The Role of Information Professionals in Global Economic Crisis
By Mohammed Nasser Al-Suqri,
Salim Saeed Al-Kindi,
Abdullah Humood Al-Sarmi [9]
Abstract
It is now generally agreed that better information use in the financial services sector might have helped to avert the economic crisis which originated in the U.S. in 2007. Similarly, it is clear that improved availability and communication of good information could have helped prevent the types of consumer and investor reactions which spread the crisis around the globe today. Drawing on a range of existing sources, this paper considers the impact of information failure and the role of information professionals in the economic crisis. It then examines how information professionals can make an important contribution to economic recovery and sets out recommendations for the profession. The paper concludes that unless information professionals play a more proactive role in making good economic and financial information readily accessible, the risk of recurrent economic crises will be increased.
Introduction: the causes and evolution of the global economic crisis
It is now generally agreed that the economic crisis, which originated in the United States in 2007 and soon spread throughout the world, was primarily the result of several interconnected factors. First, recent years had seen an increasing use of high-risk consumer lending strategies in the financial sector, leading to high levels of “bad” consumer debt, which borrowers were unable to pay when interest rates increased (Moosa, 2008). Second, the process of “securitization” had become widespread. This refers to the selling on of mortgage debt to investors by banks in order to free up credit for further lending. When interest rates rose in the mid-2000s, investors became wary of buying these high-risk securities and banks were left with them on their books, causing other banks and lenders to withdraw their credit facilities or otherwise reduce their exposure to the affected banks. As financial institutions became wary of borrowing from or lending to one another, a lack of liquidity in the financial system resulted from this situation, and the credit normally available to consumers and businesses that fuels economic activity quickly dried up (Moosa, 2008).
The situation was exacerbated when several major financial institutions prevented their investors from withdrawing their funds, which they claimed could no longer be accurately valued. This sparked a worldwide panic to withdraw money or raise cash by selling less liquid investments such as stocks and bonds, and many major financial institutions went bankrupt as a result (BBC News, 2009). Another factor contributing to the escalation of the crisis was the nature of the present-day global financial system, which has complex interdependencies and links between lenders and borrowers throughout the world, including individual consumers, investors, businesses, and financial institutions. This has been the first truly transnational crisis in which personal credit played a major role (Porter, 2009).
Gradually, the world economy seems to be emerging from recession, helped in part by major injections of money into national economies by their governments, notably in the U.S. and the U.K.; lowering of interest rates by national banks; and direct government assistance for some struggling financial institutions. It is questionable, however, whether these measures will help to prevent another financial collapse, unless the root causes of the crisis are properly addressed. It can be argued that information failure was one of the main root causes underlying virtually all the other factors that precipitated the crisis. In this case, the information professional may also be partly responsible for the occurrence of the crisis and can thus play a role in facilitating sustainable recovery.
The role of “information failure” in the crisis
In an international survey of Chief Financial Officers (Towers Perrin, 2008), 62% respondents attributed the financial crisis to poor risk management by financial institutions; this is what is likely to have led to the use of high–risk lending strategies and the growing use of securitization in the financial sector. Fundamental to risk management is information: argued that “if corporate leaders, portfolio managers and regulators want to make good riskbased decisions, they need to have the right data, and they need to have the right framework to be able to analyze the data” (Lo, 2009, p. 57). An analysis of the international economic environment in the time leading up to crisis makes it clear that both of these factors – right data and the right analysis framework – were clearly lacking. As a result, risk management was poor.
It has been argued that traditional financial risk management models do not reflect the reality of the present day situation in which international financial markets are closely interconnected (Sen, n.d.). This suggests a need to consider a much wider range of information when developing financial strategies, including not only the quantitative data traditionally used in economic and financial forecasting, but qualitative information about worldwide economic and social trends and other factors likely to influence markets, borrowing behavior, and other variables. This might include, for example, qualitative risk assessments based on the views of financial experts (Bankersonline.com, 2008), social and demographic data on types of borrowers and their lifestyles that will help banks to predict the likelihood of default on loans (Rajan, Seru & Vig, 2008), or the type of “global risk map” recommended by an expert commission working for the German government (Braasch, 2009).
There is also evidence that organizations had inadequate systems for assessing risk in the years leading up to the onset of economic crisis. For example, in a 2002 survey, 43% of corporate directors reported that their company had no risk management process, or one that was felt to be ineffective. More than a third (36%) indicated that they did not fully understand the risks faced by their organization (cited in Bainbridge, 2009).
Not only was adequate information or information systems not readily available to actors in the financial markets at the time of the crisis, but there was also a severe lack of information transparency, as banks are reluctant to share data about their lending portfolios. The OECD program on Public Management and Governance (PUMA) includes “transparency and open information systems” as one of the six main factors which define good governance.
According to the OECD, governments have a key responsibility to disseminate important information to companies and individuals in order to enable them to make sound decisions (Jia, 2008). The sharing of information between banks and the improved transparency of information relating to national economies and financial systems more generally would have enabled lenders, investors, and consumers alike to decide on acceptable levels of risk (ComputerWeekly, 2009). However, a lack of information and information transparency produced an environment of distrust and wariness, in which credit was no longer being made available or being used effectively to help drive economic activity.