History of the Great Recession | Free Essay Example

History of the Great Recession

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Topic: Business & Economics
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The Great Recession

The great recession started in December 2007 and ended in June 2009. The recession started when the 8 trillion housing bubble tumbled1. There was lots of wealth loss that reduced consumer spending. There was financial chaos due to reduced consumption and the business investments collapsed. Due to the collapse in the business investments and reduction in consumer spending, the rate of unemployment increased. About 8 million people lost their jobs during the great recession2.

Break Down to the Great Recession

At the time of the housing bubble in the 2000s, mortgage-backed securities were being marketed by the financial institutions. However, in 2007, there was a collapse in the real estate industry and the values of the securities declined and the existence of the financial institutions and banks was reduced by a great margin3. There was great effect on the global economy because of the credit crisis and the biggest financial institutions closed doors. The rate of unemployment doubled because of the Great Recession.

The aggressive policies of the financial institutions were very helpful in reducing the crisis in the global economy. Some financial institutions reduced their interest rates to uphold liquidity. Many investors moved to the banks for emergency loans and this helped ease the situation4. With the low-interest rates, it becomes easy to borrow money from the financial institutions. Businesses borrowed money from the banks and they invested whereas the consumers also borrowed money to purchase more. Because of this, there was more jobs, more production and the citizens could purchase more leading to a healthy economy.

A Manifesto for Economic Sense

According to “A Manifesto for Economic Sense” states that “the reason is simple: we are relying on the same ideas that governed policy in the 1930s”. According to the manifesto, the government should institute policies that can help it in minimizing the deficits. The government should work together with the private sector to minimize the debts5. The fiscal policy helps in reinforcing the effects of the private sector by cutting down spending.

According to Colander, the manifesto does not consider the global imbalances and undervalues the need for change. There is need for the manifesto to consider a policy that can encourage financial bubbles. Colander’s argument is that large debts and globalization are the main causes of structural problems. This can be attributed to the low rate of the exchange rate in the US or shift in the supply curve. The model on structural stagnation illustrates that the prices can be kept down through the structural forces to ensure when that when there an increased supply of money, there is an increase in asset prices6. This could lead to structural imbalances. According to Colander, plans to retrain workers through the structural changes could take longand attempts by the government to restructure could cause more havoc.

Baker and Bernstein link inequality to Unemployment

Though the great recession ended, the issue of unemployment is still a striking issue and income is still very low. According to Dean Baker and Jared Bernstein, the economic troubles were not only brought by the housing bubble but by policy failures. Baker and Bernstein argue that unemployment is the leading cause of equality1. People living in this world have different levels; there are the rich and the poor. The economic crisis led to the loss of jobs. Loss of jobs not only affects the labor force but the whole economy. It also affects those in the labor force because their income is limited considering there is no demand for labor force yet the supply is more. Those in the labor force have their bargaining power reduced. If there are high rates of unemployment, it means that the margin of income distribution will hurt the poor in the community.

When the income distribution margin is low, those who benefit are those who are employed. The unemployed purchase products at the same cost as the employed. They have to strive hard to live an equal life with the employed7. Baker and Bernstein feel that there have the levels of inequality should be reduced for a reduction in unemployment and vice versa. It ischallenging to end unemployment considering the economic policies in place8.

The great recession led to economic downturn after the housing project plunged. The government could no longer collect the tax. This led to an increase in tax revenues and the government also had to reduce its spending. The economy can be boosted through increased government spending,but the politicians play a role in reducing government spending. According to Baker and Bernstein,it might be complicated to reduce the trade deficit since the demand is already lost1.

Putnam describes what has occurred in the U.S. over the past several decades

The society in the U.S. has changed a lot over the past several decades and according to Putnam, there is need for the civil society to be active and strong. The United States has continued to emphasize the need to connect the civil society with democracy9. Social networks have a vital role to play in connecting the society. The U.S. government can make use of the social networks to connect the people and emphasize the importance of the civil society.

The community and the economy become stable when there is enough social capital. The networks are important as they facilitate communication and coordination and thus the dilemmas are resolved. According to Putnam, when there is enough social interaction, opportunism is minimized. It is important to emphasize on civic socialization to facilitate engagement of all in the society10. There has been reduced engagement of people in the society in the last decade and the number of members engaging in educational matters has reduced. The organizations such as PTA are very important in connecting people in the society though many people have snubbed their engagement. When people connect, it becomes easy to solve issues and stabilize the economy11.

What are some of the hypotheses as to how the crisis can be brought to an end?

The crisis was brought about by the lack of proper policies in governance. There are striking issues contributing to the crisis and most of them must be addressed from the top. There have to be proper policies to end issues of unemployment and reduce the credit deficits12. Apart from this, the society also plays a vital role in stabilizing the economy. It is important to work hard as a society and ensure we have backup plans for any eventualities.

Currently, it is very hard to end the crisis considering that the levels of unemployment have risen. There have to be proper procedures and policies as to how the rates of unemployment can be reduced considering that unemployment is one of the factors that greatly contributes to a poor economy. There is need for policymakers to adjust and focus on better plans to cut down credit deficits. This would help prevent the reoccurrence of another crisis.

Bibliography

Baker, Dean, and Jared, Bernstein. Getting Back to Full Employment.” Center for Economic and Policy Research 1, no. 5 (2013): 48-60.

Collander, Bill. Big Ideas in Macroeconomics: A Nontechnical View. NY: MIT Press. 2013.

Elsby, Michael, Bart,Hobijn, and Aysegul,Sahin. The labor market in the Great Recession. National Bureau of Economic Research, No. w15979 (2010): 27-28.

Jon, D,Wisman. Wage stagnation, rising inequality and the financial crisis of 2008.Cambridge Journal of Economics 37, (2013): 921-945.

Jon, D, Wisman. Ending Unemployment Crisis with Guaranteed Employment and Training. Journal of Economic Issues. Vol. XLVIII No. 3 (2014): 67-80.

Putnam, Robert,D. “Bowling alone: America’s declining social capital.” Journal of democracy 6.1 (1995): 65-78.

Footnotes

  1. Dean Baker and Bernstein Jared. “Getting Back to Full Employment.” Center for Economic and Policy Research 1, no. 5 (2013): 51.
  2. Wisman Jon D. Ending Unemployment Crisis with Guaranteed Employment and Training. Journal of Economic Issues Vol. XLVIII No. 3 (2014): 67.
  3. Michael Elsby, Hobijn Bart and Sahin Aysegul. The labor market in the Great Recession. National Bureau of Economic Research, No. w15979 (2010): 27.
  4. Michael Elsby, Hobijn Bart and Sahin Aysegul. The labor market in the Great Recession. National Bureau of Economic Research, No. w15979 (2010): 28.
  5. Bill Collander. Big Ideas in Macroeconomics: A Nontechnical View (NY: MIT Press. 2013), 122.
  6. Bill Collander. Big Ideas in Macroeconomics: A Nontechnical View (NY: MIT Press. 2013), 125.
  7. Wisman Jon D. Ending Unemployment Crisis with Guaranteed Employment and Training. Journal of Economic Issues Vol. XLVIII No. 3 (2014): 70.
  8. Dean Baker and Bernstein Jared. “Getting Back to Full Employment.” Center for Economic and Policy Research 1, no. 5 (2013): 57.
  9. Robert D Putnam. “Bowling alone: America’s declining social capital.” Journal of democracy 6.1 (1995): 68.
  10. Wisman Jon D. Wage stagnation, rising inequality and the financial crisis of 2008.Cambridge Journal of Economics 37, (2013): 940.
  11. Robert D Putnam. “Bowling alone: America’s declining social capital.” Journal of democracy 6.1 (1995): 72.
  12. Wisman Jon D. Wage stagnation, rising inequality and the financial crisis of 2008.Cambridge Journal of Economics 37, (2013): 927.