Экономические
науки/2. Экономика предприятия
студентка Базюк В.В.
Донецкий национальный университет экономики и торговли
имени Михаила Туган-Барановского
Causes of Economic Recession
The economic downturn came as predicted by many experts, e.g. Minsky (1980)
and also the Bank of England (Besley, 2009). This affected mainly countries
with large financial sector such as the US. Hodgson states that leading
economists (Coase, Friedman, Leontief) pointed out that “in recent years
economics has turned virtually into a branch of applied mathematics, and has
been become detached from real-world institutions and events”. Unfortunately
these views were not heeded. “There were many warnings in the financial markets
and the global economy” and also “imbalance in the economy”
[1].
The current financial crisis has become an earthquake to the world’s
economic system. Have started in the USA, it has rapidly overcome the
boundaries of the States and has spread over the Europe and Asia, bringing
unemployment and financial recession along. One can hardly say whether it will
last long or is going to slump. The following remains obvious, if we don’t want
its recurrence in future, we should investigate its root causes now [3].
The crisis was preceded by long period of rapid credit growth, low risk
premiums, abundant availability of liquidity, strong leveraging, soaring asset
prices and the development of bubbles in the real estate sector.
The world economic system endures times of prosperity as well as
followed by inevitable declines. The circulating scheme is characterized by the
rise of manufacturing and it is following recession, thus permitting to keep to
the world financial and economic balance order [2].
In general economic crises are caused by economic issues which grow so
large that they start impacting other areas outside of economics.
In terms of what caused the most recent global economic crisis:
1. The collapse of the sub-prime mortgage market.
The sub-prime mortgage market collapsed due to too many people defaulting on
their mortgages. This was in turn caused by several factors including general
weakness in the markets as well. The initial collapse caused other people to
have to call in debts. However, debtors relied on these excessively high
valuations in order to leverage themselves.
2. General weakness in the markets
3. Prime Minister of Bhutan Jigme Yoser Thinley blamed
the global economic crisis on "insatiable human
greed".
4. The growing sense of entitlement and lack of
willingness to sacrifice.
5. Mathematical Complexity of the markets. This allows
some financial institutions to behave as leeches on the market without actually
contributing to overall productivity. This also prevents government regulations
from being written to stop these actions, as they are not easily understood by
legislators. Further, lobbyists can usually stop such actions from taking
place.
6. Continued Government Spending. The failure of most
governments to reign in spending, and instead continuing to print money to
compensate for deficits contributes to overall weakness of the dollar and the
market.
7. Decreased financial regulation in particular areas.
Whenever there is decreased financial regulation in a particular area,
companies jump into these niches to squeeze out profit.
8. Excessive financial leveraging which did not take into
account proper risks.
Another
reason of the present economic crisis is the unrestricted emission of American
dollars. The emission of the most wide-spread world currency was strictly
controlled by the government of the USA. Each dollar had gold equivalent in the
gold reserve of the States. Purchasing capacity of it corresponded to the
quantities of products manufactured. That's not how things stack any more up
today. As a result while the USA was loosing its positions on the world market,
the dollar was weakening in the world [4].
To sum it up one can say that the root cause of the current economic
crisis lie in the ineffective policies of the economic and financial sectors of
the leading and developing countries in the world. One should take into account
the root causes to oust its re-occurrence in future.
Literature:
1. Baker, D. 2008. The Housing Bubble and the Financial Crisis. Real-World
Economics Review, vol.33, issue 46, pp.73-81.
2. Crotty, J. 2008. Structural Causes of the Global Financial Crisis: A
Critical Assessment of the „New Financial Architecture„. Political Economy
Research Institute (PERI), University of Massachusetts Amherst, MA, USA,
Working Paper no.180
3. Minsky, H. 1980. Capitalist Financial Processes and the Instability of
Capitalism. Journal of Economic Issues, vol.14, issue 2, pp.505-523, available
through database: Business Source Premier.
4. Partnoy, F. 2003. Infectious Greed: How Deceit and Risk Corrupted the
Financial Markets. Henry Holt and Company, New York.