Custom «Economics: The Great Recession» Essay Paper

Abstract

The Great Recession is one of the biggest economic crises of the current generation. It mostly started in the USA and then undermined the economy of the whole world. The research paper reveals the main factors that contributed to the beginning and development of the economical crisis of the 21^st century. It shows the main negative effects and consequences on the common workers and businesses. It tells about measures that were taken by the countries in order to reduce its harmful effect on the global economy and population. 

The Great Recession

The situation in the world economy in the end of the 2007 was very unstable and dangerous. It led to the financial crisis of 2008 called Great Recession. The next few years became difficult for many businesses all over the world. Especially, it was a hard period for small businesses and entrepreneurs who only took a credit for the formation of new business companies. The global financial crisis of 2008 was the financial and economical decline which appeared in the September - October 2008 in the form of very strong deterioration of basic economic indicators in most developed countries. It was followed by the global recession at the end of that year. The predecessor of the 2008 financial crisis was the subprime crisis in the U.S. It was the first sign which appeared in 2006, in the form of reduction in the number of house sales in early 2007 escalated into a crisis of high-risk mortgage loans. Pretty quickly credit problems were experienced by reliable borrowers. In the summer of 2007, the crisis began gradually to transform from the mortgage crisis into a financial and affected not only the United States. Many people lost their jobs and unemployment rate grew up rapidly. The Great Recession was a global crisis that had a negative financial influence on many families all over the world.  

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The financial crisis is a sharp decline in the value of any financial instrument. During the 19^th and 20^th centuries, the most of the financial crises were associated with banking crises, and with panic, among the population. The term is also often applied to the situation in the stock markets, when burst so-called "economic bubbles". The last significant global financial crisis was experienced in 2008. The Great Recession led to the bankruptcy of large banks. Many banks were saved by the national governments. Quotes on the stock markets fell sharply in 2008 and early 2009. There was significantly reduced for companies the possibility of obtaining the capital for securities placement. In 2008, the crisis had a global nature and gradually began to manifest itself in widespread loss of production, demand and commodity prices, growing unemployment. These were difficult years for American workers and their families. The labor market faced a serious downturn since Great Depression. In the United States of America the unemployment rate significantly increased. “The unemployment rate more than doubled from 4.8 percent in the fourth quarter of 2007 to 10 percent in the fourth quarter of 2009 and remains at 9.7 percent in early 2010” (Katz, 2010). The crisis made the great effect on each group of workers. Most of all, it did damage to the young workers, non-college workers and workers who were related to goods producing industries.    

Many experts consider that the mortgage crisis in the U.S. was the first sign of the Great Recession. The mortgage crisis appeared in the form of reduction in the number of home sales, and in 2007 turned into the crisis of high-risk mortgage loans. Property prices in the United States have grown to the middle of 2006. After this, they began to fall due to the borrowers for whom it became much more difficult to refinance the loan. At the same time, interest rates on mortgage loans with a floating rate began to rise, resulting in an increase, in monthly payments. It led to a sharp increase in cases of default on loans. There were too many cases of mortgage lending to people with low income and poor credit history. As a result, there was a 20% fall in property prices (Hetzel, 2012). The mortgage crisis was not so dangerous to the global economy, but it worked out as trigger that started the other problems in the economy. Subsequently, the financial crisis in the U.S. has become the detonator of the global crisis. According to analysts, the U.S. investment structures, with situations on the domestic market, have started to dump their foreign funding, which caused the outflow of funds from new markets in developing countries. As a result of the crisis that emerged in the U.S., the world began to suffer from the recession.

The main reasons of the Great Recession are as follows: the general cyclic recurrence of the economical development; imbalances in international trade and capital flows; overheating of the credit market that especially was shown in the mortgage crisis. Here, it is also necessary to mention that the devaluation of the U.S. dollar during the period 2002-2008 led to a decrease in its use as a reserve currency in, a number of countries. So, even attempts to move to other currencies in international payments resulted in a crisis in some areas of the U.S. economy. Moreover, it also led to overheating in other countries, and the anomalous pricing in the commodity markets. Some contribution to the crisis made the high prices on the raw materials, including oil. It could be explained by the credit expansion. High raw material prices were due to credit expansion, which caused inflation. The credit expansion is the issuance from the accounts on demand. There is also other mechanism. The new money, created by banks for loans were not directed to the real economy, but on the various stock exchanges. It allowed the banks to manipulate the price of goods. 

According to some experts, the significant factor of the credit crisis in the United States of America was the widespread use of derivatives and the desire to improve profitability by increasing risk since the early 1990s. However, there is no clear analysis that would show that. In 2008 and 2009, most politicians and economists predicted a quick end to the crisis. However, there were those who spoke of the long-term nature of the crisis. In 2009, in most cases the predictions of the national government about the effect of the crisis on the economy were optimistic and positive than for economies of other countries. However, in 2011, the economists claimed that the crisis has a continuous nature ant tend to keep its development.

In order to reduce the negative effect of the economic crisis on the position of the global economy, there have been taken some measures. The most significant measures have been taken by the U.S. Federal Reserve System. From December 2007 to June 2010 the Federal Reserve System issued without the return 16 trillion credits to banks, corporations and governments at zero percent. Information on such a gigantic scale of these operations was not released by the Federal Reserve System due to the expected negative reaction from the Americans. Even Congress has not been informed. In 2008, on October 8, all the major central banks of the world, excluding the Bank of Japan and Russia, made the unprecedented decision to cut interest rates at the same time. The leaders of the fifteen countries of the European Union agreed to establish a system of state guarantees for loans taken by banks, as well as provide support to financial institutions that have problems.

Hence, the Great Recession made the significant impact on the global economy. It damaged many businesses and made developed countries cooperate their efforts in order to cope with crisis. Today, the global economy almost entered on the path to expected recovery. It has not got any rights for mistakes. However, there are some thoughts that the second wave of the crisis is unavoidable.