An economic recession is the general downturn in an economy which is typically associated by a drop in the stock market. In prior years banks globally had increased freedom that allowed people to take loans for 100 percent or more the value of their homes as collateral and when it came time to sell them the banks were left with subprime mortgage crisis. This led to lack of trust among banks making this the major cause of the economic recession of 2008 since banks had stopped lending each other mortgages at the risk of them being worthless. This resulted in the banks having toxic assets which they could not liquidate. This affected the overall value of the corporate assets, mutual funds and pension funds which further aggravated the economic recession. Here are some of the effects of the economic recession of 2008-09.
High inflation was one of the major effects of the economic recession globally. This created a macro economic problem where the wages fell, wage growth slowed down and there was a significant drop in the people consumption of products. This alternatively led to a drop in the gross domestic product of countries where the economic recession was most felt. (Meschi, Vivarelli, 2009) This created high levels of unequal income distribution and service provision which further deteriorated the situation further.
Unemployment was more than 9 percent since investors had pulled out their investments where possible therefor lowering the capacity for job opportunities in the various firms. This was also affected further when companies almost shut down owing to the major losses experienced by the institutions which had left them with no choice but to retrench some of their employees. (Seguino, 2009)There were also many discouraged workers who had given up looking for work despite their qualifications as many firms were not employing workers.
There was also a significant drop in the value of real estate industry where housing values fell with more than 31 percent over the duration of 2008-09. This further deteriorated the economy further as the mortgages that had been acquired by banks were worth less than their real value which further destabilized the economy further. (Amadeo, 2017)
In conclusion it is clear that banks alone cannot regulate themselves and the governments should come in to regulate the economic situation of banks and other relevant institutions to prevent them from taking very high risks. The government should also regulate banks and other relevant institution sizes so as to reduce the risks in case an institution falls it does not affect vast areas of the economy.
Amadeo, K. (2017). The 2008 economic crisis. A look at the causes, costs and could it happen again? 23 (2), 14-15.
Meschi, E., Vivarelli, M. (2009). World development. Trade and Income Inequality in Developed Countries, 37, 287-302.
Seguino, S. (2009). The global economic crisis. Its Various Implications and Policy Responses. Burlington, VT: University of Vermont Press. 1-14
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