Global Recession

The 2007 worldwide financial crisis casted its lengthy shadow to the economic fortunes of numerous nations, resulting to what is now usually referred to as ‘Great Recession’. The elements that initially began as isolated turbulences within the sub-prime US housing market segment mutated to become a full blown recession at 2007 year end. The crisis appeared principally as a surprise to numerous policymakers, academics, multilateral agencies and investors. The historical perspective of the years leading to financial crisis indicates the worldwide economy is not as stable as presumed. The Great Recession was mainly unexpected as a result of its complex roots: it has continued to amaze the economists and policy makers throughout the globe. The real economy collapse extended devastating effects to households due to the rising unemployment along with surging poverty. Additionally, some nations were impacted more than others as a result of differences within the initial conditions.

  Factors behind the Great Recession

Leading towards the Great Recession were numerous telltale symbols which ought to have ignited attention. The enormous majority of policymakers, academics along with investors disregarded the signals and chose to create profuse claims regarding a new era (Johnson, and Wales University 7). A general euphoria cropped up with many individuals claiming that “it would be different this time”. However many similarities amongst the US sub-prime disaster along with past banking crises for instance the massive housing and prices surging prices, the rising current account deficit also growing private levels existed. Simultaneously, the experience of investors and lenders was convoluted by the extraordinary levels of mortgages secularization that created significant financial markets uncertainty as the crisis stretched out. This sequentially resulted in an unexpected turnaround of risk perceptions, that is, from risk seeking towards risk aversion. The debate surrounding this issue places emphasis on the market failure role in speeding the recession, specifically the catastrophic financial market performance which hugely contrasted the theoretical proposition stating that it is efficient (meaning stocks and bonds market prices accurately show all available data at a particular time).

Governments failure played a role to the crisis through permitting banks along with other financial institutions to take advantage of the loopholes existing within the regulatory system to boost leverage and returns. The US domestic issues involving financial regulation along with monetary policies and global imbalances played a major role in initiating the recession (Horwitz 5). The four interrelated elements that are known to fuel the crisis are: interest rates, risks perceptions, global imbalances and financial system regulations.

Loose monetary policies and global imbalances

Any reflection of the last decade certainly shows the role that the USA administration played in creating the great recession (Verick, and Islam 4). When the US was faced with 2001 recession after the ‘dot-com’ bubble busted, the monetary authorities in US hurriedly condensed the interest rate policy consequently precipitating a debt-financed expenditure boom which paved the way towards increasing worldwide global aggregate. In 2003 US’s interest rates stood at a mere 1 percent, this guaranteed the shallowness of the 2001 recession, however it ironically planted the seeds that matured to be the 2008-2009 global recession. The US government bonds yields were in addition extraordinarily low within the pre-crisis period. Low interests setting in America continued since Middle East oil exporters along with export powerhouses developed an abnormal appetite towards accumulating foreign exchange reserves in the form US-dollar currency assets (normally little-yielding US government bonds ). This situation comprised of a combination of extreme savings done by surplus nations such as China and on the other hand extreme consumption done deficit nations such as the US.

 During the pre-crisis period economists voiced out their concerns that with regard to the then large US deficit which was unsustainable. They indicated that the current account steered crises signaled an imminent crisis. In developed economies the current crises normally takes place once there is a loss in confidence along with a capital flows reversal. In the contrast during the 200-09 crisis, capital flow reversal never occurred to the US and therefore the dollar never collapsed as anticipated by economists. Further, foreign borrowing financed US firms’ investments along with mortgage debt instruments which formed part of central sub-prime disaster (Katkov 9).  Certainly, during the pre-crisis period credit grew very sturdily within deficit nations and which was enabled by capital flows from surplus nations.

Higher yields search, lax financial guidelines and risk misconception

Reduced interest rates along with yields on state bonds eventually motivated investors towards searching for greater-yielding assets. Emerging markets yields reduced as compared to treasury bills resulting to investors looking for greater returns towards the mortgage oriented securities. Taking the advantage of reduced interest ratesthe US lenders expanded activities, and having drained credit-worthy borrowers, they engaged in riskier market segments such as sub-prime (Katkov 12).    These financial innovation endeavors were encouraged by the financial system lax regulations that started in the 90s.

The mixture of obstinate financial sector incentives along with objectives of growing homeownership proportions created the surfacing market of ‘sub-prime’ housing. Indeed ‘sub-prime’ borrowers that were un-creditworthy were deemed more profitable and valued business targets by investors and lenders searching for higher yields. Aggressive lending coupled by a drop within lending regulations led to speedy ‘non-prime’ loans growth (Verick, and Islam 7). The housing bubble really was primary cause of the great recession. Due to the speedy increase in mortgage bonds secularization the housing bubble affected both local and international lenders. Mortgages were now traded in the open market within US and outside, above the regulatory measures scope.

The evolution of fresh financial products external to the scope of prevailing regulatory rules was a primary regulatory failure. The mixture of risk misconception, negligent financial regulation along with reduced returns on riskless assets motivated the excessive leverage in addition to risky assets investment specifically, mortgage-backed securities.

Ultimate trigger: the bursting of US housing bubble

Against the backdrop, unsurprisingly the great recession was triggered by the US housing market.   Immediately the Federal Reserve began raising the interest rates, the home loans delinquency rate started to grow in 2006 prior to gaining speed in 2007 (Johnson, and Wales University 10). The introduction of interest rates towards sub-prime loans steered the increase in delinquencies. Bad loans rose leading to failure of several US mortgage lenders. Throughout 2007, hedge funds got a hard hit and led to subsequent sub-prime market unwinding. In reality banks also investors worldwide were exposed to this actuality but the financial product complexity especially collateral debt obligations   along with credit default swaps, they never noticed the size of probable losses and exposure. As a result, financial institutions began hoarding liquidity resulting to a market freeze for asset backed document in mid 2007. The credit crunch had began already resulting into a further rise in risk perception and reduced lending that largely was exacerbated the collapse of Lehman Brothers, a circumstance that nearly resulted to the financial system implosion (Katkov 12).

Impacts of global recession to national economies

The global recession that began in the US within mid-2007 ultimately spread around the globe to both developing and developed economies resulting to the most horrible recession ever since World War II. In spite of the crisis severity varying diversities were experienced in different nations that are the downturn in economic contraction magnitude along with subsequent labor market deterioration impacted different nations in dissimilar intensities.   

Global recession’s Economic Effects

Since the US happened to be the epicenter of the recession, its economy experienced a direct hit through the meltdown within the market of sub-prime mortgage and the aftermaths of global recession along with the ensuing credit crunch. Consequently, the US economy in December 2007 fell into recession and is approximated to have condensed by 2.7 percent within 2009 (Verick, and Islam 7). Nevertheless, US’s contraction was much smaller as compared to a majority of G20 nations and even smaller to that of advanced economies which was -3 percent. Certainly, the diversity was the global recession’s hallmark. From the time the US went into recession in mid 2007, a majority of developed economies followed, especially the ones exposed via financial and trade channels. In contrast other nations such as China, Australia and India managed to avoid a damaging contraction, despite their amalgamation within the worldwide economy.

The mostly extremely affected comprise of the middle-income nations, particularly in Eastern and Central Europe along with the Commonwealth independent nations. The effects include the credit crunch along with domestic imbalances for instance huge current account deficits also housing bubbles. Lithuania, Armenia, Latvia and Estonia experienced the biggest an approximate 14 percent decline in GDP in 2009. Latin America got into a profound recession of about 2.1 percent within 2009, nevertheless, Mexico was the hardest hit nation its economy contracting by 7.1 percent in 2009. Generally, the smaller, featly open economies were hit harder, whilst bigger emerging economies were supported by government spending and domestic demand. For illustration China and India notably persistently grew sturdily during the recession (Katkov 8).

Impact of the recession towards the labor market

There was an even bigger diversity with regard to the labor market contraction amongst economies during the recession. Within the OECD nations the unemployment rates rose from 5.7 percent in 2007 up to 8.6 percent in 2009, this represented a huge 10.1 million jobless individuals. The OECD five hardest hit nations with regard to unemployment surge between 2007 and 2009 comprise of Estonia (+ 10.9 %), Spain (+10.3%), Ireland (+8.1), United States (+4.9%) and turkey (+4.6%) (Johnson and Wales University 13). Unemployment within the United States rose far more compared to other nations with equal economic contraction, reflecting the US labor market flexibility.

An analysis of output along with unemployment adjustment mutually offers of OECD nations reflecting the crisis diversity and complexity. For illustration, Norway and Malta underwent a simple mild contraction of the economy, whilst Germany, Netherlands and Austria evaded major labor market deterioration in spite of a bigger output decrease. Countries such as Ethiopia and Uganda persistently grew shedding the effects of the recession (Verick, and Islam 5).

Groups that hardest hit

The effects of global financial crises towards the labor markets may also me disentangled with respect to the vulnerable population segments. Five segments or groups that were hardest hit could be viewed  in terms of the following dimensions

• Age
• Gender
• Education and level of skills
• Employment contract type
• Nation of origin

To start with the recession mainly hit men hardest in developed economies, especially the younger men. For instance, between 2008 and 2009 within the European Union the unemployment rate in 27 seven nations grew by between 2.9 and 5.2 percent for young men aged below 25. This is because younger men before the recession worked in manufacturing and construction sectors which were mainly affected by the financial meltdown (Verick, and Islam 10).  Secondly, individuals possessing reduced education levels were hardest hit as a result of their over-representation within industries which got the hardest impact also motivated by the reluctance of firms in firing skilled staff. Thirdly, when the crisis hit, companies engaged in cutting back their staff numbers starting with those holding temporary contracts. This to firms was greatly cheaper as compared to laying off permanent staff protected by legislation. Additionally, immigrant workers lost their jobs more as compared to the local workers. It is critical to consider that the general labor market effects impacted more on households; especially the poorer households within the economies (Katkov 6). An actual labor market depression was prevalent to individuals placed at the bottom of income distribution, in addition a deep labor market depression affected individuals at the middle level of income distribution, and however, no labor market depression was experienced by the affluent at the top of the income distribution level.

Conclusion

Over the years prior to the global recession of 2007 along with the ensuing recession, leading academics indicated that the global economy had entered into a new volatility era referred to as the Great Moderation. The financial crisis which hit the worldwide economy within 2007 and 2008 in actuality was the first. A range of complex and interconnected issues were behind the appearance of the global recession namely global imbalances, loose monetary policies, lax financial regulations and risk misperceptions. A combination of these factors which began in the United States led to nastiest recession for almost all the nations in the world. In order for pulling out of the recession the global nations require to utilize macro-economic stimulus measures along with labor market policies. Adoption of these policies will assist these nations avoid the extreme economic contractions.  A number of countries adopted these polices during the recession and successfully avoided adverse economic effects. Whilst the countries initiated the recovery phase several risks existed which could have derailed recoveries along with hindering efforts of ensuing that job creation accompanied recovery. These risks included the premature stimulus packages abandonment, the emerging imbalances and the challenge of creating an appropriate financial sector regulation to evade repeating the mistake that were done leading to the 2007 recession.  The world up to date still suffers the effects of the global financial crisis, which began as a result of negligence and ignorance of the signs that indicated imminence of a monetary crisis. This calls for all economies especially the developed nations to put up sufficient financial regulations and tighten their enforcement to avoid driving the entire world into another financial meltdown.

Works Cited

Horwitz, Teven. “Causes and cures of the Great Recession.” Welcome to IEA | Institute of Economic Affairs. N.p., 2012. Web. 4 Oct. 2014. <http://www.iea.org.uk/sites/default/files/publications/files/Causes%20and%20Cures%20of%20the%20Great%20Recession.pdf>.

Johnson, Katkov, and Wales University. “THE GREAT RECESSION OF 2008-2009 AND GOVERNMENT’S ROLE.” ASBBS Title Page. N.p., 2011. Web. 4 Oct. 2014. <http://asbbs.org/files/2011/ASBBS2011v1/PDF/K/KatkovA.pdf>.

Katkov, Alexander. “Journal of Applied Business and Economics vol. 13(3) 2012.” North American Business Press. N.p., 2012. Web. 4 Oct. 2014. <http://www.na-businesspress.com/JABE/KatkovA_Web13_3_.pdf>.

Verick, Sher, and Iyanatul Islam. “The Great Recession of 2008-2009: Causes, Consequences and Policy Responses.” Index of /. N.p., 2010. Web. 4 Oct. 2014. <http://ftp.iza.org/dp4934.pdf>.