According to Cadieux and Conklin,the 2007 recession started in the USA and spread around the world. It has been documented as the worst recession since the 1930s and the economic lapses of late 70s and early 80s (Kaiser). Not so many people anticipated this recession; therefore, the world was ill-prepared for it (Veric and Islam, 4). For instance, hours before its outbreak, the OECD region predicted growth for the remainder of 2007 and 2008 (4). It is amazing, how a turbulent period in the US housing market turned out to be a full-blown global recession (4). A study by Veric and Islam claims that loose monetary policies, global imbalances and lenient financial regulations were some of the factors responsible for this recession (Veric and Islam, 3). Additionally, its impact was diverse and cut across all spheres of the global economy. For instance, the global financial systems were on the verge of collapse while unemployment rose drastically (Cadieux and Conklin). Consequently, economic growth and demand for goods and services declined (Verick and Islam, 4). In an effort to save the situation, Governments responded by establishing measures aimed at mitigating the impact of the recession. For instance, enormous stimulus and bailout packages were offered to the main players in the economy such as financial institutions (Cadieux and Conklin). This paper provides an insight into the events surrounding the economic recession of 2007 and the possibilities of another financial crisis in the future.
Most people believe that this recession’s first casualty was the collapse of the Lehman Brothers in 2008 ((Verick and Islam, 21). Subsequently, the US financial system collapsed before the crisis quickly spread worldwide (Wise Geek). Only China and India emerged unscathed by this economic downturn (Verick and Islam, 6). The US plays a pivotal role in the global market trading and financial industry. For that reason, a financial hitch within the US has far-reaching consequences globally (Wise Geek). This strongly supports the notion that, ‘when the US sneezes the whole world catches a cold’.
Veric and Islam reiterate that factors which brought about this recession were complex and interconnected (3). To start with, intellectuals within the economists and policy makers failed to predict it (Verick and Islam, 4). Some scholars such as Baker, who foresaw it, were very few and, thus, attracted little attention (Baker, 1). As a result, the world was caught napping by this crisis. Surprisingly, for much of 2008, the severity and progression of this crisis were still in doubt (Verick and Islam, 4). Consequently, growth forecasters such as the IMF and World Bank were forced to revise economic growth rates downwards in 2008 and 2009 when its magnitude grew (4). An earlier sign of the recession was the huge current account deficit in the US and other advanced economies financed from investment and savings by emerging economies (4). Additionally, loose monetary policies, practiced mostly in the US, during the 2001 economic lapses were also partly to blame (4). Furthermore, misperception of risk and sloppy financial regulation were other factors that greatly contributed to the recession in 2007 (4). It can, hence, be concluded that economists and policy makers played an integral role in the origin of this financial crisis. They were unable to forecast it and, subsequently, underestimated its magnitude.
The consequence of this recession to the economies and ordinary people could not go unnoticed. Firstly, the global financial system was on the verge of collapse as liquidity quickly dried up and economies recorded reduced growth (Verick and Islam, 4). Moreover, ordinary people lost jobs as this crisis evolved into a global employment crisis (Verick and Islam, 6). This was because the national deficits and debts created by the stimulus and bailout packages affected the real economy and trade flows (6). According to Cadieux and Conklininterest’s rate dropped close to zero while money supplied increased. As a result, inflation increased raising the prices of basic commodities. This further burdened the ordinary person, especially, the unemployed. There was also a rise in household defaults and a fall in mortgage prices (Mian and Sufi, 2). The Wise Geek website adds that it is difficult to comprehend the effects of the 2007 recession as it still hampers economies to date. Additionally, in countries without social security schemes, millions continue to be dragged into poverty by this recession (Verick and Islam, 4)
To curb this crisis both developed and developing countries reacted by injecting more credit into financial markets and nationalizing banks (Verick and Islam, 4). Furthermore, interest’s rates were lowered and stimulus packages offered (4). In this regard, loans, equity and guarantees were offered to banks and individuals given tax rebates (Cadieux and Conklin). As a result, national deficits and debts rose, and money supplied increased(Cadieux and Conklin). However, in most cases, these policies only partly offset this recession (Verick and Islam, 4). Maybe, if the trade markets were not interlinked, this recession could have been easier to contain (Wise Geek).
Verick and Islam predict another recession if the stimulus packages offered are withdrawn prematurely and the emerging global imbalances are not checked (3). Besides, it is argued that if the population and economies continue to grow at the same rate, the world will face another economic collapse(Pfeiffer). This is because essential resources are being consumed at an alarming rate (Pfeiffer). Furthermore, markets are falling and unemployment, in most countries, is on an all-time high (Schuman). Of special interest, is the intensifying Euro zone debt debacle (Schuman). For example, Greek, Italy and Spain’s economies are on the verge of collapse (Schuman). Interestingly, high inflation is forcing emerging markets such as China and India to slow down their vibrant economies (Schuman). These factors, combined with elevated oil and food prices, are clear signs of a looming recession.
It can, hence, be concluded that the 2007 recession was felt by all economies around the world: the advanced and developing (Verick and Islam, 6). The most obvious outcomes of this recession are summarized by the four factors that define a recession (Mian and Sufi, 2). These factors include the rise in household defaults, fall in mortgage prices, drop in consumption and increased unemployment rates (2). In addition, these factors signal an ailing economy. Therefore, to avoid the recurrence of the recession, there should be a willingness to deal with public debts and global imbalances in the earliest time possible (Verick and Islam, 3). In 2007, American policy makers and economists ignored the signs of a recession and had to face the full wrath of it later (Schuman). Hopefully, the world will not just watch as the Euro Zone crisis intensifies as it may turn into a global crisis.
Baker, Dean. Recession Looms for the U.S. Economy in 2007. 2006.9th June 2011
Cadieux, Danielle, and Conklin David. The Great Recession, 2007-2010: Causes and Consequences. 2010. 9th June 2011
http://hbr.org/product/the-great-recession-2007-2010-causes-and-consequen/an/910M08-PDF-ENGKaiser, Emily. “Recession Started in December 2007: Panel”. Reuters 1Dec. 2008. Washington (Reuters). 9th June 2011
Mian, Atif and Sufi Amir. Household Leverage and the Recession of 2007 to 2009. 2009.9th June 2011
Pfeiffer, Eric. Next Great Depression? MIT Study Predicting ‘Global Economic Collapse’ by 2030 Still on Track.2012. 9th June 2011http://news.yahoo.com/blogs/sideshow/next-great-depression-mit-researchers-predict-global-economic-190352944.html
Schuman, Michael. Global Stock Selloff: Is Another Financial Crisis Coming? 2011. 9th June 2011
Wise Geek. What is the Global Economic Crisis? 9th June 2011