The Reasons for Economic Recession - Essay Example

What do you think caused the present economic recession' We have been hearing the world's most popular and much hated term day in and day out since last year called the 'recession.' It has infiltrated our lives and now seems almost alien and scary with the power it seems to possess with millions of people losing their jobs and even huge companies like GM and Chrysler requesting the Obama government to help them and bail them out. Large business conglomerates have also suffered huge losses due to the recession this time. But, what exactly is the recession' When a country's Gross Domestic Product (GDP) growth registers a decline for six or more months in a year on a continual basis or fails to recover for years together, it results in a recession. Generally, in any expanding and fast-growing economy, after an initial growth phase of six to ten years, it is followed by a slowdown or a recession for a minimum of six months to a maximum of two years. This is the normal cycle that any growing market follows in a normal and regular economy. The recession is an unfortunate occurrence and it still pretty fresh in the mind of the people all around the world. Unfortunately, mistakes of a similar nature were made time and again and this repeat performance has again resulted in a scary and terrifying financial crisis all over again. Nearly eighty years ago, towards the end of the year 1929, a series of events occurred in the United States that resulted in disastrous consequences. It gained notoriety as the 'Great Depression' and to this day people still shudder at the thought of what the world faced in terms of the deflation, poverty and unemployment that it triggered off nearly a century ago. The debilitating phase lasted for close to a decade. The banking system collapsed in the year 1932. There was absolutely no free currency available in the market for any activity that would spell a positive change in the market trends. People held onto whatever cash they had as the price of goods were falling and a number of essential goods and commodities could be bought at the lowest imaginable cost. It was precisely at this time that President Roosevelt stepped into the picture with his New Deal programs to increase the opportunities for employment and increase liquidity. A number of government-led initiatives began to better the troublesome situation. Since the end of the Second World War, the United States has suffered nearly ten recessions. However, it is puzzling to learn that we have once again caught ourselves in a treacherous bog that closely resembles the situation described above, once again in the twenty first century. To quote a few numbers now, the Commerce Department reported that there was a deficit on international trade in goods and services last year to the tune of $677.1 billion compared to $700.3 billion in the year just before that. As consumers began to spend lesser and lesser and this in turn dwindled the growth of the market and resulted in the slowdown of the economy, the deficit in the trade was relatively smaller in the year 2008. Deregulation resulted in trade deficits and contributed to them in a direct as well as an indirect manner. Until and unless appropriate laws are established to control this kind of unprecedented trade volume, the economy cannot be and will not be restored to normalcy in the future. Last year, a $144.1 billion surplus was recorded for trade in services in the United States compared to an $821.2 billion deficit on trade in goods. $293.2 billion was the deficit on petroleum products in the year 2007, while last year it went up to $386.3 billion. The overall volume of import of petroleum products fell by an astonishing four percent in a single year. Ian McCafferty, CBI chief economic adviser says, "Given the rapid contraction in global economic activity and the continuing credit squeeze, we believe the UK will be mired in a deep recession for the whole of 2009, lasting six quarters in total and accompanied by a significant rise in unemployment." It is shocking to know than over three million people will still remain unemployed towards the end of next year, irrespective of the nature and magnitude of the relief measures that are proposed to be carried out without further delay. Akin to the first time this occurred, it is the Government that is to be blamed for the financial imbroglio and the economic meltdown that we are witnessing today in great horror and shock. Lack of any honesty and an absence of structure in the ruling government have always resulted in great suffering and loss for the people being governed. Many well-known economists inducing Richard Rahn wrote, "After the stock market crash in 1929, government revenues fell because of the drop in economic activity. The Hoover administration and the Congress increased taxes in a futile attempt to balance the budget. The tax increase only caused a further drop in economic activity, which enlarged the deficit even more. Complete and total mismanagement of funds on an enormous scale accompanied with greed, manipulation of funds and trickery has resulted in the current economic slump. Talking about the Bush government that definitely worsened the situation and triggered it in the first place, a lack of business intelligence resulted in an alarming deficit overnight. George W Bush's amazing $1.3 trillion tax cut was a direct result of the unwinding of shirt-term capital gains and this worsened the situation. This bonanza offered came at a heavy price. The stock market was first affected after the tax shortfall and the sudden problems that arose with liquidity in the financial arena. Banks began packaging debts to remove them from their records and after their sale, people who had the bad luck of borrowing from the banks and defaulting in their payments were forced to forego both the entire capital amount as well as the interest on it. This segment of the population that had no job, no income and no assets so to speak of are more commonly referred to as the 'sub-prime' borrowers had absolutely no familiarity or knowledge of risk profiles. The current situation has resulted largely due to these home loan defaults and sub-prime mortgages. Insurance companies and other hedge funds that bought these Collateralised Debt Obligations (CDOs) borrowed loans from other banks that were also selling CDOs to cover their debts. This resulted in a very catastrophic and vicious cycle and towards the end of it, the books of the banks were actually never cleared of the pending debts, which was the sole purpose of selling the CDOs right from the very beginning. Therefore, the ease with which these loans were borrowed with no set limit and no proper agenda also worsened the situation making it irreparable. These unpaid loans obviously proved to be completely redundant in backing up the U.S dollars that were circulating in the market. This, in turn, lead to the rapid decline of the dollar value as the excess and unchecked supply of money into the wrong financial channels had to be accounted for to do some damage control in the process. Just like any economy is dependant on the exquisite balance between the market forces of supply and demand, the situation resulted in increased consumption without meeting the required demands and necessities of production. As a direct result of these occurrences, more important areas of Government focus like medical and health care and provision of college tuition funds have been badly affected. Illogical and incorrect Government policies lead to the crash of the stock market and the bond market. Investors and stock traders became hesitant in investing in the stock market and this atmosphere of negativity, hopelessness and large-scale scepticism captured the market in its jaws and ripped it to shreds. Deregulation spells innovation and removal of restrictions to encourage the growth of potential businesses in the world and encourage international trading by opening up new arenas of growth and development for private markets. However, when there is no proper supervision of the kind of business deals made and lack of a governing body to control and monitor the consequences of deregulation, it is bound to result in chaos and that is precisely what is happening with the current and ongoing recession whose possible end still remains uncertain at large. The government refused to take responsibility for the situation and a few companies started ruling the entire economic and financial trading scene, making huge profits for themselves risking the livelihood of millions of workers and salaried employees working under them and only for their company. Well-defined and strict laws are the order of the day to prevent a reoccurrence of the financial crisis the world faces today. Deregulation is a key area on which a lot of work needs to be done to ensure safety, security and stability at least for the next few decades. It is of great interest to know that to make up for the deficit in trade, Americans ended up borrowing more than $6.5 trillion from foreign sources and foreign governments. For almost each working American, this comes to an astonishing amount of greater than $1,500. $3.6 billion were invested by other foreign investors in their acquisition of equities in miscellaneous kinds of businesses in the United States. This has cost the nation the loyalty of these businesses in which investments in such large amounts were made. The vast amount of funds in dollars that are in the hands of foreign investors right now is responsible for the purchase of properties in the United States along with a substantial number of shares. Now that nature of the situation and the reasons that lead to the recession and crystal clear, the solution to the problem needs to be worked on. The first and most important step that the government needs to undertake is work on the implementation of tax cuts. The Bush government had initially proposed a $150-billion bailout package in tax cuts. Currently, President Obama has also announced a $787 billion stimulus package to salvage the economy of the United States. Around $120 billion has been proposed to be spent for the betterment of the common people like better access to the World Wide Web, development of infrastructure and building roads and highways. Though these relief measures are now in place to help combat the situation, the main reasons and issues that need to be addressed are principally two in total. If they are not addressed, the world will definitely witness a double dip recession. Once the potential positive results of this package are felt, there might be a situation wherein the negative effects of the deficit in trade on the GDP will negate the good outcome of the stimulus spending. The first and the most important one among them is the problem of unequal distribution of wealth caused due to the very structure of the economy and the nature of the market due the limitless political power grabbed by corrupt and power-hungry political leaders needs to be got rid off completely. Only when the growth of an economy is monitored the correct way and driven using the right means will there be a positive trend for the collective good of the people. This has been an age-old problem and appropriate measures have to be taken in this direction to curb the accumulation of wealth in very few pockets. This kind of disparity in wealth is deleterious and injurious to the health of the economy of any country in the entire world. The second one is almost as crucial and old as the first one described above and is connected with the illogical and extensive speculation of the stock market that has been rampant since its very inception. Speculation has always resulted in the crashing of the market and also leads to a horrible credit crunch. When the prices of the stocks fall simultaneously, millions of people all over the globe also lose their hard-earned precious investment and existing stock traders and stock brokers become wary of putting any money into the stock market as it becomes close to impossible to bail themselves and their clients out of an unpredictable and sticky situation. The case and discussion on the CDOs mentioned above reflect extremely mindless, corrupt and shoddy banking practices. If the banks themselves are not put in order and their books are not checked for any kind of financial order, this situation of financial doom will prevail for a much longer time and its bad taste will linger on for quite some time. President of Eugene, Tim Berry says," These downturns are good for spurring us to step back away from the business and take that fresh look; it's like an artist squinting to see the landscape differently." This is a time when each and every company, irrespective of the size of its customer base and the nature of the products and services offered by it must sit down and carry out a good SWOT analysis. The recession is cleaning up a lot of thrash strewn in its path and looking at it from an optimist's point of view-all is not lost as long as the same mistakes are not repeated all over again. The same blunders made in government policies must be strictly avoided and the financial operations of international banks must be kept under constant scrutiny to understand the financial cycle of the flow of wealth and its distribution between the various classes of the society. Though there are many favourite and sought after measures being discussed right now to help everyone out of the situation, a few significant changes that need to be implemented as soon as possible are mentioned below. There has to be a reduction in the federal spending. This excess amount saved can then be diverted to other useful items on the agenda like Medicare, Medicaid and Social Security. The government has to design innumerable programs by consulting the leading corporate companies for the purpose of job creation and reduce the innumerable layoffs that companies are responsible for due to the current financial crisis. The presidential candidate Dennis Kucinich also proposed a New Deal for the 21st Century that eventually made no sense, but the essence of it, if captured might help design the perfect relief package and help the world get out of the recession faster and quicker than expected. Tax cuts must be encouraged more and recent news that made headlines was that nearly ninety five percent of the working American population would have tax cuts according to the latest proposal of President Obama. It has been appropriately termed as "Obama's 95% Illusion." Thorough research needs to be done to create a sensible and intelligent high-level plan for long-term financial stability. Though President Obama has already created a squad to beat the odds and save the country, the tax problems need to be addresses on a high priority basis. People must be educated to understand the risk profile that loans have. The problem arises only with secure loans, as they demand a house, bonds or even a car to be promised to the bank or the financial institution that is lending the money as collateral. The borrowers, without a clue of their financial situation, tend to worsen the situation and render themselves homeless and penniless. The government must be in a position to turn the economy around and divert it to demonstrate a positive trend in growth. They have to try and reduce the per capita debt level and increase or boost the per capita income that is disposable. Circulation of money must be increased and steps must be taken to try and contain inflation to the fullest. At the same time, the interest rates need to be balanced and an atmosphere that is suitable for the growth and development of new business initiatives must be created. A technically and financially sound business plan needs to be drawn and followed on a continual basis to ensure that the stock market and the world economy enters a period of stability. Saving must be encouraged, borrowing must be discouraged if inflation is high, exports must be given a boost, product development also must be given the importance it deserves. Once this much-needed stability is obtained, the focus can then shift to bettering the economy and improving it for better returns and profits, be it for the purpose of infrastructure development or to provide people who were given the pink slips good job opportunities and better job platforms. All that one can make of the current situation is that it seems beyond control and the economy is going to take some time before it settles down and stabilizes. The best way to beat the odds would be to pay off all your existing debts, start saving judiciously, pay your taxes regularly and buy assets and property after thorough research. References: Steps To Stop Recession For Governments, Companies & Individuals by Raj for the Economy from http://mtherald.com/steps-to-stop-recession-for-governments-companies-individuals/ U.S. deficit to hit record US$490-billion next year by Roger Runningen from http://www.prisonplanet.com/us-deficit-to-hit-record-us490-billion-next-year.html Obama's 95% Illusion from http://online.wsj.com/article/SB122385651698727257.html'mod=googlenews_wsj Read More