Effects of the Current Recession
The current recession was brought about by several factors although the collapsing of the mortgage industry is viewed as having accelerated the current economic down turn being felt all over the globe. Thee are some who feel that the problem originates from sub-prime lending a notion supported by the collapse of Fannie Mae and Freddie Mac which essentially had expanded the lending market to include low and mid level earners. The housing bubble began with an increased demand for housing n the early 90’s due to an increase in wealth brought about by high stock prices in the 90’s.Furthermore this demand spurs a proportional increase in supply for housing resulting into increased prices for homes. These homes inevitably began to be used as equity to secure loans leading to a relaxation of collateral rules and lending even to risky borrowers on the presupposition that house prices will hold.
Another factor that is taken by economists to be a major cause of the recession is the growth of the parallel banking system to a position rivaling conventional banking. The problem with this sector laid not in its growth but in the inability of the government to regulate the sector allowing players to overextend themselves with impunity. However, there are still those who believe that the problem was brought about by a collection of different principles inherent with capitalism and free markets that has seen little regulations on industry and its players (Berner and Greenlaw, 2009).
When the house bubble burst house prices fell, borrowers defaulted in their payments, banks reduced their lending leading to a credit crunch, investors’ confidence fell and the possibility of deflation became a sad reality. This led to a new breakdown of the economy since what started in the mortgage sector impacted negatively on the banking sector and by extension the ripples created in these two vital areas led to turbulence in the entire consumer market. It is important to note at this juncture that the government did not sit idly as the economy went to the dogs but have instituted several fiscal and constitutional measures to curb the recession and on when preventative measures failed, bigger measures are being taken to reverse the situation. Nonetheless, the fight to stop this down ward trend has not been easy since the crisis has spiraled out of control and has ravaged not only European markets but also Asian and African economies. It is important therefore to look at some of the effects of the crisis on different parties in the hope that in doing so we might develop a bigger appreciation of the situation and take even more drastic measures to curb it and prevent a recurrence of the same.
Effects on Peoples’ financial wealth effects
The current recession has had a drastic and devastating effect on economies, reducing growth and throwing policies into chaos since their validity had been challenged and better framework is needed to be put in place if any viable solution was to be reached. But even as more focus is being put on economic and corporate recovery its important to note that most of the victims of the crisis are the people whose future has being jeopardized as recession takes a severe toll on their lives. It is estimated that during that period of high economic growth people took more loans to invest in businesses and equities while several consumers increased their spending especially using credit facilities. These actions were driven by expectations for higher returns since stock prices were higher, job prospects were almost guaranteed and the performing economy promised success to all investment ventures (Oberbeck, 2009).
High house prices boosted consumer confidence in their ability to offset liabilities pushing them more in debt since all factors considered it was hoped that the “housing bubble” would continue. However the bubble did burst and most consumers have huge debts and with the decline in house prices hey are unable to meet their obligations in servicing their loans and mortgages leading to foreclosures and bankruptcy. The continued downward trends in the stock markets have seen investors’ loose value for their money and in addition the poor performance of industries has eroded the income of investors leading to decreased consumption (Bartlet, 2009). Some small businesses are used to funding retirement benefits for themselves and their employees through stocks and the general decrease in stock prices following the recession might translate to a significant decline in the value of those retirement packages.
One of the key issues that propelled president Obama to power is his promise to increase employment since the current economic crisis has led to the loss of millions of jobs. According to the department of labor statistics (2009) unemployment has been on the increase rising to over 12 millions. This situation makes and already bad situation even worse since the credit crunch locks out these individuals from seeking credit for investment. This is stretching the government’s funds as the number of those registering for unemployment benefits increases and pressuring is mounting on the government to deliver on its pledges.
According to Macdonald and Brownlee (2008) statistics do not convey the whole effect of recession. The two argue that there are families whereby both couples are unemployed yet they have children who depend on them for support. The budgets of these families becomes over extended such that they cannot meet several of their re4sponsibilities and the payment of utility bills causes psychological stress that might actually result to physical problems. Most families have no experience in dealing with recession and therefore end up trying to employ short term measures to ride out the crisis and such acts might push them deeper into debts and financial woes. This increased unemployment has also been a direct result of failing businesses which had collapsed due to decreased consumer spending and failure to secure capital to either offset debts or to keep them running during this hard times.
The first victims of the current financial recession are Freddie Mac and Bernie Mae followed closely there after by Lehman brothers which filed for bankruptcy (Benanke, 2009). This was just the beginning and the fears of both government and monetary experts came to light as businesses big and small wound up as they were unable to remain solvent amid the global financial catastrophe. The fall of Wall Street required an emergency action plan to stop more large businesses from closing shop. The auto industry has not been spared either with the three biggest car makers in U S struggling to keep afloat (Peavler, 2009).
This has led to the injection of billions of dollars of tax payers’ money into these corporations to secure their future and those of their employees. However, drastic measures have had to be taken to safe them which unfortunately included laying down some workers and closing some factories. The government has continued to give financial aid to big financial corporations in the hope that this will ease the credit deficit and inspire confidence in the market again.
The present financial crisis might have started in America but its effect has been felt at every corner of the world. The credit crunch have affected not only American multi nationals but also European and Asian companies that rely on America’s financial market for growth and sustainability. Several companies across Europe have collapsed with many other on the brink and it is only through quick action molded along U S economic stimulus packages that they have been saved. On the other hand the collapse and underperformance of large companies have slowed business for international banks leading to huge losses and a status whereby they are struggling to survive. Unemployment across the globe has increased with funds for responding towards calamities and disasters across the globe taking a cut in the wake of such problems. This has led to various blocks coming together to find common problems to these problems since it is clear that decisions taken might have adverse effects on other neighbors. There have been recent talks that developed nation’s needs to include developing nations while making agendas aimed at rectifying the current situation.
Conclusion and Recommendation
The current recession crisis has taken a significant toll on people and business all over the world. The credit crunch occasioned by the burst of the housing burble precipitated on of the biggest financial disaster rivaled only by the great depression. The problem might have been stopped with careful oversight by government and it is clear that it is the government’s failure to do so that brought about the crisis. There are several fiscal measures that have and continue to be taken to remedy the situation.
It is important to note that efforts to redress the problem have demanded cooperation among the various arms of governments. Initially the Federal Reserve provided short term liquidity to banks and also the direct provision of finance to key borrowers. Lastly the reserve has opened up the credit market to allow it to buy private debts in the hope that it will stabilize the financial institutions (Board of Governors, 2009).
The government has also invested billons of dollars into businesses in order to stop them from collapsing. Congress in an effort to stop recession passed the emergency economic Stabilization act designed to give the government more power to deal with the crisis. This has also involved giving large sums of money to banks and other financial institutions in the hope that it will motivate lenders to lend more money to investors and ease up the credit crunch (Treasury department, 2008). The Obama administration has secured more money that will be invested into these businesses in order to spur growth and propel the nation out of this crisis. In order not to avoid the falling into the same trap this administration has put up stricter control measures and has ordered a reduction in allowances pad t o executives.
Bruce Bartlet. The Harsh Impact on Consumption of Lost Home Equity: Why this recession is unique in the postwar years.” Forbes 2 Feb. 09
Chairman Ben S. Bernanke. Federal reserve bank: Semiannual Monetary Policy Report to the Congress, 2009. Viewed March 19, 2009 from <http://www.federalreserve.gov/newsevents/testimony/bernanke20090224a.htm >.
Bureau of Labour Statistics. Employment situation summary. United States Department of Labour, 2009. Viewed March 19, 2009 from <http://www.bls.gov/news.release/empsit.nr0.htm>.
Oberbeck Steven. “High debts in good times bite back Utahns in recession.” The salt lake tribune 16 Mar. 2009002E
Peter McDonald and Helen Brownlee “Living Day to Day: Families in the Recession.” Family Matters Nov. 18, 2008. 8-13
Richard Berner & David Greenlaw Morgan Stanley: Global economic forum. Viewed March 19, 2009 from http://www.morganstanley.com/views/gef/index.html
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Treasury Department. Finacial Report : A citizen Guide, 2008. Viewed March 19, 2009 from <http://www.fms.treas.gov/fr/index.html>