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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 worlds 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 dont 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.