My views on Recession!

There is an old adage “When there are six Economists, there are seven views”

My own belief : Economists are just like historians, who can never predict and learn from the past, on the occurrence of some incident they learn from it and then propound new theories “that in such circumstances if blah-blah steps would have been taken, it would have prevented recession.”

Why do you need so many economic theories if it does not work when required, either for the sake of showing intelligence or being known as an Economist, having passed out from big Universities.

Capitalist knows how to make money and more money; they will make it with their innovation, creativity and will pull back economy back to its growth level. They require resources that work for them and they know how to make them work.

For them, Recession is a part of business cycle when they put maximum efforts to move away from it many failed also, but at least they tried. And those who are not in business just speak and give suggestions.

Is this a Recession or a Correction.? Is Recession good or bad? Layman knows that when recession comes, growth ceases and sometime becomes negative meaning that no salary hike, no bonus rather on  the contrary may be, a cut in salary or income. Everyone perceives that we are going through bad times, even those who are not impacted by it. Why then all media , which is showing  that the world is in recession (television/ newspaper) putting so much impact on our mind? What comes through media is considered accurate, reliable, and authentic and we start believing it. Media shows us some economics figures like GDP, per capital income etc comparing the same with previous years.

One can infer from statistics that we are passing through Recession, GDP growth is below zero, unemployment rate is increasing, housing prices are down by around 30%, mortgage taken for home in some cases is higher then asset value and many more indicators reveals recession is on. It was started in US in 2007.

At present are we in business cycle phase called Recession.  Three main reasons for its cause are:

1. Regulation

Entrepreneurs run the economy and their main dictum is always to make profit. They make profit by adopting any method, means etc, certainly the chances to run the business unethically are more and this can only be curbed through regulations. Government with a view to encourage more business has reduced regulation, which rather have led to entrepreneur governance. Free trade theories and few regulations don’t work evident by credit crunch, hedge funds nondisclosures, tax liability of private equity firm, rating agencies failures, home loans, audit firms bad audits etc. Judicious regulations are required to control entrepreneur’s governance.

“Today’s spending on future income”.

All Consumer Durable Companies, Auto Majors, Retail outlets sell their products depending more upon Credit cards/ loan taken by individuals, which infact is the future income of individual rather their current income. Apparently, fewer saving and more spending. As we know US household savings in the last preceding year was –ve, so……….  even amlayman can suggest that here something is wrong, where are the economists at this point??

Here also so called Economist would come with n number of theories that even -VE savings are good.

2. Where is the money?

It is all digital money, which in fact is prevailing in the market, borrowed by most business houses and in turn by consumers in terms of credit card, auto loan etc. This all digital money in reality does not exist. It is not real, it is manufactured/ created. What money is loaned out is what money is owed. If economy is running on such money eventually it is bound to fail.

3.Collateralization on Collateral

Securitization is the process through which an issuer pools various financial assets and in turn creates a financial instrument to be issued to investors which can be repaid through cash flows of such pooled assets. This promotes liquidity in the marketplace and more important risk spreads more widely as risk remains attached to the income from such financial assets not to institutions as whole.

However, this has not happened in reality.  It proved to be wrong. Securitization used by Banks and other financial institutions rather increases their risk and not reduce it which, in turn, made the economy more vulnerable to financial disruption. Banks instead of taking these securitized bonds off the balance sheet,  kept it on and balance sheet are now having big figure’s which would have been smaller.

These three causes are required to be sorted to put economy back on track.

Is Recession good?

In short term, it really has an evil impact, unemployment rate is increasing, people  are defaulting in paying  of loans. However, in the long run, things will change.

<!–[if !supportLists]–>1.      <!–[endif]–>It makes companies tougher, committed.

<!–[if !supportLists]–>2.      <!–[endif]–>Strict regulation and supervision by regulators will put financial institutions on right governance. More so, the question of privatization of regulators would cease to exist as it was in news earlier.

<!–[if !supportLists]–>3.      <!–[endif]–>Most important household savings will be enhanced and individuals would now be discouraged from using credit cards and taking loans.

If such sentiment continues, the business would soon be back on track. Government would be compelled to play vital role, Central banks will use their old weapons of adopting of Monetary and Fiscal policies i.e. infusing lot of money in economy, reducing rate of interest, Nationalization of banks etc. What should general public do ? Easy solution is to cut down the expenses, but will this help  the economy? surely not!! In such financial crisis, only the one who has the courage and motivation to climb, can help economy. Together entrepreneurial spirit can energize the world by sprouting small businesses. Business growth is not only dependent on earnings but also connected to quality of management, new ideas and innovation.

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