The Current Scenario And Its Causes Economics Essay

INTRODUCTION:

The current picture of the economic and financial state has caused a huge literature study evaluating its origin and how to respond with the pertinent strategy. Before going in depth let us discuss about general financial crisis [1] ( Charles,P et al 2005) . The situation can be termed as an economic crisis when a financial institution or an asset lose a large part of its value. It takes many factors into account when defining a global recession, but the International Monetary Fund (IMF) states that general recession can be declared when the worldwide economic growth is 3 percent or less than that [12] (Rogoff,K.2002).

FINANCIAL CRISIS- AN OVERVIEW:

Financial crisis occurs when there is a sudden drop in market after a steady growth. It can be said that, it is the harbinger for the decline of market. Due to the volatility of the market and economic growth, this becomes the crux of the financial crisis. Stocks and real estate properties will reach the rock bottom after a period of growth. When the investors predict the market and invests in any sector, due to the market instability, the demand of that investment may decrease and their value of the estimation substantially diminishes. This trend follows a period and significantly investors’ huge investment does not return the expected revenue and this in turn affects their loan payment. They abruptly stop further investments and they begin to sell assets. [2] ( Aiginger,K. 2009) This trend persists in individual’s private income too, they also follow the same practice by selling their assets and luxury objects.

Over-optimistic companies and such individuals are the main cause for the crisis during the preceding economic growth epoch. They lean to believe that the general market growth will persists forever without any suspension. This optimism makes everyone to borrow colossal quantity of principal and invest them in homes, luxury objects and expansion of their business. Another cause are executives in banking companies tempted to lend out as much money as possible to the borrowers, regardless of the consequences for the bank and the borrowers, because this behavior gives the executives an enormous short term personal gain. When the supply decreased, the demand too got reduced. Hinder all the financial institution which lends out more money to the borrowers who pays back when they are comfortable [7]( carmassi et al, 2009). The government should interfere and has to lay proper regulations to set clear criteria that must be satisfied when the money lending process is done. Employment contracts for the bank executives should be forbidden by the bank which rewards them directly for the amount of mortgages they establish.

When did it happen?

The global financial crisis hit when there is a blooming economic trend persists. It happened in number of occasions, but the Great depression (1930) and the current financial crisis (2007-2010) are the core calamities which collapsed the global economy. [1] ( Charles,P et al 2005)

THE CURRENT SCENARIO AND ITS CAUSES:

The current financial crisis period started during 2007. It is the worst economic meltdown since the Great depression. The collapse of the US sub-prime mortgage market and the housing boom turnaround had a ripple effect around the world. Some financial goods and tools have become so difficult and abnormal, and things start to disentangle. The trust in the whole system started to fail. The origin of this present state is due to the extravagant lending of money by banks which permitted various groups to buy expensive assets that they could not afford. This was welcomed and encouraged by the politicians and was cleverly sold by the middle men. This created the trigger for the current scenario [9] ( Cooper,G. 2008) .The survival of excessive land use regulation which helped to drive up the prices. Innovations and internationalization are also cause for the regulation failure. Oligopoly structures in the agencies, insufficient regulation followed in the market, neglected cumulative systemic risks are the additional grounds involved in this trigger. Heterogeneity of profits across businesses, novel forms of equity standards, leveraging of banks, the firms and consumers are the factors which caused misinterpretation that the expected returns will be high. Bubbles in currency, oil and food shortages, short-term view on profits, inappropriate accounting rules and analyst’s reports, shortages of raw materials, energy deficit and unequal income and wealth distribution are the other aggravating factors which influenced the crisis [7]( carmassi et al, 2009). Consequently the demand decreased as the supply increased. This forms the nucleus of the present crisis.

EFFECTS:

As a result of this, unemployment increases and companies’ lay-off the employers in order to muddle through this recession, many banks filed bankruptcy and shortage of food supply too had its effects. The Gross domestic product (GDP) of the world declined for the first time since the Great depression of 1930. World economy growth dropped from 5% in 2007 to 3 % in 2008. USA and Europe economies already shrank during 2008 last quarter and those GDP from 2% to 4% [2] ( Aiginger,K. 2009). During the first quarter of 2009 production and orders declined when compared to the previous years. In order to compensate the cutback in the stipulated private sector caused by the crisis, the government passed large fiscal stimulus. During 2008-2009 alone US implemented two stimulus packages, totaling nearly $1 trillion [3] [2] ( Aiginger,K. 2009). The government has also bailed out many organizations due to large financial obligations. About 70% of GDP growth attained in the euro area and 40% of the same in the US due to the financial sector leverage [7]( carmassi et al, 2009). This is the key issues for the prevalent pressure in the European banking system. United States may be precursor of this current scenario, but the fragility persists in the European financial sector caused them badly and exposed to losses from US assets. An additional feature that made Europe more exposed to the crisis situation like the US is asset price bubble [7]( carmassi et al, 2009). Europe experienced the same real estate price bubble. During 2006-2007 house prices are less in US when compared to Europe, this is the key distinction involving the United States and the Europe [7]( carmassi et al, 2009). The banks in United States and Europe had excessive leverage and also the renovated maturity which are mistakenly manipulated by the regulatory system and allowed by the monetary policy.

AGE WAVE THEORY:

The additional cause for this economic slowdown was given by Ken Dychtwald, Ph.D in his Age wave theory [4] (Dychtwald, Ken, 1989). According to him, the persons who were born during 1947 to 1966 are called as baby boomers. According to the statistics the economic trend suitably followed as the baby boomers grow. Baby care books sales recorded a high during those initial years. Baby foods were consumed more during 1950s. The toy industry sales also reached record growth as the children grows. When they reached the teenage soft drinks sales and movie tickets sales reached the maximum. When the boomers enter the workforce during 1970s there was a record growth of 29%. Mini vans and SUVs dominated the automobile industry during 1980s and 1990s as the baby boomers started to raise their families. During 2007-2009 the workforce growth is just 12% due to the retirement of the baby boomers , and this may also be one of the reasons which kindled the crisis [5] (Dychtwald, Ken et al 2006).

FUTURE REMEDIES:

In order to tackle future recession, the UK government needs to follow some regulations. The economic policy should support the total demand by increasing the public demand or by providing inducements to encourage private expenditure [2] ( Aiginger,K. 2009). Monetary policy should be reintroduced to increase the money supply which has reduced interest rates. To improve the structure of taxation, fiscal policy is to be followed. It includes national and international stimulus packages. The European model to be followed [2] ( Aiginger,K. 2009), it includes strategic spending i.e., to invest in future technologies, education, research and development and green technology.

Government and financiers should try to compress the scam and increase the capital requirements for banks .They also should follow the regulations and it would be compelled to hold sufficient funds to cover their normal operations. In order to reduce the jeopardy, the bank should bear all the risks and also increase their transparency, their accounting ethics are to be modified accordingly and also to be included in the asset definition. It is crucial that the current land rationing policies should wither as soon as possible. Capital requirements are to be set adequately so that it cannot be evaded by the mediators to raise liquidity [8] (Minsky, H. (2008) .The simple way of doing it is to set capital requirements with reference to total assets and no gimmicks allowed.

The main cause for the delude information for investors and obstinate incentives are the assets with maximum risk. [6] (Gros, D. (2009). These assets should be scrapped to maintain the economy. The government should provide guarantees by affording small pensions and loans and also it should fight poverty by employment. The youth unemployment problem can be tackled by training and also making informal jobs more professional. By increasing the choices the supply and demand stability can be maintained. These aforementioned strategies are to be followed by the UK government in order to maintain the stability and also to prevent the arrival of the current scenario [10] (Greenspan ,A. 2009).

CONCLUSION:

Brian Cowen, the former finance minister says that, “If I am right, the next financial crisis, when it comes, stands to make the last two years look like a ‘warm up” [11]. So the optimism and complacency natures should be discarded and follow the policies and also the remedies as mentioned above to restore the trust and balance in the system.