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The Great Recession 2008 - Term Paper Example

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This paper utilizes an in-depth analysis and review of the financial crisis with emphasis on its causes, policy responses, and consequences. The paper highlights that the global economy was unstable contrary to the suggestion that it was stable prior to the crisis. …
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The Great Recession 2008
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The Great Recession 2008

Download file to see previous pages... According to the research findings the 2007 global financial crisis has had serious impacts on the economies of many countries, resulting to what economists call the Great Recession. The downturn began initially as an isolated problem with the sub-prime sector in the US housing market, mutating to a serious and fatal recession by the beginning of 2008. Consequently, other nations especially in the European Union followed the US into the crisis by mid-2008. In essence, 2009 was the first recorded year in history that the global economy was actually in recession since the Second World War. Interestingly, the recession came as a surprise to many economists, investor, academics, policy-makers, and multilateral agencies. For instance, Organization for Economic Co-operation Development’s Jean-Philippe Cotis was quoted as speculating further growth in the global economy because of the buoyancy of emerging economies and favoring financial conditions. After the economy drove into recession, the economics profession was under fire for failure to predict the financial downturn. As a result, there were few intellectual conversations taking place between scholars of like minds. Therefore, the underestimation of the severity of the global downturn was not surprising. Indeed, some leading financial forecasters like World Bank and International Monetary Funds revised their initial to their growth forecasts in 2008 and 2009. Nonetheless, there were warnings from a few economists of a brewing economical disaster. A portion of the economist predicted a looming recession based on economic models where the accumulation of the private sector was the central cause. However, their cries were not significant enough for the majority of the lulled individuals. Despite all these, the warning signs were blinking red: loose monetary policy especially in the US, lax in financial regulation, misperception of risk and search for yield, and huge current deficits in UK, US, and other super economies that accumulated huge savings of oil exporters and emerging economies. Events of 2008, with emphasis on the collapse and consequent closure of Lehman Brother, reversed the perceptions of risk-taking banks (Clungston, 2008). However, the complexity and nature mortgage-backed securities left most banks in the dark concerning the exact level of liabilities that was linked to the severing housing sector in the US. Thus, liquidity of most banks dried up, literary bringing the global financial system to a halt. Some critiques were quick to question the survival of the American-style capitalism. Governments in developing and advanced countries were quick to react aggressively, injecting obscene credit amounts into their financial markets, reducing interest rates, nationalizing banks, and unveiling stimulus packages to increase discretionary spending. Most policymakers were determined to avoid mistakes from previous crises, and their response was important avoiding disastrous depression in most countries, ...Download file to see next pagesRead More
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