Essay: The Great Recession: A Global Economic Downturn

The crisis which erupted in the financial system of developed countries in the autumn of 2008 quickly affected all economies throughout the world. The Great Recession was a global economic downturn that devastated world financial markets as well as the banking and real estate industries. The crisis led to increases in home mortgage foreclosures worldwide and caused millions of people to lose their life saving, their jobs and their home. The unemployment rate jumped from 6.1% in August 2008 to 9.5 % in 2010. Hundreds of thousands of American who had significant portion of their life saving, lost most of it all in the stock market catastrophic financial loss. It was considered to be the longest period of economic decline since the Great Depression in the 1930s. The most extreme Great Recession in the Unites States originated as a result of the subprime mortgage crisis in Western Europe. Subprime mortgages are home loans granted to borrowers with credit histories. Their home loans are considered high risk loan. By then, as the subprime crisis continued, housing prices across the country began to fall, due to a glut of new homes on the market, so millions of homeowners and their mortgage lenders were suddenly underwater, meaning their home were valued less than their total loan amounts. With the American economy teetering, The U.S Federal reserve has begun taking action by reducing the national target interest rate, which lenders use as a guide for setting rates on loans. For example, interest rates were at 5.25% in September 2007. By the end of 2008, the Fed had reduced the target interest rate to 0% for the first time in history in hopes of once again borrowing and, by extension, capital investment. However, this was not enough so the government and the Fed, should have accompanied this lowering target interest rate with a stimulus package, which was signed by President Bush in February 2008, called the Economic Stimulus Act into law. The legislation provided taxpayers with refunds ($ 600 to $ 1200), which they were encouraged to spend; reduced taxes and increased the loan limits for federal home loan programs. Furthermore, this Stimulus Package provided businesses with financial incentives for capital investment. However, despite the government’s good intentions to save the economy, the economic problem was very large, and in March 2008 investment banking giant Bear Stearns collapsed. Within a few months financial behemoth Lehman Brothers declared bankruptcy, for similar reasons. By January 2009 with a new administration in the White House, President Obama had to deal with the old financial problem of the previous government. One achievement in the Obama presidency was the Dodd-Frank reform which enabled the federal government to assume control of banks deemed to be on the brink of financial collapse and by implemented various consumer protections designed to safeguard investments and prevent that banks who provide high interest loans to borrowers who likely will have difficulty paying. Although the Great recession was officially over in the United State in 2009, among many people in America and in other countries around the world, the effects of the downturn were felt for many more years. Indeed, from 2010 through 2014, multiple European countries, including Ireland, Greece, Portugal and Cyprus, defaulted on their national debts, forcing the European Union to provide them with bailout loans and other cash investments. These countries were also compelled to implement austerity measures such as tax increases an cut to social benefit programs, including healthcare and retirement programs, to repay their debts. China, on the other hand, not only adopted a serious fiscal stimulus package but was also successful in spurring job creation and infrastructure buildup. As a result, it recovered the fastest. Since the Great Recession and the subsequent global crisis, world output has grown moderately, yet the path of economic recovery has been fragile and different. However, the coronavirus outbreak, which has put the global economy under a lockdown, is being compared to the 2008-2009 downturn. But in some industries, the virus may have already caused the biggest meltdown in history. Mainly in China, the world’s factory. Other industries like the aviation and oil industry were suffering. British Airways CEO Alex Cruz described the situation as a “crisis of global proportions look no other we have known” “Some of us have worked in aviation through the global financial crisis, the SARS outbreak and 9/11. What is happening right now as a result of COVID-19 is more serious than any of these events”. The Global financial crisis was kind of endogenous in the economic system meaning that there was a strong capital stock distortion in some countries and there was a problem of ever-indebtedness. These two roots of a crisis are much harder to cure than the situation that we are facing today where we have an interruption of production structures. Which in principle are fundamentally sound, Stefan kooths, head of forecasting at the Kiel Institute for the World Economy, said “So, even if the coronavirus crisis leads to a deep meltdown in terms of production, the chances out of this recession rather sooner than later are much better than in the global financial crisis ”. The financial system and the economy seem stronger today, but the world is full of risks. Now is a good time to prepare for the worst. And as a great philosopher said: “If you want peace, prepare to war”.