The economic crisis has been defined by the Committee of the National Bureau of Economic Research as a significant decline in economic activity which cuts across the whole economy and lasting more than a few months. This decline is seen in economic indicators like employment, production, and real income among others. The United States has faced six recessions for the last 40 years each lasting for an average period of about 10.7 months (Gascon, 2009).
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The current economic recession has resulted in the lowest level of employment in the recent past although the trend was different earlier on. The decline in industrial production was not experienced until early 2008 at the business cycle peak. The worst performing indicator in the current economic crisis is the real retail sales which had not declined even after eleven months into the recession.
This is in contrast with the previous experiences of recession where the indicator stabilized within months of recession (Gascon, 2009). The report by the National Bureau of Economic Research that the economic recession started in 2001 March has been doubted on the basis that the US economy was still growing at that period, even though was at a very slow rate. A rule of thumb has been applied in the past to declare that the economy could be undergoing a recession whenever the country experienced two consecutive quarters where the GDP contracted.
Recession can happen because of various reasons ranging from policy to issues of uncertainty, confidence, and pessimism (Labonte & Makinen, 2002). Policy errors point to the usage of policies that is unable to prevent the crisis and failure to use the alternative ones. Examples are monetary and fiscal policies.
The current economic crisis has been predicted to be one the worst for all decades comparable to the Great Depression because of the problems in the financial markets and contraction. The growth in some sectors of the US economy, for example, residential investments, personal expansion expenditures, was not sufficient enough to prevent a slow growth of the GDP. A rise in unemployment levels (3.9% in September 2000 to 5.8% in December 2001, for example) has not been helped by the slowing growth in GDP since mid-2000.
In 2002, reports indicated that the economic crisis did not affect all sectors equally, with auto sales and residential investment remaining strong but the level in industrial production has declined each subsequent month since reaching a peak in September 2000 (Labonte & Makinen, 2002).
The banks and hedge funds in the United States faced a high rate of foreclosure by homeowners who had realized that they would lose even if they sold their homes for less than their mortgage, after being met by declining house prices in 2006. Banks realized they would face huge losses. Bank refused to lead to one another because they did not want the toxic loans as collateral, resulting in a $700 billion bailout and bankruptcies or government nationalization of many firms like AIG (Amadeo, 2009).
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The influence of using a proper economic policy to control and avoid recession can be figured out. During a recession, it is possible to use fiscal and monetary policy to manipulate aggregate demand to increase the purchasing power of a recession. Fiscal and monetary policies can be used to offset the positive or the negative change in the behavior of the private actors in the economy. Some of the problems figured out in the usage of economic policies to control recession are that they are uncertain, slow in impact and variable.
Because the fiscal policy is hard and cumbersome to reverse, monetary policy can be used as a stabilization policy in the event of a recession, and this could make future recession at least shorter and shallower. The policymakers can lead to increased downturns because they can increase uncertainty and erode confidence and people’s well-being if they made policy errors.
The political cause of the economic recession has been posited. It has been observed in the history of the United States that whenever there is to be a transference of power following the end of presidential terms, there is a rise or fall in the stock market depending on the market perception of the incoming administration. According to Usakos (2009), the current problems began because the stock market had been “bullish” for nearly 7 years in Clinton’s rule, and the passage of a bill that would encourage homeownership even by the poor.
Many people moved on to acquire mortgages, with a majority preferring the adjustable interest rate mortgages hoping that the interest rates would go down and thus they would reduce their monthly payments for the same. The mortgage deal was dogged with people lying to qualify for the loan and acquire off the mortgages even among those who couldn’t afford to pay.
Impacts of the current recession
The current economic recession has caused a major blow in various sectors of the economy like job losses and production. The highest monthly job loss in 59 years was reported by the U.S. Department of Labor and Statistics for December 2008 (681,000 in number). A figure of 651, 000 job losses for February this year was reported in the first week of March (Usakos, 2009). According to a report released by Schmitt and Baker, the recession in 2008 was projected to result in 2.1% if mild-moderate, 3.8% if severe, to result in an unemployment level of between 3.2 and 5.8 million Americans. The participation rate falls at a slowdown because some people don’t seek work during the downturn. The past recessions have recorded job losses in the manufacturing sector (CalculatedRisk, 2008).
The GDP slowdown, whose continued consequence is an economic recession, is caused by a decline in business investment, a fall in housing prices and sales, as well a slowdown in manufacturing orders (Amadeo, 2009). The effects include lack of job opportunities and lay-offs, the rise in unemployment causes retail sales to decline. A decline in the stock market is often a cause of recession but can be the impact of it as well. The impact of the current global recession has been felt in various places, and these effects have manifested in more than one form. Job availability has declined in various countries across the globe as companies downsize the number of employees, salary corrections, and falling stock markets has been observed. The major issue reported at some places is the liquidity crisis in the market (Gaur, 2008).
The recession has one good impact according to Amadeo, and that is the curing of inflation, and it will do so without the help of a fiscal policy (2009).
In the six months preceding February this year, more than 3.3 million jobs have been lost in the United States according to reports by CNNMoney.com (qtd. in Usakos, 2009). This has resulted in an unemployment rate which is a record highest in 25 years. Another impact of the recession that accompanies job losses and lay-offs is the increase in outsourcing activities. Companies in the United States have been reported to opt to outsource labor in countries like India, Mexico, and China where labor is relatively cheap.
Mortgage companies would sell these loans to banks, and a crisis was rooming because the loans couldn’t be repaid by the mortgage beneficiaries. Banks, after losing trust for one another due to the mortgage account trading that made them vulnerable to losses, could not lend to each other and also to the businesses. This lack of lending happened even though the federal government reduced the Fund rate. Businesses failed to meet the operating costs like the short-run expenses and the payroll expenses.
This was followed by company sell-offs and collapses. The impact caused governments in places like Asia and Europe to create financial lifelines for their banking systems. The governments responded by efforts to rescue their own systems. China responded by cutting its interest rates for the first time since 2002, with the UK aiming to rescue its banking industry with $692 billion, Australia injecting $1.5 billion in its banking system, and India $1.32 billion in the banking industry. In the United States, the government responded to the crisis by proposing a rescue package of $700 billion to buy distressed mortgage-related assets from private firms.
The rest of the companies have also suffered, with the likes of General Motors, Ford, and Chrysler requiring rescue, and have received a government bailout of more than $30 billion. The export revenues in Africa have fallen as a result of declined U.S. and global market demand for their products, especially the raw materials. A decline in China’s export market has made the country’s GDP go down (Usakos, 2009).
Amadeo Kimberley. Causes of economic recession: Why our economy is in recession now. 2009. Web.
Amadeo Kimberley. What is a recession? (2009). Web.
CalculatedRisk. Recession: Impacts on Employment. 2008. Web.
Gaur Ela. Impact of global recession on Indian Market. 2008. Web.
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Gascon Charles. The Current Recession: How bad it is? 2009. Web.
Labonte & Makinen. The current economic contraction: How long, how deep, and how different from the past? 2002. Web.
Usakos. Who should we blame for all the impact of the current recession? 2009. Web.