The Current Recession- A different view!
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Overview
In economics, a recession is “a general slowdown in economic activity in a country over a sustained period of time” but it is not necessary that every macroeconomic indicator points toward this at a particular time.
As per IMF, whenever global growth rate is less then 3%,(though it is not accepted globally) it’s a global recession and it seem to be happen over a period of 8 to 10 years(remember last global recession was financial crisis of 1997 which lasted until 2003 ?).
We often used to compare the current situation to the Great depression of 1929. But there is a difference in Recession and Depression. Many economists defined depression as “a sustained, long downturn in one or more economies”. The current recession is just one year old. So we can not label it as depression.
The roots of current recession are in the Sub prime crisis of United States but it is not the first time when US real state market has become so much speculative. It had happened there in 1830s. This bubble burst on 10th May 1837 when all banks of New York stopped payment in gold and silver coinage. This then resulted in 5-year long severe depression. Within 2 month of the onset of this recession- Out of total 850 banks, 343 banks failed (remember there was no central bank in US in 1837 unlike this time to rescue).
We are also often used to believing that the Great depression of 1929 has been the most severe and longest. No, it is not. The most severe and longest depression is of Great depression of 1873 which lasted until 1896 – Around 23 years!. During this depression, US had recorded economic contraction for 65 months continuously which is still a world record.
Current recession
The current recession began in 2007 with the onset of Sub prime Mortgage crisis. But crisis remained at a low level until Lehman Brothers filed for bankruptcy. After that, it became a full blown crisis and bad news started to flow from all sides.
And then…
Soon, the demand evaporated as the banks gone bankrupt one by one in US and evaporation of demand from US and started to take a toll on export-oriented economies of Asia pacific.
Many countries announced bailout packages for their banks and central banks lowered interest rates to encourage lending but the distrust among banks about creditworthiness of each other is so much that banks prefer to hold extra money with them.
How we can get out of current recession
To fight recession, there is only one way in my view, that is “increasing capital expenditure by government and lowering of interest rates”.
Low rates of taxation is helpful to a limited extent because it does not affect common people. Low interest rates encourage people with modest creditworthiness to buy cheap assets. Low interest rates also encourages companies to invest in new projects with lower cost.
Increase in capital expenditure results in expansion of infrastructure which includes construction/improvement of roads, dams, power plants etc. This will create new jobs in local market and increase the demand which we need to avoid closure of factories.
How we can avoid an encore of this recession:
The current recession is the result of combination of regulatory failure and reckless investment in a particular asset. There is a need to strengthen the regulatory system in case of derivative instruments and hedge funds. Also there is a need to put sectoral limits on investments and disclosure of sectoral investments on a broad basis.
Every recession has its own causes and they are unique in some way and this demands solutions which can prevent those causes from repeating in future.
This recession also teaches us a rich lesson “Nobody can live on credit for too long”
I’m sure Warren Buffet wouldn’t be in disagreement if he reads this statement 