Impacts of the Great Recession

The term "great recession" refers to a time period in the late 2000s marked by a downturn in the economy or a significant drop in global economic activity (Neal 1099). Near the end of 2007, the US economy entered a recession, and worries grew as a severe financial crisis damaged consumer and company confidence. At the beginning of 2008, the United States was in the midst of the worst recession since the 1930s, which was marked by the failure of significant financial institutions (Neal, 1102). The global financial system might collapse as a result of the recession and financial crisis, according to the majority of economists, possibly signaling a return to the widespread economic devastation that characterized the 1930s depression (Love and Mattern 401). World's governments responded by establishing massive stimulus packages, which significantly amplified national debts and deficits. Governments also reacted by loosening various economic policies characterized by huge extensions in money supplies and reduced interest rates (Love and Mattern 402). Governments also gave bail-out packages to different financial institutions in their efforts to save them, including offering them guarantees, loans, and equity. By the beginning of the year 2009, the financial crisis had stabilized, with the "green shoots" appearance promising recovery. By the year 2010, governments could review the financial crisis and pose questions relating to its causes and consequences (Love and Mattern 403). The issues of great concern were whether it was necessary to put in place new regulations to prevent its reoccurrence, as well as whether some of the stricter laws should be enforced internationally (Neal 1103). Another issue of concern was whether such international rules and regulations should be extended to both the banks and non-bank financial institutions. Governments also tried to find ways of exiting the unique monetary and fiscal positions that appeared to threaten their economies of possible future inflation and continuous deficits (Neal 1105). This paper explores the great recession, with the focus on its causes and consequences.

Causes of the Great Recession

The United States, apparently, experienced several severe challenges, including financial institutions being on the verge of bankruptcy, as well as a declining stock market, records of high public debt levels, a plunging dollar, imminent recession threat, and frozen money markets (Kaltwasser and Zanotti 98). The global financial crisis was significantly influenced by perceptions of risk, global imbalances, improper regulation of global financial systems, and reduced interest rates among other factors (Kaltwasser and Zanotti 99). The following are some of the major cause of the great recession.

Housing Crash

The United States' housing market forms a key determinant of the rate of economic growth and consumer spending. Various factors such as overvalued assets greatly increased the house prices in the United States at a higher rate than the consumer incomes, a situation which created a rapid increase in house prices until early 2007 before the country experienced house prices fall after the boom (Kaltwasser and Zanotti 102). When the house prices finally reduced to correct the imbalance, it created a huge impact on the consumers' spending pattern as people could not remortgage to acquire more capital for spending on house purchases (Kaltwasser and Zanotti 105).

Low-interest rates

The United States monetary authorities made various adjustments to interest rates at extraordinary or unprecedented levels, a situation which created a boom in the consumption of debt-finance, thereby contributing to the housing bubble (Love and Mattern 404). Additionally, the United Sates interest rates were at significantly lower levels, including almost zero percent between the years 2003 and 2004, a situation which greatly contributed to the activation of the great recession (Love and Mattern 406). Besides, the United States' monetary policy failed to effectively address the overvalued asset bubble, a situation which contributed to the subprime mortgages’ rapid growth (Love and Mattern 407).

Subprime Mortgages Burst

There were no proper regulations that controlled subprime mortgages since the mortgage sector could sell mortgages without taking into consideration the consumers’ ability to pay back. According to global research, the value of the U.S. mortgages as on March 2007 was estimated at $1.3 trillion, with more than $7.5 million outstanding first-lien subprime mortgages (Neal 1106). The subprime mortgage increased by almost 20 percent of all the original mortgages during the peak of the United States housing bubble (Neal 1107). Besides, subprime mortgages significantly expanded during the period between the year 2004 and 2007, and a majority of the subprime mortgages resulted from massive foreclosures (Neal 1109). The situation therefore significantly affected various financial institutions and other independent mortgage brokers that were not protected by the Community Reinvestment Act. In overall, the subprime mortgage burst indirectly contributed to slow economic growth by greatly deterring consumer spending and investment (Neal 1111).

Credit Crunch

The credit crunch is a term referring to a sudden lack or shortage of funds, thereby leading to a decline in available loans. The United States' high subprime mortgage defaults contributed significantly to the credit crunch, and several commercial and investment banks suffered massive losses as a result of their engagement in the provision of the risky mortgage loans (Kaltwasser and Zanotti 107). Banks, therefore, became reluctant in lending money to any customer, even to other financial institutions, thereby leading to a shortage of funds in both in the United States and the global money markets (Kaltwasser and Zanotti 109). Additionally, the lack of liquidity in the United States financial sector made money borrowing more challenging and expensive, a situation which resulted in a reduced consumer spending and investment (Kaltwasser and Zanotti 112).

Devaluation of the Dollar

The basic economic theory states that a decline in exchange rates will ultimately enhance exportation of products, as well as stimulate economic growth within the export sector (Neal 1112). The United States depreciating dollar had, however, contributed to high inflation, as well as a decline in living standards, characterized by costlier consumer goods, thereby leading to the consumers’ lower spending power. Besides, the depreciation in the dollar made the United States to be less competitive in the global market than its trading partners (Neal 1113).

National Debt and Budget Deficit

The United States’ national debt stood at 65 percent of the country's GDP as at 2007 and worsened after the inclusion of pension liabilities. With such a massive financial deficit, the government of the United States had almost no room for the expansion of its fiscal policy since its demographics worked against its fiscal stability (Love and Mattern 408). The financial deficit also got worsened by the stage of the economic cycle, a situation which made it difficult for the United States to attract capital flow. That was because, various Asian investors, who were already aware of the United States deficit, slowed down their capital flows to the U.S. market and contributed to the diminishing or weakening of the dollar (Love and Mattern 409). The U.S., therefore, faced a fundamental imbalance between its domestic consumption and production, which formed a huge barrier to its future economic growth.

Consequences of the Great Recession

The United States' entrance into recession towards the end of 2007 resulted in a crisis on almost all economies around the world. The most affected economies were middle-incomes countries in Eastern and Central Europe, as well as various commonwealth countries (Kaltwasser and Zanotti 114). However, various low-income countries, such as Ethiopia and Uganda, experienced huge economic growths despite the global economic downturn. Although several low-income nations escaped the adverse impacts of the great recession, they equally suffered slow economic growth rate as a result of the poverty implications (Kaltwasser and Zanotti 116). In overall, the Great Recession strongly hit the more open and smaller economies, while the emerging and larger economies managed to survive due to support from government spending and domestic demand. India and China experienced faster recovery from the great recession despite being significantly affected by the created financial crisis (Kaltwasser and Zanotti 118).

In the United States, the Great Recession created an enormous impact on the country's labor market. Although the U.S. Government adjusted the country's inflation rate and making the U.S. economy to grow by 2.7 percent in the first quarter of 2010, the country’s unemployment rate remained obstinately high (Neal 1114). The United States' unemployment rate rose from 9.5 percent in June 2009 to about 10.1 percent by October 2009, before falling back to 9.5 percent in June 2010 (Neal 1115). Additionally, following the huge disconnection between the supply and demand of the country's workers, the United States unemployed population was projected to hit 10.4 million (Neal 1117). The United States policies on unemployment benefits played a role in contributing to the country's abnormally high rate of unemployment, and the extended unemployment benefits are estimated to have increased the country's unemployment rate by between 0.4 to 1.7 percent (Love and Mattern 409). Besides the great recession placed the United States at a risk of suffering a permanently high unemployment since less experienced workers are less productive and lack competitiveness in the job market (Love and Mattern 411). Therefore, the United States high rate of unemployment is likely to increase its level of structural unemployment if the labor policies are not strengthened, a move that might increase the country's inflation rate to higher levels than those experienced during the peak of the great recession.

Several years after the Great recession’s official end, most American workers still feel the impacts created by the worst economic downturn. Essentially, the current United States labor force has approximately six million fewer employees that economists had projected in the year 2009 (Neal 1119). The big gap is greatly due to the adverse impacts of the great recession. Additionally, over the last several years, the economists’ projections in the growth of the United states labor-force have been revised downward sharply. Such revisions are majorly due to the two trends or patterns that emerged in the wake of the great recession (Neal 1120).

Additionally, the Great Recession adversely affected the Indian financial market by causing a fall in its global market share, with a weakened rupee against the dollar. Besides, Indian banks suffered severe cash crunch as a result of the lack of liquidity in the country's market (Kaltwasser and Zanotti 121). The Foreign Institutional investors formed the primary investors in the Indian market, and the impacts of the great recession forced them to withdraw their shares from the Indian stock markets as a means of meeting their liabilities in their respective home countries. As a result, the Indian rupee greatly weakened against the dollar, although the country managed to recover faster from the impacts of the great recession. One of the factors that contributed to India’s fast recovery was the move by its banks not to engage in the risky subprime mortgage. Most Indian public sector financial institutions exercised extreme caution when providing loans to their clients (Kaltwasser and Zanotti 123).

Conclusion

In the current globalization era, every economy experiences economic fluctuations at varying degrees, and none of the world's countries, whether developed or developing, can escape such fluctuations. The great recession was part of such economic instabilities that come with globalization, and it adversely impacted the global economy. It resulted in a reduction in the demands of goods and services, decreased economic growth rate, shortage of cash or reduced cash flow, as well as high unemployment rates in various world countries, especially the United States. Additionally, the Great Recession contributed to the transformation of different nations by influencing the establishment of various business or economic policies aimed at boosting the respective countries' economic growth. Besides, the Great Recession contributed to the generation of new strategies and ideas aimed at stimulating economic development, as well as stabilizing the markets of various world countries to make them more competitive in the global market.



Works Cited

Kaltwasser, Cristobal Rovira, and Lisa Zanotti. "The Comparative (Party) Politics of The Great Recession: Causes, Consequences and Future Research Agenda." Comparative European Politics (2016): 97-124. Web.

Love, Nancy S., and Mark Mattern. "The Great Recession: Causes, Consequences, And Responses." New Political Science 33.4 (2011): 401-4117. Web.

NEAL, LARRY. "A Reading List for Economic Historians on The Great Recession Of 2007–2009: Its Causes and Consequences." The Journal of Economic History 71.04 (2011): 1099-1123. Web.