Entrepreneurship During and After Each Recession Thesis

Pages: 7 (2213 words)  ·  Style: MLA  ·  Bibliography Sources: 4  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

Entrepreneurship During and After Each Recession

The objective of this work is to examine the 1980 Economic Crisis, 1986 Savings & Loan Crisis, 1989 Junk Bond market collapse, 2000 Dotcom implosion, and the 2008 Economic crisis (current) and to briefly introduce each event and explain who the economy was able to recover. The underlying theme should be how Entrepreneurship was the stabilizing and enduring factor throughout each of these recessions. Give examples of companies and industries which started and flourished during and after each recessional period.


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Entrepreneurship is defined differently depending upon who is being asked about entrepreneurship. It is reported in the work of Cantor and Cox (2009) entitled: "Literature & the Economics of Liberty: Spontaneous Order in Culture" states that the focus of the Austrian School is on "...entrepreneurial behavior, the unceasing efforts of businessmen to adjust to the never-ending changes in the economic world. More than any other school, the Austrians insist on the importance of uncertainty and risk as economic factors. In their view, the entrepreneur is constantly anticipating an uncertain future, trying to predict changes in demand and to figure out new economies of production for satisfying it. Thus, for the Austrian School, the entrepreneur becomes a kind of artist. Indeed, the Austrians stress the creativity of the entrepreneur. Like an artist, he is a visionary, a risktaker, and a pioneer, and if he is to be successful, he will generally be found running counter to the crowd, or at least ahead of it the Austrian School views economic activity as creative in the first place, from its perspective, to show an artist implicated in the commercial world is perfectly compatible with asserting his freedom and individuality." (Cantor and Cox, 2009)

Thesis on Entrepreneurship During and After Each Recession Assignment

This freedom is stated to be inherent to the view of economic activity as creative in the first place, from its perspective to show an artist implicated in the commercial world is perfectly compatible with asserting his freedom and individuality." (Cantor and Cox, 2009) This is a model of an economic order referred to as "spontaneous order' and which has as one of its most "...cogents exponents of a large-scale shift in thinking that can be described as the movement form top-down to bottom-up models of order." (p.21)

This belief is stated to have began with the work of economists including Adam Smith and "more broadly the Scottish Enlightenment thinkers with whom he is associated. Indeed, the great contribution of economics to thought in general has been way of conceiving order that need not be imposed from above on phenomena but can grow up out of them, an order generated by the phenomena themselves." (Cantor and Cox, 2009, p.22) It is stated that in a modern economy"... The relevant and crucial knowledge -- of consumer desires and the means for satisfying them -- is always of necessity widely dispersed and only market prices can coordinate the information, giving entrepreneurs the signals they need to work toward bringing supply in line with demand." (p.22)


The economic crisis of the 1980s often referred to as the debt crisis is stated to be according to many due to "petrodollar recycling of the 1970s." This crisis was characterized by the rise of prices for oil. During this time commercial banks eagerly made loans to governments and other entities owned by states and private companies in developing countries and backing these loans were petrodollars from the Middle Eastern oil countries. During this frenzy of borrowing and lending everything halted suddenly in the recession of the early 1980s and the drop in oil prices and the strength of the dollar along with high interest rates globally is reported to have "depleted foreign exchange reserves that debtor countries relied upon for international financial transactions." (Carrasco, nd) The 'case-by-case' debt restructuring negotiations are that attributed for having saved the international financial system from certain collapse which was referred to as the "muddling through approach" and was a process which involved work-out phases.

This approach involved the commercial banks stating agreement that they would:

(1) provide new loans to debtor countries, and (2) stretch out external debt payments. (Carrasco, nd, p.1)

These reforms had as their focus "longer-term and deeper structural reforms in debtor countries." (Carrasco, nd, p.1) The new entrepreneurs were commercial banking options following this period of economic crisis.


The savings and loan crisis of 1986 is stated to have began due to unmanaged asset/liability gaps that led to interest rate exposures, speculative investments in junk bonds and service industries, fraud...and massive losses from lending to and investing in the U.S. commercial real estate sector." (Carrasco, nd, p.1) Estimates for the clean-up of this crisis was estimated to be $30 to $50 billion but in actuality it cost $153 billion. Entrepreneurs were certainly creating new alternatives over the following period which led to the junk bond market collapses of 1989.


The work of Hylton (1990) entitled: "The Drexel Collapse; 'Junk Bonds' Advance; Traders are Surprised" reported a strong rise in the prices of junk bonds in moderate active trading following the filing of a Chapter 11 bankruptcy protection late Tuesday night. It was stressed by traders that the market had shown strong response although there remained unanswered questions relating to the bond inventory held by Drexel. David Frum (1990) wrote in the National Review article entitled: "Bearing Down on Milken -- Michael Milken and Junk Bond Collapse" as follows:

"Productivity grew at a faster pace in the 1980s than at any time since 1973; manufacturing productivity, at its fastest pace since World War II. No, junk bonds don't get all the credit -- new technologies and deregulation also helped -- but they do deserve some." (Hylton, 1990, p.1)

It is reported by Frum that the junk bond market entered more treacherous financial waters. Specifically stated is: "Takeovers financed by junk got the stock market moving up again after the ordinary investor called it quits in October 1987 -- but they also inflated asset prices so radically that more of the new managements found, when they strode into their new executive suites, that they had overpaid for the company and their debt charges were crippling. Milken had dreamed up more and more exotic refinancings for them: payment-in-kind bonds and zero-coupon bonds, all of which delayed the grim moment of cash settlement." (p.1) Frum reports that gravity was not forever delayed by ingenuity in this instance as 1988 witnessed more company defaults and even the larger companies were defaulting including: "Integrated Resources, Eastern Airlines, SCI Television, Southmark, Griffin Resorts." (1990, p.2) The junk-bond market collapsed in June of 1989. Creative finance was in rare form during the Drexel era with relative ease in raising capital but greed turned a "clever innovation into first a fad and then a craze. The result was, as it will always is, that sharp market correction known as a crash. In other words, what happened is exactly what advocates of open financial markets should have expected: With the usual noise, mess, and confusion, we are stumbling toward the efficient outcome.

Frum reports that the U.S. industry was behaviorally transformed through the takeovers and leveraged buyouts they financed." (Hylton, 1990, p.1) Many levels of management were effectively removed and consolidated than the 1970 management of companies exhibited and the capital markets were driven by "...junk-financed takeover and leveraged buyouts" which were a boom to companies that were young and innovative.

However, while manufacturing grew and expanded Wall Street "got floppy. Deals began to be made merely to generate fees; share prices approached tulip-craze levels. It was a classic case of a market success attracting new money which in turn needed new applications in which to invest, forcing prices and the market up and seeping into ever-riskier areas. And the longer it went on, the riskier it became." (Hylton, 1990, p.1)


The Dotcom implosion was characterized by the lack of delivery on promises made by many websites however, dotcoms such as Amazon.com and other Internet giants evolving during the Dotcom boom era remain because their websites were more than merely fluff but were substance and evidence of the promise of their creation. The Dotcom boom was another example of what occurs in the free market in that the market while imploding corrected itself through embedding solid and substantial management practices in internet company business models.


The present economic crisis has resulted primarily from the overvaluation of mortgage assets and the expansion of interest rates in subprime mortgages coupled with high-risk lending. Banks have failed much akin to the bank failings during the Great Depression with capitalist giants such as GM being overtaken by the government and mortgage foreclosures and unemployment of the population reaching phenomenal and historical proportions. Hedge fund investing has also contributed greatly to the economic crisis of the present.


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