Late-2000s recession


Late-2000s recession
Late-2000s recession around the world
  • Africa
  • Americas
    • South America
    • United States
  • Asia
  • Europe
  • Oceania
    • Australia


World map showing real GDP growth rates for 2009. (Countries in brown are in recession.)

The late-2000s recession, sometimes referred to as the Great Recession[1] or Lesser Depression[2] or Long Recession, [3] is a severe ongoing global economic problem that began in December 2007 and took a particularly sharp downward turn in September 2008. The Great Recession has affected the entire world economy, with higher detriment in some countries than others. It is a major global recession characterized by various systemic imbalances and was sparked by the outbreak of the late-2000s financial crisis.

There are two senses of the word "recession": a less precise sense, referring broadly to "a period of reduced economic activity",[4] and the scientific sense used most often in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle, with two or more consecutive quarters of negative GDP growth. By the economic-science definition of the word "recession", the Great Recession ended in the U.S. in June or July 2009.[5][6] However, in the broader, layperson sense of the word, many people use the term to refer to the ongoing hardship (in the same way that the term "Great Depression" is also popularly used).[7] In the U.S., for example, persistent high unemployment remains, along with low consumer confidence, the continuing decline in home values and increase in foreclosures and personal bankruptcies, an escalating federal debt crisis, inflation, and rising gas and food prices. In fact, a 2011 poll found that more than half of all Americans think the U.S. is still in recession or even depression, despite official data that shows a historically modest recovery.[8]

Contents

Overview

According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in December 2007.[9] The financial crisis is linked to reckless lending practices by financial institutions and the growing trend of securitization of real estate mortgages in the United States.[10][not in citation given] The US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world. A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices.[11][12] The precarious financial situation was made more difficult by a sharp increase in oil and food prices. The emergence of Sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. As share and housing prices declined, many large and well established investment and commercial banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance.

A global recession has resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices. In December 2008, the National Bureau of Economic Research (NBER) declared that the United States had been in recession since December 2007.[13] Several economists have predicted that recovery may not appear until 2011 and that the recession will be the worst since the Great Depression of the 1930s.[14][15] Paul Krugman, who won the Nobel Memorial Prize in Economics, once commented on this as seemingly the beginning of "a second Great Depression."[16] The conditions leading up to the crisis, characterized by an exorbitant rise in asset prices and associated boom in economic demand, are considered a result of the extended period of easily available credit [17] and inadequate regulation and oversight.[18]

The recession has renewed interest in Keynesian economic ideas on how to combat recessionary conditions. Fiscal and monetary policies have been significantly eased to stem the recession and financial risks. Economists advise that the stimulus should be withdrawn as soon as the economies recover enough to "chart a path to sustainable growth".[19][20][21]

Pre-recession economic imbalances

The onset of the economic crisis took most people by surprise. A 2009 paper identifies twelve economists and commentators who, between 2000 and 2006, predicted a recession based on the collapse of the then-booming housing market in the U.S:[22] Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Steve Keen, Jakob Brøchner Madsen & Jens Kjaer Sørensen, Kurt Richebächer, Nouriel Roubini, Peter Schiff and Robert Shiller.[22]

Among the various imbalances in which the U.S. monetary policy contributed by excessive money creation, leading to negative household savings and a huge U.S. trade deficit, dollar volatility and public deficits, a focus can be made on the following ones:

Commodity boom

Brent barrel petroleum spot prices, May 1987 – April 2011.

The decade of the 2000s saw a global explosion in prices, focused especially in commodities and housing, marking an end to the commodities recession of 1980–2000. In 2008, the prices of many commodities, notably oil and food, rose so high as to cause genuine economic damage, threatening stagflation and a reversal of globalization.[23]

In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year.[24] In July 2008, oil peaked at $147.30[25] a barrel and a gallon of gasoline was more than $4 across most of the U.S.A. The economic contraction in the fourth quarter of 2008 caused a dramatic drop in demand and prices fell below $35 a barrel at the end of the year.[25] The high of 2008 may have been part of broader pattern of spiking instability in the price of oil over the preceding decade [26] This pattern of spiking instability in oil price may be a product of Peak Oil. There is concern that if the economy was to improve, oil prices might return to pre-recession levels.[27]

The food and fuel crises were both discussed at the 34th G8 summit in July 2008.[28]

Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bioethanol production) increased in price 3.5-fold in less than 1 year while producers of sodium hydroxide have declared force majeure due to flooding, precipitating similarly steep price increases.[29][30]

In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.[31]

Housing bubble

UK house prices between 1975 and 2010.

By 2007, real estate bubbles were still under way in many parts of the world,[32] especially in the United States,[33] United Kingdom, United Arab Emirates, Italy, Australia, New Zealand, Ireland, Spain, France, Poland,[34] South Africa, Israel, Greece, Bulgaria, Croatia,[35] Norway, Singapore, South Korea, Sweden, Finland, Argentina,[36] Baltic states, India, Romania, Russia, Ukraine and China.[37] U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the U.S. housing market) ... it's hard not to see that there are a lot of local bubbles".[38] The Economist magazine, writing at the same time, went further, saying "the worldwide rise in house prices is the biggest bubble in history".[39] Real estate bubbles are (by definition of the word "bubble") followed by a price decrease (also known as a housing price crash) that can result in many owners holding negative equity (a mortgage debt higher than the current value of the property).

Inflation

In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10–20 year highs for many nations.[40] "Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets," have been named as possible reasons for the inflation.[41]

In mid-2007, International Monetary Fund (IMF) data indicated that inflation was highest in the oil-exporting countries, largely due to the unsterilized growth of foreign exchange reserves, the term "unsterilized" referring to a lack of monetary policy operations that could offset such a foreign exchange intervention in order to maintain a country's monetary policy target. However, inflation was also growing in countries classified by the IMF as "non-oil-exporting LDCs" (Least Developed Countries) and "Developing Asia", on account of the rise in oil and food prices.[42]

Inflation was also increasing in the developed countries,[43][44] but remained low compared to the developing world.

Causes

The great asset bubble:[45]
  1. Central banks' gold reserves – $0.845 tn.
  2. M0 (paper money) – - $3.9 tn.
  3. traditional (fractional reserve) banking assets – $39 tn.
  4. shadow banking assets – $62 tn.
  5. other assets – $290 tn.
  6. Bail-out money (early 2009) – $1.9 tn.

Debate over origins

The central debate about the origin has been focused on the respective parts played by the public monetary policy (in the US notably) and by private financial institutions practices. In the U.S., mortgage funding was unusually decentralized, opaque, and competitive, and it is believed that competition between lenders for revenue and market share contributed to declining underwriting standards and risky lending.[46]

On October 15, 2008, Anthony Faiola, Ellen Nakashima, and Jill Drew wrote a lengthy article in The Washington Post titled, "What Went Wrong".[47] In their investigation, the authors claim that former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt vehemently opposed any regulation of financial instruments known as derivatives. They further claim that Greenspan actively sought to undermine the office of the Commodity Futures Trading Commission, specifically under the leadership of Brooksley E. Born, when the Commission sought to initiate regulation of derivatives. Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crisis of 2008.

While Greenspan's role as Chairman of the Federal Reserve has been widely discussed (the main point of controversy remains the lowering of Federal funds rate at only 1% for more than a year which, according to the Austrian School of economics, allowed huge amounts of "easy" credit-based money to be injected into the financial system and thus create an unsustainable economic boom),[48][49] there is also the argument that Greenspan's actions in the years 2002–2004 were actually motivated by the need to take the U.S. economy out of the early 2000s recession caused by the bursting of the dot-com bubble — although by doing so he did not help avert the crisis, but only postpone it.[50][51]

Some economists - those of the Austrian school and those predicting the recession such as Steve Keen - claim that the ultimate point of origin of the great financial crisis of 2007–2010 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom turned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses.[52]

Robert Reich believes the amount of debt in the US economy can be traced to economic inequality, where middle class wages remain stagnant while wealth concentrates at the top, and households "pull equity from their homes and overload on debt to maintain living standards."[53]

Effects

Overview

International trade, 2000-2010. 2000=100.[54] A plunge in the volumes of exchanges can be seen as of the second half of 2008.

The late-2000s recession is shaping up to be the worst post-World War II contraction on record:[55]

  • Real gross domestic product (GDP) began contracting in the third quarter of 2008, and by early 2009 was falling at an annualized pace not seen since the 1950s.[56]
  • Capital investment, which was in decline year-on-year since the final quarter of 2006, matched the 1957–58 post war record in the first quarter of 2009. The pace of collapse in residential investment picked up speed in the first quarter of 2009, dropping 23.2% year-on-year, nearly four percentage points faster than in the previous quarter.
  • US Domestic demand, in decline for five straight quarters, is still three months shy of the 1974–75 record, but the pace – down 2.6% per quarter vs. 1.9% in the earlier period – is a record-breaker already.
  • A report in 2009 by Bloomberg states that $14.5 trillion of value of global companies has been erased since the crisis began.[57]

Political instability related to the economic crisis

Beginning February 26, 2009 an Economic Intelligence Briefing was added to the daily intelligence briefings prepared for the President of the United States. This addition reflects the assessment of United States intelligence agencies that the global financial crisis presents a serious threat to international stability.[58]

Business Week in March 2009 stated that global political instability is rising fast due to the global financial crisis and is creating new challenges that need managing.[59] The Associated Press reported in March 2009 that: United States "Director of National Intelligence Dennis Blair has said the economic weakness could lead to political instability in many developing nations."[60] Even some developed countries are seeing political instability.[61] NPR reports that David Gordon, a former intelligence officer who now leads research at the Eurasia Group, said: "Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we're in a recession of normal length. If you're in a much longer-run downturn, then all bets are off."[62]

Globally, mass protest movements have arisen in many countries as a response to the economic crisis. Additionally, in some countries, riots and even open revolts have occurred in relation to the economic crisis.

For example, the Arab Spring revolts taking place in the Arab world since December 18, 2010 were ostensibly sparked by the self-immolation of an unemployed Tunisian man named Mohamed Bouazizi who was prevented from even selling produce from a cart. This act, combined with general discontentment about high unemployment, food inflation, corruption,[63] lack of freedom of speech and other forms of political freedom,[64] and poor living conditions led to the most dramatic wave of social and political unrest in Tunisia in three decades,[65][66] resulted in scores of deaths and injuries, and an eventual regime change in Tunisia. To date, there have been revolutions in Tunisia[67] and Egypt;[68] a civil war in Libya;[69] civil uprisings in Bahrain,[70] Syria,[71] and Yemen;[72] major protests in Algeria,[73] Iraq,[74] Jordan,[75] Morocco,[76] and Oman,[77] as well as on the borders of Israel;[78] and minor protests in Kuwait,[79] Lebanon,[80] Mauritania,[81] Saudi Arabia,[82] Sudan,[83] and Western Sahara.[84]

In January of 2009 the government leaders of Iceland were forced to call elections two years early after the people of Iceland staged mass protests and clashed with the police due to the government's handling of the economy. Hundreds of thousands protested in France against President Sarkozy's economic policies. Prompted by the financial crisis in Latvia, the opposition and trade unions there organized a rally against the cabinet of premier Ivars Godmanis. The rally gathered some 10-20 thousand people. In the evening the rally turned into a Riot. The crowd moved to the building of the parliament and attempted to force their way into it, but were repelled by the state's police. In late February many Greeks took part in a massive general strike because of the economic situation and they shut down schools, airports, and many other services in Greece. Police and protesters clashed in Lithuania where people protesting the economic conditions were shot by rubber bullets. In addition to various levels of unrest in Europe, Asian countries have also seen various degrees of protest. Communists and others rallied in Moscow to protest the Russian government's economic plans. Protests have also occurred in China as demands from the west for exports have been dramatically reduced and unemployment has increased. Beyond these initial protests, the protest movement has grown and continued in 2011.

Policy responses

The financial phase of the crisis led to emergency interventions in many national financial systems. As the crisis developed into genuine recession in many major economies, economic stimulus meant to revive economic growth became the most common policy tool. After having implemented rescue plans for the banking system, major developed and emerging countries announced plans to relieve their economies. In particular, economic stimulus plans were announced in China, the United States, and the European Union.[85] Bailouts of failing or threatened businesses were carried out or discussed in the USA, the EU, and India.[86] In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a focus of economic and financial crisis management.

IMF recommendation

The IMF stated in September 2010 that the financial crisis would not end without a major decrease in unemployment as hundreds of millions of people were unemployed worldwide. The IMF urged governments to expand social safety nets and to generate job creation even as they are under pressure to cut spending. Governments should also invest in skills training for the unemployed and even governments of countries like Greece with major debt risk should first focus on long-term economic recovery by creating jobs.[87]

United States policy responses

The Federal Reserve, Treasury, and Securities and Exchange Commission took several steps on September 19 to intervene in the crisis. To stop the potential run on money market mutual funds, the Treasury also announced on September 19 a new $50 billion program to insure the investments, similar to the Federal Deposit Insurance Corporation (FDIC) program.[88] Part of the announcements included temporary exceptions to section 23A and 23B (Regulation W), allowing financial groups to more easily share funds within their group. The exceptions would expire on January 30, 2009, unless extended by the Federal Reserve Board.[89] The Securities and Exchange Commission announced termination of short-selling of 799 financial stocks, as well as action against naked short selling, as part of its reaction to the mortgage crisis.[90]

Market volatility within US 401(k) and retirement plans

The US Pension Protection Act of 2006 included a provision which changed the definition of Qualified Default Investments (QDI) for retirement plans from stable value investments, money market funds, and cash investments to investments which expose an individual to appropriate levels of stock and bond risk based on the years left to retirement. The Act required that Plan Sponsors move the assets of individuals who had never actively elected their investments and had their contributions in the default investment option. This meant that individuals who had defaulted into a cash fund with little fluctuation or growth would soon have their account balances moved to much more aggressive investments.

Starting in early 2008, most US employer-sponsored plans sent notices to their employees informing them that the plan default investment was changing from a cash/stable option to something new, such as a retirement date fund which had significant market exposure. Most participants ignored these notices until September and October, when the market crash was on every news station and media outlet. It was then that participants called their 401(k) and retirement plan providers and discovered losses in excess of 30% in some cases. Call centers for 401(k) providers experienced record call volume and wait times, as millions of inexperienced investors struggled to understand how their investments had been changed so fundamentally without their explicit consent, and reacted in a panic by liquidating everything with any stock or bond exposure, locking in huge losses in their accounts.

Due to the speculation and uncertainty in the market, discussion forums filled with questions about whether or not to liquidate assets[91] and financial gurus were swamped with questions about the right steps to take to protect what remained of their retirement accounts. During the third quarter of 2008, over $72 billion left mutual fund investments that invested in stocks or bonds and rushed into Stable Value investments in the month of October.[92] Against the advice of financial experts, and ignoring historical data illustrating that long-term balanced investing has produced positive returns in all types of markets,[93] investors with decades to retirement instead sold their holdings during one of the largest drops in stock market history.

Loans to banks for asset-backed commercial paper

How money markets fund corporations

During the week ending September 19, 2008, money market mutual funds had begun to experience significant withdrawals of funds by investors. This created a significant risk because money market funds are integral to the ongoing financing of corporations of all types. Individual investors lend money to money market funds, which then provide the funds to corporations in exchange for corporate short-term securities called asset-backed commercial paper (ABCP). However, a potential bank run had begun on certain money market funds. If this situation had worsened, the ability of major corporations to secure needed short-term financing through ABCP issuance would have been significantly affected. To assist with liquidity throughout the system, the US Treasury and Federal Reserve Bank announced that banks could obtain funds via the Federal Reserve's Discount Window using ABCP as collateral.[88][94]

Federal Reserve lowers interest rates

Federal reserve rates changes (Just data after January 1, 2008 )
Date Discount rate Discount rate Discount rate Fed funds Fed funds rate
Primary Secondary
rate change new interest rate new interest rate rate change new interest rate
October 8, 2008* -0.50% 1.75% 2.25% -0.50% 1.50%
April 30, 2008 -0.25% 2.25% 2.75% -0.25% 2.00%
March 18, 2008 -0.75% 2.50% 3.00% -0.75% 2.25%
March 16, 2008 -0.25% 3.25% 3.75%
January 30, 2008 -0.50% 3.50% 4.00% -0.50% 3.00%
January 22, 2008 -0.75% 4.00% 4.50% -0.75% 3.50%

– * Part of a coordinated global rate cut of 50 basis point by main central banks.[95]

– See more detailed US federal discount rate chart:[96]

Legislation

The Secretary of the United States Treasury, Henry Paulson and President George W. Bush proposed legislation for the government to purchase up to US$700 billion of "troubled mortgage-related assets" from financial firms in hopes of improving confidence in the mortgage-backed securities markets and the financial firms participating in it.[97] Discussion, hearings and meetings among legislative leaders and the administration later made clear that the proposal would undergo significant change before it could be approved by Congress.[98] On October 1, a revised compromise version was approved by the Senate with a 74–25 vote. The bill, HR1424 was passed by the House on October 3, 2008 and signed into law. The first half of the bailout money was primarily used to buy preferred stock in banks instead of troubled mortgage assets.[99]

In January 2009, the Obama administration announced a stimulus plan to revive the economy with the intention to create or save more than 3.6 million jobs in two years. The cost of this initial recovery plan was estimated at 825 billion dollars (5.8% of GDP). The plan included 365.5 billion dollars to be spent on major policy and reform of the health system, 275 billion (through tax rebates) to be redistributed to households and firms, notably those investing in renewable energy, 94 billion to be dedicated to social assistance for the unemployed and families, 87 billion of direct assistance to states to help them finance health expenditures of Medicaid, and finally 13 billion spent to improve access to digital technologies. The administration also attributed of 13.4 billion dollars aid to automobile manufacturers General Motors and Chrysler, but this plan is not included in the stimulus plan.

These plans are meant to abate further economic contraction, however, with the present economic conditions differing from past recessions, in, that, many tenets of the American economy such as manufacturing, textiles, and technological development have been outsourced to other countries. Public works projects associated with the economic recovery plan outlined by the Obama Administration have been degraded by the lack of road and bridge development projects that were highly abundant in the Great Depression but are now mostly constructed and are mostly in need of maintenance. Regulations to establish market stability and confidence have been neglected in the Obama plan and have yet to be incorporated.

Federal Reserve response

In an effort to increase available funds for commercial banks and lower the fed funds rate, on September 29, 2008 the U.S. Federal Reserve announced plans to double its Term Auction Facility to $300 billion. Because there appeared to be a shortage of U.S. dollars in Europe at that time, the Federal Reserve also announced it would increase its swap facilities with foreign central banks from $290 billion to $620 billion.[100]

As of December 24, 2008, the Federal Reserve had used its independent authority to spend $1.2 trillion on purchasing various financial assets and making emergency loans to address the financial crisis, above and beyond the $700 billion authorized by Congress from the federal budget. This includes emergency loans to banks, credit card companies, and general businesses, temporary swaps of treasury bills for mortgage-backed securities, the sale of Bear Stearns, and the bailouts of American International Group (AIG), Fannie Mae and Freddie Mac, and Citigroup.[101]

Asia-Pacific policy responses

On September 15, 2008 China cut its interest rate for the first time since 2002. Indonesia reduced its overnight repo rate, at which commercial banks can borrow overnight funds from the central bank, by two percentage points to 10.25 percent. The Reserve Bank of Australia injected nearly $1.5 billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $1.32 billion, through a refinance operation, its biggest in at least a month.[102] On November 9, 2008 the 2008 Chinese economic stimulus plan is a RMB¥ 4 trillion ($586 billion) stimulus package announced by the central government of the People's Republic of China in its biggest move to stop the global financial crisis from hitting the world's second largest economy. A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan ($586 billion) in infrastructure and social welfare by the end of 2010. The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance.

China's export driven economy is starting to feel the impact of the economic slowdown in the United States and Europe, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion. On November 28, 2008, the Ministry of Finance of the People's Republic of China and the State Administration of Taxation jointly announced a rise in export tax rebate rates on some labor-intensive goods. These additional tax rebates will take place on December 1, 2008.[103]

The stimulus package was welcomed by world leaders and analysts as larger than expected and a sign that by boosting its own economy, China is helping to stabilize the global economy. News of the announcement of the stimulus package sent markets up across the world. However, Marc Faber January 16 said that China according to him was in recession.

In Taiwan, the central bank on September 16, 2008 said it would cut its required reserve ratios for the first time in eight years. The central bank added $3.59 billion into the foreign-currency interbank market the same day. Bank of Japan pumped $29.3 billion into the financial system on September 17, 2008 and the Reserve Bank of Australia added $3.45 billion the same day.[104]

In developing and emerging economies, responses to the global crisis mainly consisted in low-rates monetary policy (Asia and the Middle East mainly) coupled with the depreciation of the currency against the dollar. There were also stimulus plans in some Asian countries, in the Middle East and in Argentina. In Asia, plans generally amounted to 1 to 3% of GDP, with the notable exception of China, which announced a plan accounting for 16% of GDP (6% of GDP per year).

European policy responses

Until September 2008, European policy measures were limited to a small number of countries (Spain and Italy). In both countries, the measures were dedicated to households (tax rebates) reform of the taxation system to support specific sectors such as housing. The European Commission proposed a €200 billion stimulus plan to be implemented at the European level by the countries. At the beginning of 2009, the UK and Spain completed their initial plans, while Germany announced a new plan.

On September 29, 2008 the Belgian, Luxembourg and Dutch authorities partially nationalized Fortis. The German government bailed out Hypo Real Estate.

On 8 October 2008 the British Government announced a bank rescue package of around £500 billion[105] ($850 billion at the time). The plan comprises three parts. The first £200 billion would be made in regard to the banks in liquidity stack. The second part will consist of the state government increasing the capital market within the banks. Along with this, £50 billion will be made available if the banks needed it, finally the government will write away any eligible lending between the British banks with a limit to £250 billion.

In early December German Finance Minister Peer Steinbrück indicated a lack of belief in a "Great Rescue Plan" and reluctance to spend more money addressing the crisis.[106] In March 2009, The European Union Presidency confirmed that the EU was at the time strongly resisting the US pressure to increase European budget deficits.[107]

Global responses

Responses by the UK and US in proportion to their GDPs

Most political responses to the economic and financial crisis has been taken, as seen above, by individual nations. Some coordination took place at the European level, but the need to cooperate at the global level has led leaders to activate the G-20 major economies entity. A first summit dedicated to the crisis took place, at the Heads of state level in November 2008 (2008 G-20 Washington summit).

The G-20 countries met in a summit held on November 2008 in Washington to address the economic crisis. Apart from proposals on international financial regulation, they pledged to take measures to support their economy and to coordinate them, and refused any resort to protectionism.

Another G-20 summit was held in London on April 2009. Finance ministers and central banks leaders of the G-20 met in Horsham on March to prepare the summit, and pledged to restore global growth as soon as possible. They decided to coordinate their actions and to stimulate demand and employment. They also pledged to fight against all forms of protectionism and to maintain trade and foreign investments. They also committed to maintain the supply of credit by providing more liquidity and recapitalizing the banking system, and to implement rapidly the stimulus plans. As for central bankers, they pledged to maintain low-rates policies as long as necessary. Finally, the leaders decided to help emerging and developing countries, through a strengthening of the IMF.

Countries maintaining growth or technically avoiding recession

Poland is the only member of the European Union to have avoided a decline in GDP, meaning that in 2009 Poland has created the most GDP growth in the EU. As of December 2009 the Polish economy had not entered recession nor even contracted, while its IMF 2010 GDP growth forecast of 1.9 per cent is expected to be upgraded.[108][109][110] Analysts have identified several causes: Extremely low levels of bank lending and a relatively very small mortgage market; the relatively recent dismantling of EU trade barriers and the resulting surge in demand for Polish goods since 2004; the receipt of direct EU funding since 2004; lack of over-dependence on a single export sector; a tradition of government fiscal responsibility; a relatively large internal market; the free-floating Polish zloty; low labour costs attracting continued foreign direct investment; economic difficulties at the start of the decade which prompted austerity measures in advance of the world crisis.

While China, India and Iran have experienced slowing growth, they have not entered recession.

South Korea narrowly avoided technical recession in the first quarter of 2009.[111] The International Energy Agency stated in mid September that South Korea could be the only large OECD country to avoid recession for the whole of 2009.[112] It was the only developed economy to expand in the first half of 2009. On October 6, Australia became the first G20 country to raise its main interest rate, with the Reserve Bank of Australia deciding to move rates up to 3.25% from 3.00%.[113]

Australia has avoided a technical recession after experiencing only one quarter of negative growth in the fourth quarter of 2008, with GDP returning to positive in the first quarter of 2009.[114][115]

Raising interest rates

The Bank of Israel was the first to raise interest rates after the global recession began.[116] It increased rates in August 2009.[117]

Followed by Norges Bank of Norway, the Reserve Bank of Australia in March 2010[118] and the Reserve Bank of India on 18 March 2010.[119]

Countries in economic recession or depression

Many countries experienced recession in 2008.[120] The countries/territories currently in a technical recession are Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong, Singapore, Italy, Russia and Germany.

Denmark went into recession in the first quarter of 2008, but came out again in the second quarter.[121] Iceland fell into an economic depression in 2008 following the collapse of its banking system. (see Icelandic financial crisis)

The following countries went into recession in the second quarter of 2008: Estonia,[122] Latvia,[123] Ireland[124] and New Zealand.[125]

The following countries/territories went into recession in the third quarter of 2008: Japan,[126] Sweden,[127] Hong Kong,[128] Singapore,[129] Italy,[130] Turkey[120] and Germany.[131] As a whole the fifteen nations in the European Union that use the euro went into recession in the third quarter,[132] and the United Kingdom. In addition, the European Union, the G7, and the OECD all experienced negative growth in the third quarter.[120]

The following countries/territories went into technical recession in the fourth quarter of 2008: United States, Switzerland,[133] Spain,[134] and Taiwan.[135]

South Korea "miraculously" avoided recession with GDP returning positive at a 0.1% expansion in the first quarter of 2009.[136]

Of the seven largest economies in the world by GDP, only China and France avoided a recession in 2008. France experienced a 0.3% contraction in Q2 and 0.1% growth in Q3 of 2008. In the year to the third quarter of 2008 China grew by 9%. This is interesting as China has until recently considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres.[137] This figure may more accurately be considered to be 5–7% now that the main growth in working population is receding. Growth of between 5%–8% could well have the type of effect in China that a recession has elsewhere. Ukraine went into technical depression in January 2009 with a nominal annualized GDP growth of −20%.[138]

The recession in Japan intensified in the fourth quarter of 2008 with a nominal annualized GDP growth of −12.7%,[139] and deepened further in the first quarter of 2009 with a nominal annualized GDP growth of −15.2%.[140]

Major economies affected by the recession.[141]

Country Total GDP loss Recession length (number of quarters)
 Poland -0.40% 1
 Australia -1.00% 1
 Israel -1.21% 2
 Argentina -1.69% 2
 South Africa -2.65% 3
 Cyprus -2.85% 4
 Switzerland -3.25% 4
 Canada -3.36% 6
 Malta -3.37% 4
 Norway -3.44% 11
 New Zealand -3.45% 5
 Portugal -3.68% 4
 France -3.87% 4
 Chile -4.11% 4
 United States -4.14% 6
 Belgium -4.23% 3
 Korea, South -4.58% 2
 Spain -4.89% 7
 Czech Republic -4.94% 3
 Netherlands -5.29% 5
 Austria -5.44% 4
 Brazil -6.14% 2
 United Kingdom -6.15% 6
 Germany -6.62% 4
 Italy -6.76% 7
 Bulgaria -7.05% 5
 Croatia -7.41% 8
 Sweden -7.43% 7
 Slovakia -7.62% 1
 Denmark -8.06% 6
 Hungary -8.32% 6
 Luxembourg -8.34% 5
 Mexico -8.47% 4
 Greece -8.95% 9
 Slovenia -9.71% 3
 Finland -9.96% 4
 Romania -10.00% 9
 Russia -10.86% 4
 Ireland -12.24% 13
 Turkey -12.82% 4
 Iceland -15.07% 11
 Lithuania -16.95% 6
 Estonia -20.33% 7
 Latvia -25.14% 8

Official forecasts

On March 2009, U.S. Fed Chairman Ben Bernanke said in an interview that he felt that if banks began lending more freely, allowing the financial markets to return to normal, the recession could end during 2009.[6][142] In that same interview, Bernanke said Green shoots of economic revival are already evident.[143] On February 18, 2009, the US Federal Reserve cut their economic forecast of 2009, expecting the US output to shrink between 0.5% and 1.5%, down from its forecast in October 2008 of output between +1.1% (growth) and −0.2% (contraction).[144]

The EU commission in Brussels updated their earlier predictions on January 19, 2009, expecting Germany to contract −2.25% and −1.8% on average for the 27 EU countries.[145] According to new forecasts by Deutsche Bank (end of November 2008), the economy of Germany will contract by more than 4% in 2009.[146]

On November 3, 2008, according to all newspapers, the European Commission in Brussels predicted for 2009 only an extremely low increase by 0.1% of the GDP, for the countries of the Euro zone (France, Germany, Italy, etc.).[147] They also predicted negative numbers for the UK (−1.0%), Ireland, Spain, and other countries of the EU. Three days later, the IMF at Washington, D.C., predicted for 2009 a worldwide decrease, −0.3%, of the same number, on average over the developed economies (−0.7% for the US, and −0.8% for Germany).[148] On April 22, 2009, the German ministers of finance and that of economy, in a common press conference, corrected again their numbers for 2009 downwards: this time the "prognosis" for Germany was a decrease of the GDP of at least −5%,[149] in agreement with a recent prediction of the IMF.[150]

On June 11, 2009, the World Bank Group predicted for 2009 for the first time a global contraction of the economic power, precisely by −3%.[151]

Comparisons with the Great Depression

On April 17, 2009, head of the IMF Dominique Strauss-Kahn said that there was a chance that certain countries may not implement the proper policies to avoid feedback mechanisms that could eventually turn the recession into a depression. "The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today." The IMF pointed out that unlike the Great Depression, this recession was synchronized by global integration of markets. Such synchronized recessions were explained to last longer than typical economic downturns and have slower recoveries.[152]

The chief economist of the IMF, Dr. Olivier Blanchard, stated that the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time. "Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression." The IMF also stated that a link between rising inequality within Western economies and deflating demand may exist. The last time that the wealth gap reached such skewed extremes was in 1928-1929.[153]

In the United States

1937 to 1943 depression compared to 2008 to 2011 recession, using percentage gained/lost since 1937 and 2008, respectively
Dow Jones Industrial Average figures for percentage lost in 1937-1943 vs 2008-2011 (based on initial 1937 and 2008 DJIA month end amount, respectively)

Although some casual comparisons between the late-2000s recession and the Great Depression have been made, there remain large differences between the two events.[154][155][156] The consensus among economists in March 2009 was that a depression was not likely to occur.[157] UCLA Anderson Forecast director Edward Leamer said on March 25, 2009 that there had not been any major predictions at that time which resembled a second Great Depression:

"We've frightened consumers to the point where they imagine there is a good prospect of a Great Depression. That certainly is not in the prospect. No reputable forecaster is producing anything like a Great Depression."[158]

Differences explicitly pointed out between the recession and the Great Depression include the facts that over the 79 years between 1929 and 2008, great changes occurred in economic philosophy and policy,[159] the stock market had not fallen as far as it did in 1932 or 1982, the 10-year price-to-earnings ratio of stocks was not as low as in the '30s or '80s, inflation-adjusted U.S. housing prices in March 2009 were higher than any time since 1890 (including the housing booms of the 1970s and '80s),[160] the recession of the early '30s lasted over three-and-a-half years,[159] and during the 1930s the supply of money (currency plus demand deposits) fell by 25% (where as in 2008 and 2009 the Fed "has taken an ultraloose credit stance").[161] Furthermore, the unemployment rate in 2008 and early 2009 and the rate at which it rose was comparable to most of the recessions occurring after World War II, and was dwarfed by the 25% unemployment rate peak of the Great Depression.[159]

Nobel Prize winning economist Paul Krugman predicted a series of depressions in his Return to Depression Economics (2000), based on "failures on the demand side of the economy." On January 5, 2009, he wrote that "preventing depressions isn't that easy after all" and that "the economy is still in free fall."[162] In March 2009, Krugman explained that a major difference in this situation is that the causes of this financial crisis were from the shadow banking system. "The crisis hasn't involved problems with deregulated institutions that took new risks... Instead, it involved risks taken by institutions that were never regulated in the first place."[163]

On November 15, 2008, author and Southern Methodist University economics professor Ravi Batra said he is "afraid the global financial debacle will turn into a steep recession and be the worst since the Great Depression, even worse than the painful slump of 1980–1982 that afflicted the whole world".[164] In 1978, Batra's book The Downfall of Capitalism and Communism was published. His first major prediction came true with the collapse of Soviet Communism in 1990. His second major prediction for a financial crisis to engulf the capitalist system seems to be unfolding since 2007 with increasing attention being paid to his work.[165][166][167]

On February 22, 2009, NYU economics professor Nouriel Roubini said that the crisis was the worst since the Great Depression, and that without cooperation between political parties and foreign countries, and if poor fiscal policy decisions (such as support of zombie banks) are pursued, the situation "could become as bad as the Great Depression."[168] On April 27, 2009, Roubini expressed a more upbeat assessment by noting that "the bottom of the economy [will be seen] toward the beginning or middle of next year."[169]

On April 6, 2009 Vernon L. Smith and Steven Gjerstad offered the hypothesis "that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge."[170]

In his final press conference as president, George W. Bush claimed that in September 2008 his chief economic advisors had said that the economic situation could at some point become worse than the Great Depression.[171]

A tent city in Sacramento, California was described as "images, hauntingly reminiscent of the iconic photos of the 1930s and the Great Depression" and "evocative Depression-era images."[172]

In the United Kingdom

On 22 August 2008, the Office for National Statistics reported that the economy had reached a standstill, with 0% growth, during the second quarter of that year.[173]On 24 October, statistics for the third quarter of the year showed the first contraction in the national economy for 16 years.[174]With further contraction in the final quarter of 2008, the recession was officially declared on 23 January 2009.[175]

On 10 February 2009, Ed Balls, Secretary of State for Children, Schools and Families of the United Kingdom, said that "I think that this is a financial crisis more extreme and more serious than that of the 1930s and we all remember how the politics of that era were shaped by the economy."[176] On 24 January 2009, Edmund Conway, Economics Editor for The Daily Telegraph, had written that "The plight facing Britain is uncannily similar to the 1930s, since prices of many assets – from shares to house prices – are falling at record rates [in Britain], but the value of the debt against which they are held remains unchanged."[177]

On 23 October 2009, it was reported that the British economy had contracted for six successive quarters - the longest run of contraction since quarterly figures were first recorded in 1955.[178]The end of the recession was declared on 26 January 2010, when it was reported that the economy had grown by 0.1% in the final quarter of 2009.[179]

Fears of a double-dip recession were sparked on 25 January 2011 when it was reported that the economy had contracted by 0.5% during the final quarter of 2010 following a full year of growth, although this was largely blamed on the severe weather which affected the nation in late November and almost all of December.[180]These fears were eased on 27 April 2011 when it was reported that the economy had grown by 0.5% in the first quarter of 2011,[181]and then on 26 July 2011 when 0.2% growth was reported for the second quarter of the year.[182] On 01 November 2011, it was reported that the UK economy had grown by 0.5% during the third quarter of the year. [183]

In Ireland

Ireland entered into an economic depression in 2009.[184] The ESRI (Economic and Social Research Institute) predict an economic contraction of 14% by 2010,[185] however this number may have already been exceeded with GDP dropping 7.1% quarter on quarter during the fourth quarter of 2008,[186] and a possible greater contraction in the first quarter of 2009 with the fall in all OECD countries with the exception of France exceeding the drop of the previous quarter.[187] Unemployment is up 8.75%[188] to 11.4%.[189][190][191] Government borrowing and the financial bailout and Nationalisation of one of Ireland's banks[192] which were loaded with debt due to the Irish property bubble.

Job losses and unemployment rates

Many jobs have been lost worldwide following the onset of a recession in 2007. So far, the job losses have been demonstrably less than during the Great Depression of the 1930s, when US unemployment peaked at 25% of the labour force.[193] The United States entered into recession in December 2007[194] when job losses began. Unemployment increased drastically starting in September 2008 following the bankruptcy of Lehman Brothers.[195] In March 2009, U-3 unemployment had risen to 8.5%.[196] In March 2009, statistician[197] John Williams argued that "measurement changes implemented over the years make it impossible to compare the current unemployment rate with that seen during the Great Depression".[197] By December 2010, the official U.S. unemployment rate had increased to 9.8%.

Second Wave of Recession?

A September 14, 2011 Reuters Poll indicated that economists thought the probability of another recession was at 31%, up from 25% the month before.[198] In their article “On the Possibilities to Forecast the Current Crisis and its Second Wave” Askar Akaev, Viktor Sadovnichiy, and Andrey Korotayev published a forecast of a second wave of the crisis.[199]

See also


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