Initiation and End of the Crisis in the Global Realm - Essay Example

A STUDY OF THE 2008 RECESSION By of the of the of the School 9 March Introduction The 2008 recession generated global financial crisis (GFC) that most countries in the western world had least expected since a similar one that occurred approximately six decades ago. The world economy has since the great depression of the 1940s experienced several declines normal in economic cycles, and later recovered easily. Most declines have been trivial in the regional and national levels, with the exception of a few serious cases like the East Asian crisis of 1997 (Radelet and Sachs, 1998). It triggered short and long standing effects in nations, some of which are yet to fully recover. The beginning and impacts of the 2008 recession in individual countries today remains a constant reminder of the policies and measures the governments and financial analysts in the financial institutions ought to address as priorities. Initiation and end of the crisis in the global realm Most economists and analysts tend to emphasis on the start and spread of the recession in 2008. While its spread is quite clear in the western countries during and after 2008, there is no doubt it began in the United States towards the end of 2007. The National Bureau of Economic Research (NBER) recognizes the global recession to have started in December 2007 in the US economy, when it was identified with the sliding of the labour market especially in the last quarter of the year (Borbely, 2009). However, it was only a hit for the national economy of the US until it spread to other linked economies in 2008. The cause of the recession is linked to the economic cyclic performance of the housing market in USA, which later affected the economic performances of other industries. The United Stated had been experiencing a steady economic growth, with a healthy labour market and a rapid growth in the housing market after 2001. In the housing sector, home prices increased and more construction took place, contributing to increased employment, mortgage financing and growth in real estates and generated a positive wealth effect that triggered higher spending vital for the overall economic growth (Goodman and Mance, 2011). All the housing price inflations in the USA tended to follow a particular pattern after WWWII. The 2001-2006 case was no exception, as it was a period marked with loose monetary policy. Two years prior to the 2007 recession, the US economy experienced expansion in credit and money supply. This fuelled excessive borrowing at low interest rates to finance housing purchases; this in turn increased aggregate demand for household products and other consumption (stlouisfed.org, 2010). Unfortunately, the housing market began cooling off at the peak marked with high prices and escalating interest rates. These high prices chocked off further expenditure in the real estate and housing market in 2007, which triggered a decline in the housing and general economic growth rate, slowing down investment, expansion and consumption demand into a US recession (Foldvary, 2007). The US suffered from the credit crunch forcing the housing market to collapse, effectively trimming of the payrolls and causing millions of job losses that worsened the recession. The effect of the housing bubble gradually spread to other economic sectors and the linked foreign financial institutions were neither spared. It’s through securitization that the effect of the American housing bubble spread across the global economies; apparently, the collapse of the home prices in the US caused the mortgage backed securities (MBS) purchased in bulk by foreign financial institutions and investors across the globe to begin defaulting and later eroding their balance sheets (Beckman, 2010). There is no doubt that US banks had implemented an inappropriate policy that resulted in bad loans only for homeowners to default their payments and engage into foreclosure of their listed properties. After a long period of struggle to stabilize the global economy right from the national level, the US government had to implement a series of fiscal stimulus policies. It took one and a half years to restore the global economy, spanning from its start in December 2007 in the US to June of 2009 (Labonte, 2010; Shierholz, 2014). During this period, the trouble had spread to European Union countries, to Eastern Asia and other American nations. To solve the initial causes of and mitigate the crisis, different bodies and agencies implemented their policies in the course of the recession period, which contributed to global recovery from the recession. According to Blinder and Zandi: In late 2007, the federal reserve established a new credit facility to provide liquidity to financial institutions and markets, in 2008 adopted a zero-interest-rate policy, 2009-2010 offered massive quantitative easing, purchase of treasury bonds and MBS, in 2008 the congress established a troubled asset relief program (TARP) and tax rebates checks were offered lower and middle income households, FDIC increased deposit insurance limits and guaranteed bank debts, enactment of American Restoration and Recovery Act (ARRA) occurred in 2009 (2010, p. 2). Crisis in the UK The UK was one of the G7’s economies that shrunk into a recession following the US housing trouble in the summer of 2007. The UK entered into a recession in 2008, in the third quarter of the year, taking six consecutive quarters until its end in last quarter of 2009 (parliament.uk, 2010). These quarters recorded a decline in the GDP and in 2009, it hit the worst. Comparing the performances during UK’s recession, the 3rd and 4th Q of 2008 recorded a fall of 0.6 and 1.5 %, while the 1st Q and 2nd Q of 2009 recorded 2.4 and 07 % further declines, leading the British economy to an official recession in early 2009 (Vaitilingam, n.d., p.12). However, the impact was less severe in terms of output decline compared to other G7 countries. In 2010, UK’s economy got into a recovery mode, exhibiting positive growth in GDP as demonstrated below: Decline and recovery of UK’s GDP from 2008 recession (Gregg and Wadsworth, 2010, p. 26). The price bubble in the US ended up affecting prices of UK’s stock assets through their previous integrated economy. Most of UK’s financial institutions like the Northern Rock Bank had lost millions of pounds from investing in toxic assets backed by securitization from the bad mortgage loans (Chang, 2011). UK banks were among the foreign institutions that had acquired the US MBS bundles, where upon the collapse of the US housing market, they were exposed to financial losses. This triggered market fear and loss of investors’ confidence. UK Banks declined in their lending eventually triggering a credit crunch in the country. The recovery efforts entailed temporary nationalization of Northern Rock and Anglo Irish banks (telegraph.co.uk, 2009). The Bank of England issued over £200 Billion for debt guarantee and liquidity schemes and cut interest rates to about 4% to ease the financial crisis (telegraph.co.uk, 2009). It also implemented temporary cuts in VAT, rescue packages from the government and bail out by the IMF (telegraph.co.uk, 2009). It is quite unfortunate that after the recovery efforts, the economy sunk in a second recession in 2011. Global, regional and national indicators that proved that there was a recession Rise in unemployment was evident across the globe, but it varied across the nations and regions. In the US, the unemployment rate picked from 5.0% in 2007 to 10 % by October 2009, by 1.75% in Australia between early 2008 and mid-2009, by 2.3% in Canada from October 2008 to October 2009 and further worse in the European region (U.S Bureau of Labour Statistics, 2012; Plumb, Baker and Spence, 2010; LaRochelle-Côté and Gilmore, 2010). Global, regional and countries GDPs contracted in consecutive quarters due to reduced output along 2008 to 2010. At the national levels, there were changes in the household income. Countries and regions especially in the European region and the US expressed drastic decline in the average household disposable income. Per Capita Investment in most countries declined in fear of inflation and overall consumption and trading in developed countries declined. How it affected various aspects of economic and corporate behaviour? Reduction in spending: The purchasing power of most households and employees were affected, in turn affecting their consumption behaviour. Economies of the western countries suffered reduction in spending as the housing market collapsed, unemployment increased and investors retrieved in fear of further losses. The UK recorded reduced household spending for five consecutive months, reducing discretionary purchases by about 9 % from 2008 to mid-2009 (Gittins, Luke, Household expenditure, household and labour market division, 2012). Job and payroll cuts: The recession caused rise in unemployment rates as companies and governments shed workers to reduce costs. The private sector, local and state governments resorted to job cuts, eliminating more than 0.7 million jobs in America between 2007 and 2011 just to address budget shortfalls and diminishing revenues (Cooper, gable and Austin, 2012). Slow trade and GDP: Trade reduced due to slowed production and withheld resources across the globe, which effectively negatively affected national and global GDP. See diagram below. (Oner, 2012). Bankruptcy and bailout: Bad loans in use of MBS had led several banks and companies to bankruptcy and closure. Affected financial institutions sought bailout from their governments’ central banks (e.g. Bank of England), regional banks of the European Union and IMF among other financial schemes to keep them running. Conclusion If the 2008 situation caused a GDP decline of more than ten per cent in the regions, affected countries and in the global economy, it could have warranted the description of a great depression. However, most countries decline in GDP was less than 10 per cent and the global economy contracted by a lesser value. Similarly, it has been accompanied by several recessions’ in short period intervals. Therefore, it was a great recession characterized by more than two quarters of GDP decline in global, regional and national economies. References Beckman, K., 2010. What Caused the Financial Crisis and Recession? [online] Available at: [Accessed 9 March 2015]. Blinder, A.S. and Zandi, M., 2010. How the Great Recession was brought to an End. [online] Available at: [Accessed 9 March2015]. Borbely, J. M., 2009.U.S. Labor Market in 2008: Economy in Recession. Monthly Labor Review. [online] Available at: [Accessed 9 March 2015]. Chang, W. W., 2011. Financial Crisis of 2007-2010. [online] Available at: [Accessed 9 March 2015]. Cooper, D., Gable, M. and Austin, A., 2012. The Public-Sector Jobs Crisis: Women and African Americans hit Hardest by Job Losses in State and Local Governments. [online] Available at: [Accessed 9 March 2015]. Gregg, P. and Wadsworth, J., 2010. Jobs in the Recession. 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