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Global Financial Crisis - Essay Example

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The Ex- President of the United States Ronald Reagan once said recession is when a neighbor loses his job; depression is when you lose yours. The biggest point of concern today is the global financial crisis or recession. The economic meltdown has caught us all wrong footed, the business organizations across the globe suffered huge amount of losses which resulted in pay cuts and slashing of jobs…
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Global Financial Crisis
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"Global Financial Crisis"

Download file to see previous pages Many professionals and experts around the world believe that a true economic recession can only be confirmed if GDP (Gross Domestic Product) growth is negative for a period of two or more consecutive quarters.
The roots of a recession and its true starting point actually rest in the several quarters of positive but slowing growth before the recession cycle really begins. While the "two quarter" definition is accepted globally, many economists have trouble supporting it completely as it does not consider other important economic change variables. For instance, current national unemployment rates or consumer confidence and spending levels are all a part of the economic system and must be taken into account when defining a recession and its attributes.
An economic recession is primarily attributed to the actions taken to control the money supply in an economy. The Central Bank is the agency responsible for maintaining the delicate balance between money supply, interest rates, and inflation. When this delicate balance is tipped, the economy is forced to correct itself.
In an environment where inflation is prevalent, people tend to cut out things like leisure spending. They also budget more, spend less on things they usually indulge in, and start saving more money than they did. As people and businesses start finding ways to cut costs and derail unneeded expenditures, the GDP begins to decline. Then, unemployment rates will rise because companies start laying off workers to cut more costs, because consumers are not spending like they were. It is these combined factors that managed to drive the economy into a state of recession.(Sources: Recessiom.org)
The paradigm shift in the US economy was a big contributing factor. The economy shifted to a service based economy from a predominant manufacturing sector. By the year 2009, manufacturing and agriculture constituted less than 10% of the whole economic base. Decline in manufacturing took place mainly due to off shoring or outsourcing but vastly increased productivity was the bigger factor. Lack of security became an issue as the employments trend changed from a long term employment relationship to a short term attachments. The result of the shift from manufacturing to service, in short, has been a disaggregation of employment in which the attachments of workers to particular firms is more tenuous, expected tenures are shorter, and workplaces themselves are often on a smaller scale. The new portable employment included portable pensions; that is a pension plan that moves with an employee when he or she changes the employer. Pension investment became a big business dominated by institutional investors. With a portable defined contribution systems pension is based on investment returns which created pressure for high returns and also removed employee incentives to stay with a single firm. This resulted in a vicious circle of profit pressure and employment instability. (G.F. Davies, 2009)

Following a period of economic boom, a financial bubble-global in scope-has now burst. A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple ...Download file to see next pagesRead More
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