A students Point of View What is global recession?

Global recession or global financial crisis is a massive economic downfall that happens when the ratio of supply and demand is extremely distorted and the stocks hit the red zone. A good example is the 2008-2012 global recession. The 20082012 global recession, sometimes referred to as the late-2000s recession, Great Recession, the Lesser Depression, or the Long Recession, is a marked global economic decline that began in December 2007 and took a particularly sharp downward turn in September 2008. The global recession affected the entire world economy, with higher detriment in some countries than others. It is a major global recession characterized by various systemic imbalances and was sparked by the outbreak of the Financial crisis of 20072008. The economic side effects of the European sovereign debt crisis, accompanied with slowing US and Chinese growth continues to provide obstacles to world economic growth. (From Wikipedia.org).

The cause
There are many things that may lead to recession like hyperinflation, greedy banks, and how they were handing out credit and loans to people who really could barely afford them to begin with. Inflation rates started to creep up to quickly, and made it even harder for people to pay back loans and credit....thus, creating a slow meltdown effect. Hyperinflation occurs when a country experiences very high and usually accelerating inflation. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases rapidly as the functional or internal currency, as opposed to a foreign currency. It loses its real value very quickly, normally at an accelerating rate. Hyperinflation results from a rapid and continuing increase in the supply of money, which occurs when a government prints money or creates credits in bank accounts, instead of collecting taxes to fund government activities. The price increases that result from more government spending create a vicious circle, requiring ever growing amounts of money creation to fund government activities. Hence both monetary inflation and price inflation rapidly accelerate. Such rapidly increasing prices cause widespread unwillingness of the local population to hold the local currency as it rapidly loses its real value. Instead they quickly spend any money they receive, which rapidly increases the velocity of money flow, which in turn causes further acceleration in prices. Hyperinflation is often associated with wars or their aftermath, political or social upheavals, or other crises that make it difficult for the government to tax the population.

The effect
Companies going bankrupt is a common thing during recession (a good example is the Lehman Brothers) Four years ago, Lehman Brothers fell, sending shock waves through the financial system. Credit and lending dried up, many major financial institutions looked vulnerable, and the world economy slipped into a crisis from which it has not yet recovered. Indeed, the firefighting that was needed at that time led to a stressing of government balance sheets and build-up of debt that is the root cause of the second dip of what many now call the Great Recession. Over these four years, too, the reasons for the crisis have been deconstructed and analysed near-endlessly. Some of them poor regulation, irresponsibility in the financial sector, a lack of understanding of macro-prudential risk are now generally accepted as primary causes. It seems important to ask, therefore, whether these lessons learnt have caused reforms to be implemented. The answer, unfortunately, seems to be no. Indeed, the fact is that too little has changed since Lehman fell. Consider the questions of regulatory reform. Any hope of closer co-ordination between regulators internationally foundered on the desire of some countries to protect their competitive advantage in lax regulation. Even within individual countries, the lessons have not been applied. Regulators dealing with dynamic financial markets cannot always be tied down by legislated rules that are quickly out of date. Principles-based regulation does a lot better than rules-based legislation. Yet in the United States landmark legislative response, the Dodd-Frank Act, started with only 848 pages, has now exploded, with its rules, into being nearly 9,000 pages. Then theres the question of regulatory co-ordination, necessary to stop financial firms from shopping around for the most lax regime. The Sahara case in India demonstrates that regulators in this country the Securities and Exchange Board of India, the Reserve Bank of India and the corporate affairs ministry barely even talk to each other except at the highest levels. The dynamic between the state and financial markets has actually changed very little. States stepped in to bail out stressed financial firms and entire systems in the aftermath of Lehmans fall, expanding public debt dangerously. Yet the European Union, for example, can legitimately complain that this has not bought it respite from financial markets which immediately turned around to try and make money off the fact that government bond yields were diverging and increasing in consequence, precipitating the euro crisis. Further, given that public finances were key to recovery after Lehman, there was a wide consensus that plugging loopholes in tax collections and going after tax havens was a global necessity. Yet in India, as the outcry about the General Anti-Avoidance Rules, or GAAR, and the persistence of the Mauritius route have shown, financial markets have fought back against that consensus. Meanwhile, the states big monetary interventions of which the Federal Reserves various giant expansions are examples have had little enough effect on unemployment or bond yields, and have served only to prop up financial sector balance sheets and stock market indices, and drive up commodity prices sending India, in particular, deeply into crisis. The recovery has been expensive, and has disproportionately

benefited those who got the world into crisis in the first place. Worst of all, attention has drifted away from the perverse incentives and short-term thinking in the financial sector that was the biggest cause of the problem. Those remain completely intact. Four years after Lehman fell, its clones go from strength to strength.

The prevention
There are several things to try and avoid recession. Basically, the government and monetary authorities need to try and increase aggregate demand (consumer spending, investment, exports). There is no guarantee that they will work. It will depend on the policies and also the causes of the recession. For example, it is easier if the downturn affects just one country. In a global downturn, you are more subject to the fate of economies. If the recession is caused by very high interest rates, then cutting interest rates may help avoid a recession. But, if you have a large fall in asset prices / bank losses (often called balance sheet recession) it is more difficult because even if you cut interest rates, banks may still not lend.

Policies to avoid a Recession 1. Cutting Interest Rates. Cutting interest rates should help to boost aggregate demand. Amongst other things, lower interest rates reduce mortgage interest payments, giving consumers more disposable income. Lower interest rates also encourage firms and consumers to spend rather than save. (Effect of lower interest rates) As well as cutting base rates, the monetary authorities could try and reduce other interest rates in the economy. e.g. the Central Bank could buy government bonds or mortgage securities. Buying these bonds causes lower interest rates and helps to boost spending in the economy. However, lower interest rates dont always work. In 2008- 09, interest rates were cut to 0.5% in the UK, yet it didnt avoid a recession. This was because

Banks didnt pass the base rate cut onto consumers Although interest rates were low, banks were reluctant to lend and consumers reluctant to spend.

This is known as a liquidity trap In 2011, there is the prospect of a second recession, but interest rates are already low. Therefore, in this case it is not helpful.

2. Preventing Home repossessions. Home repossessions can cause bank losses and falls in consumer spending. The government may try to freeze mortgage rates to preventing house repossession. (E.g. Effects of Freezing subprime rates )Also, the Federal Reserve 3. Expansionary Fiscal Policy. Cutting taxes increases consumer disposable income. This can be a policy to increase consumer spending. However, it will cause higher government borrowing. This may not be practical for countries who are already seeing a rise in government bond yields (e.g. Euro members like Greece, Ireland and Italy, have little scope for expansionary fiscal policy) Also, there is no guarantee tax cuts will boost spending if confidence is very low. Can tax cuts avoid a recession? As well as tax cuts, the government could try higher government spending on capital investment projects. This directly injects money into the economy, it may be more effective than tax cuts, if tax cuts are just saved. 4. Devaluation. A devaluation in the exchange rate can cause a boost in aggregate demand. A fall in the value of the dollar, makes exports cheaper and imports more expensive increasing domestic demand. (See: effects of devaluation) However, in a global recession, demand for exports may be quite inelastic. Also, in a global recession, countries may begin competitive devaluation. This is when several countries try to gain a competitive advantage by devaluing currency against others, but it proves self-defeating. 5. Quantitative Easing if interest rates are already zero, then the Central Bank may have to pursue unconventional monetary policies. This involves the Central Bank electronically creating money and using this money to buy long dated securities. This increases bank reserves and should help encourage bank lending. Also, it reduces interest rates on bonds which should help encourage spending and investment. See: Quantitative Easing explained 6. Higher Inflation Target. This is a conscious decision to target growth rather than inflation. See: Optimal inflation target

The next recession

It is not impossible to experience another recession. Since money is the root word of recession, as long as money is circulating there will always be a chance for another recession. Resistance is futile against recession, we cannot avoid it but we can survive it.

We must be prepared for the next recession for we do not know when it will next occur and for how long it will last. Who knows what lies ahead so a bit of preparation never hurt. The following tips may help endure a possible recession, depression or other unforeseen calamity. It never hurts to be prepared. Below are some things you can do to survive the next recession: 1. Create a cash cushion. See a financial planner for advice and assistance on how much money to save for family emergencies. A good rule of thumb is to stash away at least three months salary as a financial cushion. 2. Save 10 percent of your monthly paycheck to help build up your financial emergency cushion. 3. Determine your net worth. Tally both assets and debt. Subtract the two and the result will be your net worth. Assets: Home, car, savings, savings bonds, money market funds, mutual funds are all examples of assets. Liabilities: Charge card debt, outstanding bills, outstanding mortgage balance, car loans and property taxes are all examples of debt. 4. Live frugally.