the period from 2000 to 2007 and it reached to about 252.5% of
GDP. Although, the economy grew by an average of 5.7% for the same period, it was a debt-
fuelled growth which had a defective economic structure and resulted in the financial crisis.
Table 7 Growths of US Debt, 1960-2007
65
The real economy (Nominal GDP) grew from 1952 as index base but beginning 1975, the
Total Credit Market Debt Outstanding outpaced the real economy (see Figure 16) and increased
tremendously to almost $12 trillion in 2007 while GDP was much lower as can be seen in Figure
10.
Figure 10
66
The unfavorable factor about this debt-fuelled growth in the U.S. economy is that most of
the debts were borrowed by the Private Sector (see Figure 11). Private Sector Indebtedness
soared to more than $20 trillion in 2007 and this is where the problem started when derivatives
and structured notes such as Mortgage-Backed Securities (MBS), Collateral Debt Obligations
(CDOs), Credit Swaps and other forms of derivatives collapsed in the market due to the
subprime crisis when prices of house properties in the U.S. went down.
67
Figure 11
Furthermore, the seven largest banks in the United States were heavily involved and were
counterparties to investments in derivatives (see Figure 12). Wells Fargo, Bank of New York,
Hongkong Shanghai Banking Corporation, Wachovia, Bank of America, J.P. Morgan/Chase. The
largest investments were made by Wachovia, Bank of America, and J.P. Morgan/Chase and the
estimated cumulative value of investments in derivatives valued at almost $50 trillion as of the
year 2005. As such, as mentioned when the prices of house properties in the country declined,
the value of derivatives went into a disastrous level and many investors panic and made
68
tremendous losses. Many of the big banks and financial institutions collapsed and some of them
were bailed out by the government.
Figure 12
Seven largest US banks' counter-party to their investment on the derivatives market - 2005
(Source: Office of the Comptroller of the Currency / US Department of Treasury)
As in this section, the past economic crisis in the United States which was the Great
Depression was discussed. The failure of the United States Federal Reserve to intervene further
catapulted the economy to its worst economic slump. It was only through the intervention of the
government through massive public spending and employment that the economy gradually went
back to recovery. The post Great Depression recovery was also analyzed and also the pre-current
economic crisis economy was also analyzed as to the symptoms and systemic structures that
contributed to the current economic crisis in the United States. In the next section, the Russian
69
financial crisis will be discussed in relation to how they dealt with their crisis in the past with the
use of macro-economic policies.
The Russian Economic Crisis
The exports of Russia (see Table 8) increased from USD 82.4 billion in 1995 to almost
four times in 2006 which is valued at USD 304.5 billion. These included its major exports which
were crude oil and natural gas. Its imports also increased from USD 62.6 billion 1995 to USD
163.9 billion in 2006 which included machinery and equipment which raised from a value of
imports of USD 15.8 billion in 1995 to USD 78.8 billion in 2006. These heavy importations of
machineries and equipments indicated the increase in industrialization in the country.
Russia’s trade balance as opposed to the United States negative trade balance is positive
which further increased from USD 15.8 billion in 1995 to USD 78.8 billion in 2006.
Table 8
70
As the last two sections discussed the economic crisis of the United States and Russia
and how they dealt with it through macro-economic policies, the next section will discuss the
economic crisis of Italy in the past and how the government dealt with the crisis.
Italy’s Economic Crisis
The GDP of Italy (see Figure 13) decreased to USD 1097.347 billion in January 2001
from USD 1200.82 billion January 2000. During January 2002 it went up to USD 11117.36
billion. The GDP further increased to USD 1218.925 billion on January 2003 and increased
again to USD 1507.167 billion in January 2004. During January 2005, it increased to USD
1727.25 billion and further went up to USD 1776.371 billion by January 2006.
Furthermore, the Italian GDP increased to USD 1856.706 billion and in January 2008 it
was valued at USD 2101.637 billion. Finally, in January 2009, its GDP was valued at USD
2293.008 billion.
These figures surely were healthy from 2001 to 2005. However, during the period
January 2006 to 2008 inflation set in and affected the inflation adjusted GDP during this period.
This will be discussed further in the subsequent sections regarding Italy’s recent economic as
spurred by the world economic crisis.
Figure 13
71
Its GDP growth (see Figure 14), decreased from 0.7% in the first quarter of 2001 to -0.4%
in the second quarter of 2001 and increased to 0.4% during the second quarter of 2002 and again
it declined to -0.4% in the second quarter of 2003. It recovered back again to 0.6% during the
first quarter of 2004 and declined again to -0.2% during the fourth quarter of 2004. However,
during the second quarter of 2005 it increased again to 0.5% and declined again to 0.1% during
the third quarter of 2006. During the fourth quarter of 2006, it rebounded to a high of 1.1%
growth but declined again to zero growth during the second quarter of 2007. It further declined
to -0.4% during the fourth quarter of 2007 until it slightly recovered to 0.5% during the first
quarter of 2008.
Figure 14
72
Italy’s private consumption (see Table 9) increased from a -0.2 growth rate during the
third quarter of 2004 to 0.3 growth rate during the fourth quarter of 2004. However, during the
first quarter of 2005 it went down again to -0.8 and rebounded back to 0.7 during the second
quarter of 2005 until it slightly declined to 0.5 during the third quarter of 2005. During the fourth
quarter of 2005, private consumption declined to -0.1 and then recovered slightly to 1 during the
fourth quarter of 2006. It decreased again to 0.3 during the second quarter of 2006 and recovered
slightly to 0.6 during the third quarter of 2006. Public consumption improved slightly from a
growth rate of -0.1 during the third quarter of 2004 to 0.2% during the second quarter of 2006
but slightly went down again to -0.2 during the third quarter of 2006.
Gross fixed investment growth were also negative during the third quarter of 2004 at -0.8
and further dipped to -1.3 during the third quarter of 2006 which were not a healthy indicator as
investments were needed to drive the economy to a higher level. The exports of goods and
services figures were not also encouraging as it posted a low 0.4 growth during the third quarter
of 2004 and became worst at -1.7 during the third quarter of 2006. The country’s growth rate in
73
imports were higher than its exports were not a good economic indicator during the period 2004
to 2006 as its imports growth rate of 0.4 during the third quarter of 2004 increased to 2.1 during
the third quarter of 2006. In the over-all its GDP growth rate were low during this period as had
been mentioned in the previous section.
Table 9 Italy’s GDP and its components, 3rd quarter of 2004 to 3rd quarter of 2006
As to the detailed composition of the GDP of Italy in 1995 (see Table 10), its private
consumption comprised mainly the driver to its growth with 58.5% and government or public
consumption comprised of 20.7% of its GDP. Government expenditures were important to
support the economic development of the country as were in the case of Russia and the United
States. Gross fixed investment at 20% was also a key driver in its economic activity. The exports
of goods and services was the second key driver of economic growth in the country as it
comprised of 26.3% of GDP. However, the imports of the country comprised a -26.4%. As such,
this is deducted from the GDP.
74
Table 10
Source: ISTAT
As regard to Italy’s share in world merchandise exports in value terms, its exports share
declined from an index of 100 to an index of 79 from 1995 to 2005. As compared to the other
countries in the European Union, Italy had the lowest performance in this critical area.
Figure 15
75
As regard to industrial production in Italy, the non-export oriented sectors outpaced the
export oriented sectors (see Figure 16). The production index of the non-export oriented sectors
increased from 99 in 2000 to 102 in 2001 but decline to a low of 97 in 2002. However, it
rebounded in 2003 to a high of 98 and further went up to 99 in 2004. It declined slightly to a low
of 97 in 2005 but further increased again to a high of 100.5 during 2006. In the case of export
oriented sectors, it increased from an index of 97 in 2000 to a high of 103.5. However, during the
2001 to 2003 period it declined to a low of 97 and further plunged down to its lowest at 92 in
2005. During the period of 2006, it slightly increased to 94.
This indicated that the Italian economy was more oriented towards the non-export sector.
Figure 16
76
In terms of productivity (see Figure 19), Italy’s performance was the lowest during the
2002 to 2004 period with -0.3 index in GDP per hour worked as compared with other countries.
Figure 19
As regard to foreign direct investments in Italy, it was second to the lowest among the
countries in the European Union (see Figure 20) as its FDI inflows as a percentage of GDP
lagged behind other countries as it posted only 0.5% average during the 1996 to 2000 period and
only slightly improved to an average of 1% during the 2001 to 2005 period. The highest
performance was posted by Ireland with 13%.
Figure 20 Foreign Direct Investments (FDI) in Italy and the EU
77
In the previous sections, it discussed and evaluated past economic crisis of the United
States, Russia, and Italy. In the next and two succeeding sections, the present economy and crisis
of the United States, Russia, and Italy will be discussed and analyzed. Furthermore, their bailout
measures and economic actions will also be evaluated.
The Present Economy and the Credit Market Collapse in the United States
Bear Stearns, AIG, Lehman Bros. and Other Financial Giants
The downfall of financial giant Bear Stearns rumbled through the heart of the U.S.
economy. Unlike Enron and WorldCom, its collapse was mainly due the U.S. housing crisis and
the “short selling panic” of its shares wherein Bearn Stearns loss the confidence of the investing
public. As Waggoner and Lynch (2008) commented:
“Bear Stearns failed because its investors no longer believed it could repay its loans — even its
short-term, overnight loans. Even worse, investors concluded the bank no longer could stand
behind the complex agreements it had with other financial institutions. And Bear Stearns had a
web of intertwined agreements with other banks, investment houses and corporations (Waggoner
and Lynch, 2008).”
The American International Group, one of the world’s largest financial services company
also was on the brink of bankruptcy but a bailout is still being planned. The biggest mistake of
78
AIG was getting involved in credit default swap (CDS). A subsidiary of AIG issued around $447
billion of CDS. A credit default swap (CDS) is a financial derivative that a debt holder can use as
a hedge by a debtor corporation of sovereign (Gilani, 2008).
As such, when the housing market collapsed, AIG’s mortgage pools that it insured began
to fall in value and take its toll on it’s leveraged loans until its finances overheated.
The financial bubbles of Lehman Brothers., Merrill Lynch and other financial giants such as
Bank of America were heavily influenced by the collapse of the U.S. housing market and their
financial breakdowns reverberated throughout the globe.
Reduction of Purchasing Power
The current U.S. economic crisis also led to reduction in purchasing power primarily due
to the increase in employment and loss of investment income. Subprime mortgage problems are
expected to result in financial hardship for, not only the stock market, financial institutions, job
market, minorities, a growing number of individuals and families, but also the world economy.
This in turn, will raise standards of lending possibilities because when defaults occur on
Subprime loans, the sale or foreclosure of the properties are more likely to result in losses due to
the “flattening” or drop in home prices. This leads to a sharp depreciation in property values,
decreased business investments, and lower tax revenues, which in turn affects the quality of
schools and decreases nearby property values. (Sayeed, 2008).
Analysis of the Cause of the Crisis
The following graphs (Figure 21) as regard to United States house prices in Los Angeles,
San Diego, San Francisco, and Denver would indicate that prices are falling and this is the effect
of the housing crisis to the sub-prime market. This is not good since the prices will affect the
value of the houses which were bought at higher prices before.
79
Figure 21 US House Price Graph 2004-2011
Source: http://www.housepricesdrop.com
As shown in Figure 22 below, subprime mortgage originations increased from 1994 to
2005 to $68.5 billion and decreased to $64 billion in 2006. The increases in subprime
originations were due to increased of borrowers in the subprime market since qualified risk
buyers were declining due to the housing crisis.
80
Figure 22 Subprime Mortgage Originations, 1994-2006
Figure 23 shows the quarterly U.S. bank earnings from 2004 to 2008. The securities/other
gains and net operating income of banks went down on the 3rd quarter of 2007 to $28.8 billion
and down further to $0.6 billion in the 4th quarter of 2007. During the first quarter of 2008, these
figures went up slightly to $19.3 billion which was way down compared to a high of $36.8
billion in 2007. These figures indicated the bad impact of the housing crisis to the mortgage
market since the financial capacity of banks had depleted because of it and as such the banks
capacity to finance mortgages had been hampered severely.
81
Figure 23
Furthermore, Figure 24 would indicate that properties with foreclosure activity were
rapidly increasing from the first quarter of 2007 to the third quarter of 2008 which figured to
765,550 houses. This is the impact of the housing crisis to the subprime and mortgage market.
82
Figure 24
As shown in Figure 25, the leverage ratios for major investment banks had increased
sharply because of the impact of the housing crisis. The leverage ratio is a measure of the risk
taken by a firm, a higher ratio indicates more risk. The leverage ratios of Lehman Bros., Bear
Stearns, Merrill Lynch, Goldman Sachs, and Morgan Stanley all increased from 2003-2007
because of the U.S. housing crisis.
83
Figure 25
The U.S. subprime crisis resulted to the heavy decline of the market stock index in the
United States (see Figure 26) in 2007 and affected other stock markets around the world
resulting to heavy financial losses in trillions of dollars around the globe which can never be
recovered by investors.
84
Figure 26 United States Stock Index, 2003-2007
Source: World Bank
The crisis resulted to a heavy drop in the growth rate of GDP of the United States (see
Figure 27) during the 2008 to 2009 period with negative growth rates diving to as low as -6.7%
of the GDP.
85
Figure 27
The industrial production index in the United States also suffered as it dropped heavily
during the period 2008 to 2009 (see Figure 28) to as low as -1.7%.
86
Figure 28
Impact of U.S. Crisis in Other Countries
The U.S. subprime crisis resulted to the heavy decline of the market stock index in the
United States in 2007 and affected other stock markets around the world resulting to heavy
financial losses in trillions of dollars around the globe which can never be recovered by investors.
The resulting stock index decline in the stock markets throughout the world is proof that the U.S.
economic crisis had a tremendous impact on the global economy.
The Current Economic Crisis in Russia
87
The global crisis has increased and resulted to problems in production and employment in
many countries. Russia is not excluded from this predicament and its real GDP in 2009 would
likely decline to about 7.9 percent. Its unemployment could also increase to 13 percent and
poverty to 17.4 percent by the end of the year. The crisis affected the global environment and it
will be difficult for Russia. However, the decline in real GDP in Russia during the first quarter of
2009 was 9.8 percent which was down from 8.7 percent growth for the same period in 2008. This
is estimated to further decline in 2009 (see Table 11).
Industrial production also declined from 6.3% in 2006 to -15.4% during the January to
May 2009 period. Fixed capital investment growth also declined from 16.7% in 2006 to -17.7%
during the January to May 2009 period. In addition, the federal government balance decreased
from 7.4% of GDP to -3.1% of GDP during the January to May 2009 period. The current account
balance of USD 95.6 billion in 2006 also decreased heavily to USD 11.1 billion the first quarter
of 2009. All of these macroeconomic indicators were alarming and the state of economic health
in Russia was and still indicated an economic crisis which should be acted upon immediately by
their government.
Table 11 Main Macroeconomic indicators, 2006-2009
88
However, there also some indicators that shows that is quite easing Russia’s problems
such as the current increases in the prices of oil which favors the country it is rich in this
resource. The first half of 2009 showed that average oil prices went up. The average oil prices on
a monthly basis increased to USD 58 a barrel in May (The World Bank, 2009).
As seen in the macro-economic indicators industrial output declined and Russia’s
industrial output (see Figure 29 and 30) dived during the 2008-2009 period. Other countries
including high income countries also declined drastically in terms of production output during
the same period.
Figure 29
89
Figure 30
90
Household consumption which was the principal source of growth in current years for the
economy decreased by 2.2 percent during the first quarter of 2009. This is due to declining
consumer confidence in the country and according to a Rosstat survey, the consumer confidence
index resulted to a negative 35 percent. Also a decline in investment had already started during
the fourth quarter of 2008 (The World Bank, 2009).
The demand sources of Russia’s real GDP growth declined (see Figure 31) from 8.70%
during the first quarter of 2008 to a low of -10.50% during the second quarter of 2009 as
consumption, investment, and net exports all suffered decreases in output.
Figure 31 Demand Sources of Russia’s Real GDP Growth, by Quarter, 2008-09

(% change y-o-y)
91
The sectoral sources of Russia’s real GDP growth also declined as the non-tradable
sectors decreased from 8.70% during the first quarter of 2008 to a low of -7% during the second
quarter of 2009. The tradable sectors also dived from 4.9% during the first quarter of 2008 to a
low of -15% during the second quarter of 2009.
Figure 32 Sectoral Sources of Russia’s Real GDP Growth, by quarter 2007-2009

(% change y-o-y)
Russia’s balance of payments (see Table 12), as mentioned already declined from USD
94.7 billion in 2006 decreased heavily to only USD 11.1 billion during the first quarter of 2009.
Its trade balance declined also decreased drastically from USD 139.3 billion in 2006 to only
92
USD 21.7 billion during the first quarter of 2009. Furthermore, its capital and financial account
also posted negative figures. Its change in reserves also decrease from 107.5% in 1996 to -131.1
in the fourth quarter of 2008 and further declined with more negative figures during 2009.
Table 12 Russia’s Balance of Payments (USD billions) 2006-Q1-2009
Oil prices and the trade balance also went down (see Figure 33) during the 2008 to 2009
period. This added the economic problems of the country as exports and oil are very important
components of the Russian economy.
Figure 33 Oil Prices and the Trade Balance
Source: CBR and World Bank
93
The revenues of the government (see Table 13) dropped from 40.2 percent of GDP in
2007 to 32.6 percent of GDP during the January to April 2009 period. The surplus as percent of
GDP also declined from 6.1 percent of GDP in 2007 to -0.4 percent of GDP during the January
to April 2009 period.
Table 13 Consolidated Budget, Revenues, Expenditures, and the Fiscal Surplus, 2007-09
Russia’s reserve fund and national welfare fund designed for economic crisis are also
dwindling (see Figure 34) as the reserve fund which included the national welfare fund declined
from a high of USD 220 billion during January 1, 2009 to USD 185 billion on January 6, 2009.
The reserve fund declined from USD 130 billion in January 3, 2009 to USD 100 billion in
January 6, 2009.
94
Figure 34 Russia’s Reserve and National Welfare Funds, USD Billion
Italy’s Recent Economic Trends
In 2007, the Italian GDP measured on purchasing power parity basis was estimated at $1.8
trillion and accounted for 2.8% of the gross world product. The country’s GDP per capita is one
of the highest in the world which is estimated at $36,000 by the International Monetary Fund.
The growth of the GDP of Italy (adjusted by inflation) decreased to 0.5% July 2006 from
0.7% in January 2006 and further declined to 0.3% in the third quarter of 2006. However, during
January 2007, the GDP growth rate increased to 1.4% but again went down to 0.3% in the
95
second quarter of 2007. On July 2007, the GDP growth rate further declined to 0.1% and
recovered slightly to 0.2% during the third quarter of 2007.
During January 2008, the Italian GDP growth rate (see Figure 35) declined to -0.4% but
recovered slightly to 0.5% on the second quarter of 2008. It again went down to -0.6% on July
2008 and further dipped down to -0.8% during the third quarter of 2008. During January 2009,
the GDP further declined further to -2.1% and its worst performance was during the second
quarter of 2009 with its GDP growth rate plunging to -2.7%.
Figure 35
These figures all indicate the unhealthy economic scenario for Italy and the effect of the
global economic crisis on its Gross Domestic Product.
Furthermore, Italy’s industrial production index (see Figure 36) went down from 104 in
2007 to 81 in June 2009. This is another bad indicator for the country’s economy as industrial
production is a crucial index in its economy.
Figure 36
96
Source: ISTAT
Another bad indicator was that the harmonized unemployment rate (see Figure 42) in the
country also increased from only 6 percent in 2007 to 7.4 percent in March 2009.
Figure 37
The consumer price index in the country (see Figure 38) dropped from 4 percent in 2008
to -0.1 percent in July 2009.
Figure 38
97
Source: ISTAT
Italy’s trade balance (see Figure 39) also declined from a high of 3.8 billion Euros in 2005
to a low of 200 million Euros at the end of 2007.
Figure 39
Source: ISTAT
98
The real export growth of Italy (see Figure 40) also declined from a high of 0.2 growth rate
in 2000 to almost zero growth at the end of 2007.
Figure 40
Comparative Regression Analysis of the United States, Italy, and Russia
Regression Analysis of U.S. GDP and World Average Oil Prices, 1993-2007
The regression analysis of U.S. GDP and world average oil prices from 1993 to 2007
resulted to an R2 of .89537 (see Appendix) which indicated a strong relationship between the
two variables.
Figure 41 Regression Chart of U.S. GDP and World Ave. Oil

Prices, 1993-2007
99
Regression Analysis of Russia’s GDP and Average World Oil Prices, 1993-2007
The regression analysis of Russia’s GDP and average world oil prices from 1993-2007
resulted to an R2 of .894384 (see Appendix) which indicated a very strong relationship between
the two variables.
Figure 42 Regression Chart of Russia’s GDP and Ave.

World Oil Prices, 1993-2007
Regression Analysis of Italy’s GDP and Average World Oil Prices, 1993-2007
100
Regression analysis of Italy’s GDP and average world oil prices resulted to an R2
of .844407 (see Appendix) which again indicated a very strong relation between the two
variables.
Figure 43 Regression Chart of Italy’s GDP and Ave.

Multiple Regression Analysis of U.S. GDP and Other Macro-economic Variables
Multiple Regression Analysis of U.S. GDP as dependent variable and inflation,
unemployment rate, population, current account balance, average crude oil prices, and exchange
rate as independent variables was conducted. The result was that the regression coefficient or R2
is .99877 which was a very strong indicator of relationship between GDP and variables
mentioned (see Appendix).
Multiple Regression Analysis of Russia GDP and Other Macro-economic Variables
101
Multiple Regression Analysis of Russia GDP as Dependent Variable and Inflation,
Population, Current Account Balance, Oil Prices and Forex as Independent Variables was
conducted (see Appendix). The result was that there was a low indication of relationship between
GDP and these macro-economic variables with an R2 of .20117.
Multiple Regression Analysis of Italy GDP and other Macro-economic Variables
Multiple Regression Analysis of Italy GDP as dependent variable and inflation,
unemployment rate, population, average crude oil prices, and Currency exchange rate as
independent variables was conducted (see Appendix). The result was that there was a strong
indication of relationship between Italy’s GDP and the macro-economic variables mentioned
with an R2 of .916266.
Multiple Regression Analysis of U.S. GDP, Italy GDP and Russia GDP
The multiple regression analysis with the U.S. GDP as dependent variable and Italy’s
GDP and Russia’s GDP as independent variables resulted to an R2 of .8798 (see Appendix). This
indicated a strong relationship between the U.S. GDP and the GDP of Russia and Italy.
Regression Analysis of Italy GDP and Currency Exchange
The regression analysis of Italy GDP and Currency Exchange (see Appendix) yielded an
R2 of .296 which means that there is a low relationship between the two variables
Figure 44 Regression Chart of Italy GDP and Currency Exchange
102
Regression Analysis of U.S. GDP and Currency Exchange
The regression analysis of the U.S. GDP and the Currency Exchange (see Appendix)
yielded an R2 of .01269 which means that there is a very low relation between the two variables.
Figure 45 Regression Chart of U.S. GDP and Currency Exchange
Regression Analysis of Russia GDP and Currency Exchange
The regression analysis between Russia GDP and currency exchange yielded an R2
of .034251 (see Appendix) which means there was a low relationship between the two variables.
103
Figure 46 Regression Analysis of Russia GDP and Currency Exchange
Chapter 5
CONCLUSION, RECOMMENDATION, AND FORECAST
104
Chapter 5
CONCLUSION AND RECOMMENDATION
Prior to the current U.S. subprime crisis, the Enron and WorldCom financial fiascos
showed that the accounting policies and regulations in the United States need to be changed and
that giant companies which seemed to be financially healthy would close down and shock the
stock markets. During the highlights of the U.S. financial crisis many giant companies went
bankrupt and some of them were rescued through government bailouts. The downfall of financial
giant Bear Stearns hurt the economy of the United States. Unlike Enron and WorldCom, the
reason for its collapse were not because of fraud but because of the “short-selling panic” of its
shares where the firm loss the confidence of the investing public.
The American International Group (AIG), one of the world’s largest financial services
company was almost bankrupt but the government took control and made a bailout to minimize
the financial shocks. The biggest mistake of AIG was in getting involved in credit default swap
(CDS) wherein its subsidiary issued around $447 billion of CDS.
The financial meltdowns of Lehman Brothers, Merrill Lynch and other financial giants
such as Bank of America were mainly due to the collapse of the U.S. housing market.
The financial crisis escalated in the United States and Europe during 2008. This started as
already mentioned with the take-over of Bear Stearns by J.P. Morgan with government funds
involved. The U.S. government seized control of Fannie Mae and Freddie Mac and these are
financial institutions which own or guarantee about half of all the assets mortgaged in the
country.
These financial debacles affected the world economy and caused other financial crisis in
other parts of the Globe. Major banks and financial institutions in Europe, Asia and other regions
105
which were affected by the U.S. financial crisis were taken over by their governments through
bailouts. The United States allocated $700 billion for their domestic bailouts and mainly for the
financial sector. The British government also allocated $685 billion to rescue their banking and
financial sectors. Austria, France, Germany, the Netherlands, Norway, and Spain invested a total
of $262 billion for bank recapitalization and $110 billion for bank assets purchases. In Asia, the
South Korean government made $100 billion in credit guarantees for its financial sector and
allows banks to draw on its foreign reserves to meet their financing requirements.
Governments around the globe came to rescue their troubled private banks and financial
institutions and nationalized them in order to take control of these financial institutions. By
strengthening and nationalizing banks, private investment manipulations can be lessened and
make them less vulnerable to a financial crisis from any parts of the globe due to globalization.
Prior to the financial crisis in the United States, its macro-economic indicators such as its
balance of trade posted wide negative figures which amounted to a staggering figure of $758
billion in 2006. Its current account balance also posted a deficit of $811.47 billion for the same
period. The Net US International Investment Assets posted negative figures which ballooned to
$2.5 billion in 2006. This is the reason the country borrowed money and run into huge debts
which caused its financial crisis.
The linear and multiple regression analysis of key economic indicators of the United
States which are the Gross Domestic Product, Balance of Trade, Balance of Current Account,
and Household Debts resulted to positive and inverse linear relationship between the dependent
variable and the independent variables with a regression coefficient of 0.98. The Balance of
Trade and Balance of Current Account of the United States which were mostly negatively
affected badly the Gross Domestic Product as shown by their inverse linear relationship. On the
106
one hand, household debts resulted to a positive linear relationship with GDP. However, the
economic growth which is debt-driven contributed to the financial crisis which was spurred by
the decline in home prices because the structured notes/collateralized debt obligations tied up
with home mortgages also dropped resulting to the housing financial bubble.
The U.S. owned assets abroad increased from 1978 to 2008 to almost $14 trillion.
However, the foreign assets in the U.S. outpaced it and it amounted to $16 trillion. Since the
foreign owned assets can be anytime withdrawn and returned to their home countries, these
assets are not structurally healthy for the U.S. economy.
U.S. household debt grew to $12.8 trillion in 2006 with most of these debts coming from
home mortgage valued at $9.7 billion for the same period. The foreclosures of housing properties
as caused by the subprime problem when debts were not paid hurt the economy badly because of
these structural and systemic defects in the economy. Furthermore, the decline in house prices
aggravated the problem as derivatives and structured notes values declined and investors suffered
major losses.
The U.S. economy from 2000-2007 grew with an average GDP growth rate of 5.7%.
However, it was a debt-fuelled growth and the private sector debt accounted for 252.5% of GDP.
The real economy grew but the total credit market debt outstanding increased tremendously to
almost $12 trillion in 2007 while GDP was much lower.
The negative factor about this debt-fuelled growth in the U.S. economy is that most of the
debts came from the private sector which jumped to more than $20 trillion in 2007 and this is
where the financial debacle started when derivatives and structured notes such as mortgage-
backed securities, collateral debt obligations and credit swaps collapsed when the house prices
depressed at the height of the housing crisis.
107
The seven largest banks in the United States were actively engaged as counterparties to
investments in derivatives and structured notes valued at $50 trillion by the year 2005 and these
investments probably increase more during 2006 and 2007. As such, when the housing market
collapsed, many of these banks almost collapsed and some were bailed out by the government in
order to restore confidence in the market.
The charts showed that United States house prices in Los Angeles, San Diego, San
Francisco, and Denver would indicate that prices are falling and this is due to the effect of the
housing crisis to the sub-prime market. This is not a good sign as was already mentioned since
the lower prices will decrease the value of the houses which were bought at higher prices before.
The subprime mortgage originations increased from 1994 to 2005 to $68.5 billion and
decreased to $64 billion in 2006. The increases in subprime originations were due to increased of
borrowers in the subprime market since qualified risk buyers were declining due to the housing
crisis.
Furthermore, the data as revealed on the charts would indicate that properties with
foreclosure activity were rapidly increasing from the first quarter of 2007 to the third quarter of
2008 which figured to 765,550 houses. This is the impact of the housing crisis to the subprime
and mortgage market;
The data through the charts shows the quarterly U.S. bank earnings from 2004 to 2008.
The securities/other gains and net operating income of banks went down on the 3rd quarter of
2007 to $28.8 billion and down further to $0.6 billion in the 4th quarter of 2007. During the first
quarter of 2008, these figures went up slightly to $19.3 billion which was way down compared to
a high of $36.8 billion in 2007. These figures
108
indicated the bad impact of the housing crisis to the mortgage market since the financial capacity
of banks had depleted because of it and as such the banks capacity to finance mortgages had
been hampered severely.
The data through the charts indicates that the leverage ratios for major investment banks
had increased sharply because of the impact of the housing crisis. The leverage ratio is a measure
of the risk taken by a firm; a higher ratio indicates more risk. The leverage ratios of Lehman
Bros., Bear Stearns, Merrill Lynch, Goldman Sachs, and Morgan Stanley all increased from
2003-2007 because of the U.S. housing crisis.
The subprime crisis in the United States resulted to the financial disaster in the stock
market in the United States as well around the world as indicated by country and regional stock
indices as shown in the charts of this study. The resulting stock index in the markets throughout
the globe is proof that the U.S. financial crisis had a tremendous impact on the global economy.
In addition, the impact of the U.S. financial crisis caused the GDPs and other macro-
economic indicators around the world to decrease indicating that these countries were affected
heavily due to globalization.
In comparison, (see Appendix 10) the United States as of 2008 had the highest GDP
which is almost USD 14 trillion while Italy had almost USD 2 trillion and Russia with USD 1.7
trillion dollars. As the United States spurred the world global economic crisis including Russia
and Italy, their economies are also affected.
Macro-economic tools such as monetary policy as well as fiscal policy were used as the
main weapon in fighting the economic crisis of their respective countries. As the monetary
policies did not work during the Great Depression as the banking system collapsed, the U.S.
government utilized fiscal policy and Keynesian theories through massive government spending
109
to create employment and industrialization until the country recovered from the crisis. Russia
also utilized government spending and fiscal policy to recover from its 1998 economic crisis and
made economic reforms such as privatization, corporate governance, and shareholder and
investor right protection. They also develop structural reforms in terms of developing bankruptcy
procedures and also formulated efficient business incentives for investments in the country.
They also implemented a tax reform to address in reducing tax burden on companies and
introduced a more fair and business friendly tax system to encourage business development in
the country. The banking system was also restructured to be more sustainable and meet the real
sector needs in terms of payments and credits which resulted to economic recovery for the
country.
Italy also utilized macro-economic tools and initially its policy was heavily Keynesian
with the government controlling most of its businesses especially in undertaking to recover from
its economy after World War 11 with the help of financial aid from the United States. Eventually,
the country developed its small and medium scale industry by providing financial incentives and
support until it became the foundation of the country’s economy.
During the current economic crisis, the United States came up with a USD 700 billion
bailout measure to save major financial institutions from breaking down and the government
intervened and invested heavily in the shares of private corporations. It also increased the ceiling
for deposit insurance to encourage people to deposit in banks and also increased the interest rates
for deposits. This is also what Russia did in their banking system as well as in Italy.
Governments around the world were consolidating their financial institutions and banks as
a result of the current economic crisis.
110
In Sweden, their central bank announced that it will lend $700 million to Kaupthing, and
Icelandic bank. Ireland also made unlimited guarantees on retail, commercial and interbank
deposits which covered $575 billion of liabilities which followed similar measures made in
Austria, Denmark, Germany, Greece, Iceland, Italy and Portugal. The governments of Sweden,
the United Kingdom and the United States also increased their limits on deposit guarantees.
The US Federal Reserve, the European Central Bank, the Bank of Canada, Sveriges
Riksbank and the Swiss National Bank made cuts for their benchmark rates by half a percentage
point. This marked for the first time coordination efforts which are unprecedented in world
history.
These timeline suggest of world economic crisis spurred by the U.S. subprime crisis with
major banks and financial institutions affected by the U.S. financial crisis. Governments around
the world came to the rescue of troubled private banks and financial institutions and nationalized
them in order to seize control and these imply that governments are learning from the problems
of financial globalization which made their financial institutions vulnerable to a crisis. By
nationalizing private banks under the control of their governments, the state is strengthened and
made them less vulnerable to private investment manipulations such as the lessons learned in the
mortgaged backed securities in the U.S. subprime crisis.
The current financial crisis in the United States affected the economies throughout
the world and caused the global economic crisis. Even the rich nations suffered and their GDPs
and macro-economic indicators declined due to the crisis. However, the developing and
periphery nations are the ones that were really hit hard as indicated by their economic growth
rates, declining exports, massive unemployment, decreasing remittances, and lesser external
financing for trade and infrastructure development.
111
The regression analysis of U.S. GDP and world average oil prices from 1993 to 2007
resulted to an R2 of .89537 which indicated a strong relationship between the two variables. The
regression analysis of Russia’s GDP and average world oil prices from 1993-2007 resulted to an
R2 of .894384 which indicated a very strong relationship between the two variables. Regression
analysis of Italy’s GDP and average world oil prices resulted to an R2 of .844407 which again
indicated a very strong relation between the two variables.
Multiple Regression Analysis of the United States GDP as dependent variable and
inflation, unemployment rate, population, current account balance, average crude oil prices, and
exchange rate as independent variables was conducted. The result was that the regression
coefficient or R2 is .99877 which was a very strong indicator of relationship between GDP and
variables mentioned Multiple Regression Analysis of Russia GDP as Dependent Variable and
Inflation, Population, Current Account Balance, Oil Prices and Forex as Independent Variables
was conducted. The result was that there was a low indication of relationship between GDP and
these macro-economic variables with an R2 of .20117.
Multiple Regression Analysis of Italy GDP as dependent variable and inflation,
unemployment rate, population, average crude oil prices, and Currency exchange rate as
independent variables was conducted. The result was that there was a strong indication of
relationship between Italy’s GDP and the macro-economic variables mentioned with an R2
of .916266.
The regression analysis of Italy GDP and Currency Exchange yielded an R2 of .296 which
means that there is a low relationship between the two variables. The regression analysis of the
U.S. GDP and the Currency Exchange yielded an R2 of .01269 which means that there is a very
low relation between the two variables. The regression analysis between Russia GDP and
112
currency exchange yielded an R2 of .034251 which means there was a low relationship between
the two variables. As such, the impact of the global crisis in international marketing as based on
the analysis of data is that the markets in the United States, Russia, Italy, and other countries will
be lower and that it will take some time for the international market to normalize.
Recommendations
The following are the recommendations to alleviate and solve the economic and
international marketing crisis:
1. The United States government should formulate a policy for more strict accounting
standards in assessing the viability of corporations especially financial institutions;
2. The government should form a committee or body to oversee the housing crisis and
formulate solutions for the short term and also for the long term;
3. The government should learn from this housing crisis and in the near future should be
more strict in monitoring financial institutions and also in terms of implementing
financial and mortgage policies; and
4. More severe legal penalties should be passed by the United States Congress to punish
financial criminals in order to prevent prospective violators in the near future;
5. The World Bank and the United Nations should work together to restructure a new
world economic order and looked into the problems caused by globalization;
6. The developing countries should strive for economic independence and not depend on
the core nations since satellization would result to underdevelopment;
7. The further strengthening and nationalization of banks and financial institutions in
other countries. Nation-states would become stronger if their banks are controlled by
them as what other nations are doing during the financial crisis;
113
8. It is about time that the World Bank and other industrialized countries to help each
other and more help for the developing countries who are more suffering from these
crisis through more worldwide conference and consultations on alleviating and
preventing the global economic crisis in the near future;
9. Securities such as derivatives and structured notes should be reviewed and more strict
regulations should be formulated in order to avoid a repeat of the disastrous effects of
debt and derivatives; and
10. A world economic and international marketing crisis committee should be created in
order to evaluate the causes and impact of the global crisis and monitor developments
around the world. Countries which need more support and help should be given
attention by this world body.
114
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APPENDICES
Appendix 1
Test Regression - Linear
gdp v bot
Performed by user Date 19 June 2009
n 31
R2 0.76
Adjusted R2 0.75
SE 1635.7
Term Coefficient 95% CI SE t statistic DF p

Intercept 3977 3174 to 4781 392.8 10.12 29 <0.0001
Slope -0.0136 -0.0165 to -0.0107 0.00141 -9.66 29 <0.0001
Sum
Source of variation squares DF Mean square F statistic p
Model 249894308.1 1 249894308.1 93.41 <0.0001
Residual 77585623.9 29 2675366.3
Total 327479931.9 30
121
Appendix 2 Analyze it Software Multiple Regression Analysis Results of Gross Domestic

Product, Balance of Trade, Balance of Current Accounts, and Household Debts

<Dataset title>
GDP v BOT, BOCA, HD
n 31
R2 0.98
Adjusted R2 0.98
SE 428.3

Intercept 1837 1398 to 2277 214.1 8.58 27 <0.0001
BOT 0.02367 0.01169 to 0.03565 0.005839 4.05 27 0.0004
BOCA -0.01793 -0.03023 to -0.00562 0.005998 -2.99 27 0.0059
HD 1.217 1.039 to 1.394 0.0865 14.06 27 <0.0001
Sum
Model 322526493.1 3 107508831.0 586.00 <0.0001
Residual 4953438.8 27 183460.7
Total 327479931.9 30
122
Appendix 3 Linear Regression Result for GDP and BOCA

<Dataset title>
<Variable>: R1 v R3
n 31 (cases excluded: 1 due to missing values)
R2 0.80
Adjusted R2 0.79
SE 1500.2

Intercept 4009 3284 to 4735 354.6 11.31 29 <0.0001
Slope -0.01284 -0.01528 to -0.01041 0.001190 -10.79 29 <0.0001
Sum
Model 262211977.9 1 262211977.9 116.51 <0.0001
Residual 65267954.1 29 2250619.1
Total 327479931.9 30
Appendix 4 Linear Regression Results for GDP and HD

<Dataset title>
GDP v HD
123
n 31
R2 0.96
Adjusted R2 0.96
SE 674.8

Intercept 2023 1596 to 2451 209.1 9.68 29 <0.0001
Slope 0.9765 0.9005 to 1.0525 0.03717 26.27 29 <0.0001
Sum
Model 314273960.5 1 314273960.5 690.14 <0.0001
Residual 13205971.5 29 455378.3
Total 327479931.9 30
Appendix 5 U.S. Gross Domestic Product, 1929-2004
Government
Personal Gross
consumption
Con. private
GDP Exports Imports expenditures
domestic
Expend. and gross
investment
investment
124
1929 103.6 77.4 16.5 5.9 5.6 9.4
1930 91.2 70.1 10.8 4.4 4.1 10.0
1931 76.5 60.7 5.9 2.9 2.9 9.9
1932 58.7 48.7 1.3 2.0 1.9 8.7
1933 56.4 45.9 1.7 2.0 1.9 8.7
1934 66.0 51.5 3.7 2.6 2.2 10.5
1935 73.3 55.9 6.7 2.8 3.0 10.9
1936 83.8 62.2 8.6 3.0 3.2 13.1
1937 91.9 66.8 12.2 4.0 4.0 12.8
1938 86.1 64.3 7.1 3.8 2.8 13.8
1939 92.2 67.2 9.3 4.0 3.1 14.8
1940 101.4 71.3 13.6 4.9 3.4 15.0
1941 126.7 81.1 18.1 5.5 4.4 26.5
1942 161.9 89.0 10.4 4.4 4.6 62.7
1943 198.6 99.9 6.1 4.0 6.3 94.8
1944 219.8 108.7 7.8 4.9 6.9 105.3
1945 223.1 120.0 10.8 6.8 7.5 93.0
1946 222.3 144.3 31.1 14.2 7.0 39.6
125
1947 244.2 162.0 35.0 18.7 7.9 36.4
1948 269.2 175.0 48.1 15.5 10.1 40.6
1949 267.3 178.5 36.9 14.5 9.2 46.7
1950 293.8 192.2 54.1 12.4 11.6 46.8
1951 339.3 208.5 60.2 17.1 14.6 68.1
1952 358.3 219.5 54.0 16.5 15.3 83.6
1953 379.4 233.1 56.4 15.3 16.0 90.6
1954 380.4 240.0 53.8 15.8 15.4 86.2
1955 414.8 258.8 69.0 17.7 17.2 86.5
1956 437.5 271.7 72.0 21.3 18.9 91.4
1957 461.1 286.9 70.5 24.0 19.9 99.7
1958 467.2 296.2 64.5 20.6 20.0 106.0
1959 506.6 317.6 78.5 22.7 22.3 110.0
1960 526.4 331.7 78.9 27.0 22.8 111.6
1961 544.7 342.1 78.2 27.6 22.7 119.5
1962 585.6 363.3 88.1 29.1 25.0 130.1
1963 617.7 382.7 93.8 31.1 26.1 136.4
1964 663.6 411.4 102.1 35.0 28.1 143.2
1965 719.1 443.8 118.2 37.1 31.5 151.5
126
1966 787.8 480.9 131.3 40.9 37.1 171.8
1967 832.6 507.8 128.6 43.5 39.9 192.7
1968 910.0 558.0 141.2 47.9 46.6 209.4
1969 984.6 605.2 156.4 51.9 50.5 221.5
1970 1038.5 648.5 152.4 59.7 55.8 233.8
1971 1127.1 701.9 178.2 63.0 62.3 246.5
1972 1238.3 770.6 207.6 70.8 74.2 263.5
1973 1382.7 852.4 244.5 95.3 91.2 281.7
1974 1500.0 933.4 249.4 126.7 127.5 317.9
1975 1638.3 1034.4 230.2 138.7 122.7 357.7
1976 1825.3 1151.9 292.0 149.5 151.1 383.0
1977 2030.9 1278.6 361.3 159.4 182.4 414.1
1978 2294.7 1428.5 438.0 186.9 212.3 453.6
1979 2563.3 1592.2 492.9 230.1 252.7 500.8
1980 2789.5 1757.1 479.3 280.8 293.8 566.2
1981 3128.4 1941.1 572.4 305.2 317.8 627.5
1982 3255.0 2077.3 517.2 283.2 303.2 680.5
1983 3536.7 2290.6 564.3 277.0 328.6 733.5
1984 3933.2 2503.3 735.6 302.4 405.1 797.0
127
1985 4220.3 2720.3 736.2 302.0 417.2 879.0
1986 4462.8 2899.7 746.5 320.5 453.3 949.3
1987 4739.5 3100.2 785.0 363.9 509.1 999.5
1988 5103.8 3353.6 821.6 444.1 554.5 1039.0
1989 5484.4 3598.5 874.9 503.3 591.5 1099.1
1990 5803.1 3839.9 861.0 552.4 630.3 1180.2
1991 5995.9 3986.1 802.9 596.8 624.3 1234.4
1992 6337.7 4235.3 864.8 635.3 668.6 1271.0
1993 6657.4 4477.9 953.4 655.8 720.9 1291.2
1994 7072.2 4743.3 1097.1 720.9 814.5 1325.5
1995 7397.7 4975.8 1144.0 812.2 903.6 1369.2
1996 7816.9 5256.8 1240.3 868.6 964.8 1416.0
1997 8304.3 5547.4 1389.8 955.3 1056.9 1468.7
1998 8747.0 5879.5 1509.1 955.9 1115.9 1518.3
1999 9268.4 6282.5 1625.7 991.2 1251.7 1620.8
2000 9817.0 6739.4 1735.5 1096.3 1475.8 1721.6
2001 10128.0 7055.0 1614.3 1032.8 1399.8 1825.6
2002 10469.6 7350.7 1582.1 1005.9 1430.3 1961.1
2003 10971.2 7709.9 1670.4 1045.6 1546.5 2091.9
128
2004 11734.3 8214.3 1928.1 1173.8 1797.8 2215.9
Appendix 6
129
Appendix 7 Regression Analysis of U.S. GDP and World Average Oil Prices, 1993-2007
130
Simple Regression
Oil
X-Variable: prices
Y-Variable: GDP
N A B R
19264.3
Y = A + B*X 15 -186950 9 0.94624
131
132
Appendix 8
Regression Analysis of Italy’s GDP and Average

Simple
Regression
VA
X-Variable: R2
133
VA
Y-Variable: R1
R-
Squ
N A B R are
678. 20.2 0.91 0.84

992 747 891 440
Y = A + B*X 15 3 3 6 7
845. 0.01 0.89 0.80
Y=A* 353 338 661 391
e^(B*X) 15 7 4 2 3
Appendix 9
Multiple Regression Analysis of U.S. GDP as

dependent variable and inflation, unemployment rate,
population, current account balance, average crude oil
prices, and exchange rate as independent variables
Multiple Regression
X-variables: Inflation, ave. cons. Prices
134
UR
Population
CAB
Av. Oil
pr.
Exch Rate
Y-Variable: GDP
Method: Direct
Summary
R- Std.Err
N R Square or
0.99930 78.4606
normal 15 0.99965 1 3
0.99938 0.99877
corrected 8 6
Equation
95%
Coeffici Conf. Std.Err
ent (±) or T
7055.67 3059.62
Constant -19885.4 7 3 -6.4993
0.16456 0.07136 -
Inflation, ave. cons. Prices -0.22289 6 3 3.12333
0.07731 0.03352 -
UR -0.10273 4 6 3.06411
0.10380 0.01107 9.36964
Population 9 0.02555 9 9
0.00144 0.00062
CAB -0.00168 4 6 -2.6841
32.3431 14.4861 5.14873
Av. Oil pr. 8 4 6.28177 6
0.16419 -
Exch Rate -0.07471 0.37864 4 0.45503
Analysis of variance
Degree
s of
Sum of Freedo Mean
Squares m Square F
7037862 117297 1905.39

Regression 9 6 72 9
135
49248.5 6156.07
Residue 7 8 1
7042787 503056
Total 8 14 3
Appendix 10
Regression Analysis of
Italy GDP and Currency
Exchange
Simple Regression
X-Variable: VAR2
Y-Variable: VAR1
R-
N A B R Square
-
2783.60 0.8246 0.54424 0.29619
Y = A + B*X 15 6 6 1 8
136
Appendix 11
Regression Analysis of US GDP and Forex
Simple Regression
X-Variable: Exch R
US
Y-Variable: GDP
R-
N A B R Square
-
11775.5 1.1213 0.11268 0.01269
Y = A + B*X 15 6 5 8 9
137
Appendix 12
Regression Analysis of Russia GDP and Forex
Simple Regression
X-Variable: Exch R
Rus
Y-Variable: GDP
R-
N A B R Square
-
Y = A + B*X 15 725592.2 200.069 0.18507 0.034251
138
139

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The Impact of the Global Crisis on International Marketing

IMPACT OF THE GLOBAL CRISIS ON

By: Dwight B. Perez, Ph.D. in Development

the following specific research questions will be answered in the study:

be viewed through main economic indicators? and

2. What is the impact on international marketing in terms of the economic indicators of

selected countries such as the United States, Russia, and Italy?

impact on the global economy.

and Italy, their economies are also affected.

support until it became the foundation of the country’s economy.

a result of the current economic crisis.

Generally, the impact on international markets indicated a continuation of the economic

Background of the Problem

of the company but by other factors such as regulations (Niskanen, 2002).

which increased to 79 percent from 2006 (RealtyTrac Staff, 2008).

forwarded the mortgage payments rights to third-party investors through mortgage-backed

market in the U.S. as well as in other countries (Onaran, 2008).

pressure on growth (Bernanke).

subprime mortgage crisis is estimated at US $945 billion (Finfacts Team, 2008).

affected other financial institutions and corporations around the world.

financial institutions under major financial predicaments (World Bank, 2009)..

involved (World Bank).

(AIG) with an emergency bailout loan of $85 billion.

Bingley with a loan package of $90 billion.

invested $16.4 billion in capital (World Bank).

investing $23.2 billion to purchase its assets.

bank, BNP Paribas.

infusion was valued at $864 million (World Bank).

banks (World Bank).

second decrease in just three weeks (The World Bank).

The government of Britain announced a $685 billion plan to restore confidence in

country’s sixth largest bank (The World Bank).

bank debt guarantees (The World Bank).

government of U.K. invested $64 billion in Royal Bank of Scotland.

foreign currency financing requirements.

of financial globalization which made their financial institutions vulnerable to a crisis. By

Statement of the Problem

the following specific research questions will be answered in the study:

be viewed through main economic indicators? and

4. What is the impact on international economic development in terms of the economic

2 To identify the causes of the economic global crisis, and

3 To recommend international development strategies to fight the economic global crisis.

Importance and Rationale of the Study

prevent such crisis to occur in the near future.

public and private entities in their own countries.

Structure of the Study

or not. Short term vs. long term)?

decisions macro economically efficient or driven by political motives?

such, the study will be structured mainly as follows:

Background of the Problem

Statement of the Problem

Importance and Rationale of the Study

Structure of the Study

Chapter 2 Review of Literature

Chapter 4 Research Findings, Analysis and Discussion

Chapter 5 Conclusions, Recommendations, and Forecast

the role of government in economic development since macroeconomics is related closely to

government actions in providing solutions to market failures. Economic theories of development

and production of goods and services are also run by them.

and production of goods and services.

Basic Market System

In an economy, the market is where producers and consumers (McConnell, 1969,

quantity of supply increases and if price decreases, quantity of supply decreases.