Managerial Economics: Great Recession and Housing Market in USA and Europe - Example

Managerial Economics: Great Recession and Housing Market in USA and Europe Managerial Economics: Great Recession and Housing Market in USA and Europe Today the developing countries’ economics growth is very slow, in fact, it would be better to depict the economic growth as nothing is happening that verifies the economic growth. A part of the world is comprised of developing countries and in this manner; a major of the world is not progressing at all. On the other hand, the situation is a bit different for developed countries. Economists believe that after the recession of 2008 and 2009 a greater economic recession is ahead. Economist (2011), forecasts the economic recession and titles it as “Time for a double dip?” in the similar manner, an articles in the “Financial Times” discuses the similar scenario and titles the articles as “Mission impossible: stop another recession.” The housing sector in USA and Europe had deep impact due to the great recession but steps taken by USA and European governments countered the great recession. The recession has a deep impact on all the businesses in the developed countries. Housing sector in United States was fallen back due to the economic recession. Due to the recession, a large number of populates are unlikely to buy a new home. Fewer people are interested to buy a new home. In fact, the renting of houses also got affected as many people tried to either sell the owned houses or rent the houses to manage the household expenses. The downsizing is some companies also played a part in maximizing the economic recession. Another reason was the bankruptcy of many investment and insurance companies. Supply and demand The rapid increase in the prices of houses is due the more supply of goods and services and less demand of goods or services. However, the intense decline in the real estate prices is the reason for the bubble in the housing sector. As the demand increases and the supply shorten, the prices of the goods or services increase while if the supply increases and demand decreases, the price of the goods and services decrease. Like if, one person offers a service to a one person, the service offering person will quote the price that has no comparison. On the other hand, if two-person offer a similar service at some given prices to one person; the person that takes the service can compare the given prices of the services and in competition, both the service providers try quote the price that is lesser in comparison to the other. According to Krugman, supply is the amount of services and goods that the supplier is able and willing to bring to the market at a given price (Krugman, 2006). Demand is the amount of services and goods that consumers are able and willing to purchase at a given price. The great economic recession is because demands have a higher ratio as compared to the supplies. The demand of the goods and services reduce due to the social impact or due to the lesser any other reason that is degrading the economic behavior of the product or service. A great number of houses were available for the buyers but only for those consumers that can afford the higher price (Stengel, 2011). Earlier in 2005, investment banks are very willing to give loans to the homeowners against the values of their homes. Due to this, the price of homes increased steadily. The total borrowed amount reached $750 billion against the homes. However, as the supply of loans shortened, due to economic failure of various funding banks and companies, the demand increased that reduced the prices of homes down to a significant level (Stengel, 2011). Causes of Housing Bubble and cost analysis The major cause of the housing bubble is the investment banks that lack the internal and external transparencies and regulatory controls. The advent of newer concepts like internet investment and trading, the investment banks made huge profits in terms of commissions, higher interest rates and lower regulation. Surplus and Shortage In the trades of mortgage and other investment instruments, homebuyers, lenders, investment banks, investors and insurance companies are linked. In this sequential order, homebuyers give finance to the lenders. The lenders process the mortgage through an investment bank to earn interest on the mortgage. The investment banks process the mortgage and combine the mortgage with other mortgage that comprises home loans, car loans, student loans and similar other loans. There mortgage derivates are often categorized as collateralized debt obligations (CDOs). Insurance companies pay the difference if the CODs prices go down. In this way, the risk is transferred to the insurers. Insurance companies earn the premiums. The higher the prices of the CODs, the heavier the premium will be charged by the insurance companies due to the higher risk factor (Grusky, 2011). As there is no risk in CDOs, as insurance companies will bear the burden of risk, the demand for the CDOs expanded massively. Investment banks offered more CDOs to meet the demand. The prices of the houses tripled from 1997-2007. The prices of other real-estate properties also increased. The immense increase in the price is due to the diversion of uncontrolled funds that entered into investment banks. However, the prices of real estate properties dropped significantly on 30 December 2008, as discussed by Case-Shiller home price index. Consumer’s surplus In 2006, the sub-prime loans increased. Borrowers were allowed to take 99% of the investment. The sub-prime loans suited the investment banks because of higher interest rates and higher risk factor. Due to the immense flow of credit towards the housing sector, the housing recession expanded more. During the period, the banks borrowed huge finance to give loans that increases the “leverage ratio”. “Leverage ratio is the ratio between the bank’s borrowed assets and the bank’s owned assets. The ratio was so high that it was about 33:1 in 2006. In this manner, it is clear that the coming recession after year 2006 was due to the bad policies and unconcerned and uncontrolled financial modeling (Roubini & Mihm, 2010). GDP, Unemployment and Liquidity crises The rate of unemployment rise by 6.1% as reported by United States Department of Labor on 5 September 2008. The rise in the unemployment is the highest in previous five years. United States department of labor also pointed that the unemployment rate will further rise to 9% by the year 2010 if the situation remains the same. According to Bob Brusca of FAO Economics "Job losses are still mild by recession standards, but the losses are relentless and they are accumulating," said. "If job growth had paced with population growth during this year, it would have meant 1.3 million new jobs would have been created. Instead, 605,000 were lost. That means about 2 million fewer people are working than if the economy were on a steady path. And thats a big number (Isidore, 2008)." From 2007 to 2008, a large amount of investment of about $800 billion is provided to rescue the small banks. Washington mutual bank packed in sub mortgage business and about 3000 employed lost their jobs due to the downsizing of the business. Federal Reserves granted funds o the banks and insurance companies to continue the business but the situation remained the same. The decline in the prices of houses made the economic crisis worst. The decline in the prices of homes hit the economics of the regions so hard that economist believed that economy would remain unstable for several years after the emergency reliefs. However, it is important to eliminate the existing factors that may become a factor in increasing the economic crisis. Social Impact of Economic Crisis Social impact of the economic crisis is the key to determine and evaluate the ratio of satisfied societal members within the society. During the economic crisis, the lower market precipitation and higher financial risks elevated the alterations in the social behavior of the societal members. The economic crises also influenced the rise in health problems. The analysis of the social behaviors and heath reports of the people suggests that the more people were found to have increased blood pressure and hypertension. Many people lost their jobs and due to the lack of income resources, people were found to have lower standard of living. Moreover, social problems that give birth to crime emerged. Social problems like lack of valued resources, lack of health care facilities and lack of social character gave birth to more social crisis during the recession. On the other hand, during the recession, the crime rates decreased. Police and law enforcement agencies maintained strict crime control policies to counter the crimes. Moreover, law enforcement agencies did homework to counter the crimes (Keeley & Love, 2010). After analyzing the facts about the crime after the great recession, Christopher Uggen writes, “Six of the 7 crimes dipped more from 2007-2010 than in the preceding years, with the steepest decreases occurring for motor vehicle theft, robbery, and murder. The only exception to this pattern was burglary, which dropped by 2.5 percent per year before 2007 and 1.2 percent per year thereafter. Larceny-theft, the most common Part I crime, also fell by a relatively modest 2.8 percent per year in the recent period. Nevertheless, all seven of these commonly reported serious crimes have declined significantly in the past three years (Uggen, 2014)”. Immediate Steps Many steps are taken to reduce the impact of financial recession. Long-term plans and short terms plans were given by the economists and government emphasized that the both the long-term plans and short-term plans should have a positive impact on both the economy and the well-being of the people. The government owned banks have huge treasury as compared to that of the privately owned banks. Economist believed that it is better to give some fund to the banks have lost their intermediate business by giving huge amount of loans to the people. On the other hand, banks were advised to recover the loan amount so that the bank may continue the progress. Banks were advised not to put any financial asset on stake and give least amount as the loans. On other hand, smaller banks were merged into larger units. Some larger banks bought the financial assets of the smaller banks to reduce the economic burden on the smaller banks. In the similar manner, insurance companies also found mergers to counter the economic situation. Increasing Total Revenues Long-term plans included attracting the foreign investors to invest in USA. Foreign officers in embassies have given task to attract the foreign investors and give them attractive packages like free visas, tax exemption, etc to attract as many foreign investors as they can. Many Chinese investors showed interest in investing in the premises of USA. In the similar manner, foreign investors from other countries also showed great interest in investing in USA. The government made some easy and understandable rules for the investors. One that investors are welcome from any part of the world to attain an E-2 investors Visa, however, the investment amount should not be less $50 million. However, some exemption were given to the investors that can prove to the embassy that the business will be able to generate more than 10 jobs in the next year. Indian investors also invested mush in USA. The housing sector of USA and Europe are fallen back due to the great recession. Considering the scale of the great recession, economist and analysts believed that it would be very difficult for the USA and Europe housing markets to stand again. In the similar manner, all other economical sectors also influenced die to the great recession. Analysts have views that USA will face another recession. However, the steps taken by the government to counter the great recession provided USA market an escape from the recession. References Isidore, C. (2008). Unemployment rate hits 5-year high of 6.1% - Sep. 5, 2008. Money.cnn.com. Retrieved 31 December 2014, from http://money.cnn.com/2008/09/05/news/economy/jobs_august/ Grusky, D. (2011). The great recession. New York: Russell Sage Foundation. Keeley, B., & Love, P. (2010).From crisis to recovery: The causes, course and consequences of the great recession. Paris: OECD. Krugman, P., & Wells, R. (2006).Economics. New York: Worth. Roubini, N., &Mihm, S. (2010). Crisis economics: A crash course in the future of finance. New York, N.Y.: Penguin Press. Stengel, D. (2011). Managerial economics concepts and principles. New York, N.Y.] (222 East 46th Street, New York, NY 10017): Business Expert Press. Uggen C. (2014). Crime and the Great Recession. University of Minnesota. Retrieved from https://www.soc.umn.edu/~uggen/crime_recession.pdf Read More