The Economic Recess of 2008

The Economic Recess of 2008

            Other than the great depression of 1930, reports suggest that the world’s economy came to face its most dangerous crisis in 2008. It had remained undisputed that the recession began the previous year when the prices of sky-high home in the US turned down as well as spreading quickly starting with the whole of US financial sector and later to the financial markets overseas. Studies assert that the catastrophe affected the industry of investments and banking, insurance companies, mortgage lenders among other areas of the economy. Other than the financial sector, the carnage ensured that companies that relied on credit, as well as the American auto industry, were similarly dragged into the pit with the rest. Research conducted in 2009 indicates that the share prices plunge was felt throughout the world for instance in a company such as Dow Jones in the US averagely lost 35.8% of the shares’ value in 2008 (Marek, 5). Furthermore, the report concludes by stating that by the end of 2008, the recession that had been growing deeper and deeper had enveloped the entire globe. This paper aims at reviewing the impact of the US economic crisis of 2008 on the world market, and its impact on US ability to make sovereign decisions.

Economies overseas each in their manner resembled the American economy. By the end of 2008, states such as Japan, Germany, as well as China had been locked by the economic recession. For other developing countries around the world, the effects of the recess were felt even more as most of these countries lost markets abroad where they could export or import their products (Divino, 20). Besides, the foreign investments which most of these states depended on for their growth, ended up withering leaving them in a situation of helplessness. During this crisis, none of the big economies was prosperous throughout the globe, and for this reason, the world lacked an engine that would save it from the recess (Marek, 5). Researchers, as well as private and government economists, came to a similar conclusion which was a prediction of the worst recoveries. With the recess questioning the financial globalization, it single-handedly amplified the risks associated with financial markets as well as banking activities, bringing about imbalances in the finances of the forefront economic powers.

During this economic recession, the European Union responded swiftly with an increase in the amount of government borrowing that was initially offset by the expenditure cuts as well as the packages or raised taxes. A study conducted on the effects of the crisis on the European states indicates that the financial recession resulted in a substantial worsening of the underlying strength of Spain and Ireland’s public finances. Even though the adverse effects were less severe in the European Union, Italy, France, as well as the UK, witnessed the weakening of their public finances with the percentages ranging a little over 7%of the GDP (Divino, 20). This implied if these states had not taken any policy action, they would end up in a position that would require them to continuously borrow over 7% of the GDP for the rest of their years. It is also evident that Germany remained unaffected in a long time by the crisis. To Germany, the recession seemed like an increase in the borrowing which was temporarily followed by a quick return to normality.

In most cases, globalization has been associated with political factors that are the basis for the formation of trading blocs as well as the participation of the various countries in international trade treaties. The impacts of a weak global economy on politics is based on the fact that the recess in the economy or its weakness is associated with the persecution of political integration via shortages in the food market as well as the nutritional changes that are associated overweight conditions of the same(Goryakin et al, 67). It has been noted that for greater political integration in the globe, more profound economic progress in the regional level is key through which mechanisms such as trade barriers that are formulated to protect individual countries from the effects of weak economies are activated. Recently, economists have concluded that since the political manifestations of all developing countries are difficult to predict, it is, therefore, possible to assert that the globalization of politics tends to act independently based on economic forces.

In most cases, government bodies are forced to make changes on their spending, budgets as well as investments to correctly respond to the economic condition that is currently on play. Therefore, the regulations of governing bodies on the economy is primarily employed to engineer the growth of the economy as well as the prevention of the negative consequences of the economy in case it is in a weak state or is in recess. Keynesian economists recommend that the respective governments are experiencing the effects of a weak economy to lower their interest rates to encourage the restoration of the economy through borrowing and lending mechanisms (Marek, 5). Since the weak economies are associated with high inflation, governing bodies opt to raise the interest rates to counter this problem through the use of government policies such as tax incentives. The integration of such strategies shows the interests of the government in attempting to preserve certain precious economic conditions to ensure further economic progress which is essential to the public as well as stakeholders.

Based on the economic status of the state, consumers, as well as their representatives, may decide to choose to delegate the allocative decisions to the government. In the case where the economy is weak or is in recess, the government abilities in making sovereign decisions are adversely affected rendering the government incapable of making critical decisions that concern the entire public (Goryakin et al, 67). The strength to make sovereign decisions is favored by factors such as the over-reliance of imperfect information by the government, similarly, the government lack proper information concerning the externalities that are in play to be able to avert the current situation. Last but not least, most of the governments during an economic recess are characterized by a non-rational behavior towards the impending horror.

Weak economies in the US have been categorized as catalysts with amplifying effects on the current world stage. This is so because economists have concluded that a weak economy is a period when companies should be more vigilant and alert to ensure that proper controls are employed to mitigate and identify the exact causes of the recess. For instance, if a company whose sale is to be reduced by 12% as a result of the weak state of the economy and the rise of competitive firms, the company bears in mind that after losing a market, with the correct sales databases, the firm has an added advantage of securing a new market (Marek, 5). Since large percentages of the unemployment rate characterize the current world stage, a weak economy ensures an absolute rise in these rates. This is because, most of the employees are retrenched, leaving them in a position where they can’t make both ends meet as most of the necessary goods and services are above their reach.

Research conducted in 2012 asserts that recession or weakness in an economy is havoc to economic growth as well as development. To support this statement, the report proves that a recession slows the economy at a rate of 37%. In this case, most of the investors are hesitant to invest in firms that might succumb to losses during the recess and the producers are left in a state where they are not able to churn out their services and products (Divino, 20). As an accompanying fact of high standards of living, customers lack the necessity to purchase the expensive goods that are scarcely available in the market. The lack of purchasing power means continued suffering from the production sector.

The current instabilities in our sovereignty can be based on several factors that have recently come to light from a study that was conducted recently. The chief of all changes responsible for this condition is the sudden change in the ability to formulate new and advanced credit lines which single-handedly dries up the slows the rate of economic growth, the flow of currency as well as the buying and selling of assets on the international market (Marek, 5). The effects of this horror trickle down to the root of the economy affecting financial institutions, individuals as well as businesses leaving them in possession of mortgage assets whose value had precipitously dropped lacking the necessary funds to repay any loans that were still due (Goryakin et al, 67). The reason as to why our sovereign is affected in some fashion is because most of the institutions have been saddled with mortgage securities that are generally risky that cannot afford an extension to new credit. Since the loans each of these firms owe doesn’t bring any positive cash flow, the institutions can’t survive for long. They are resulting in a fall that resembles that of Washington Mutual among other institutions.

In conclusion, from the evidence availed in this paper, the financial crisis framework that was in play before the 2008 financial crisis proved severe cases of under development in the economic sector. This statement suggests that if otherwise, the crisis could not have happened in the first place. Since then, measures and policies have been put in place to refabricate and redesign financial supervision and regulation around the globe with the aim of preventing a future crisis. It is evident that the creation of crisis prevention policies is aimed at imparting confidence in developing states in averting their predicaments. Cases of premature withdrawals of stimulus policies should be highly avoided despite the presence of an exit strategy that is ready for employment. This exit protocols, however, should be an integrated framework policy that is broad and one that entails the enhancement and growth of economic structural reforms.

Works Cited

DIVINO, JOSE ANGELO. “WHAT IMPACT DOES INFLATION TARGETING HAVE ON THE REAL ECONOMY OF DEVELOPING AND EMERGING         COUNTRIES?”. Annals Of Financial Economics, vol 13, no. 03, 2018, pg. 20. World          Scientific Pub Co Pte Lt, doi:10.1142/s2010495218500124.

Goryakin, Yevgeniy et al. “The Impact Of Economic, Political And Social Globalization On         Overweight And Obesity In The 56 Low And Middle Income Countries”. Social Science      & Medicine, vol 133, 2015, pg. 67. Elsevier BV, doi:10.1016/j.socscimed.2015.03.030.

Marek, Petr. “Financial Crisis, Fall And Financial Theory”. European Financial And Accounting   Journal, vol 2008, no. 4, 2008, pg. 5. University Of Economics, doi:10.18267/j.efaj.86.