Only just the financial storm raised by the U.S. mortgage crisis began to tail away, as a new anxiety engulfed markets around the world. In Tokyo, London, Moscow, New York, everywhere, stocks of both famous corporations and little known companies has become cheaper. What is the cause of turmoil at this time? The answer is simple. Market participants were alarmed by the terrible word “recession”.
The most popular definition of the recession in economy (economic downturn) is considered to be a situation where within two consecutive quarters of the year there is a so-called process of a “negative growth”, that is it has been fixed a reduction of the gross domestic product (GDP) (Tarantino and Cernauskas 109). As well there is another definition of the recession. The professional definition of the recession based on the following factors: a significant reduction in production, profits, trading activity, and employment level that continues for at least six months and affects most sectors of the economy. Therefore, for example, recession, provoked by the stock exchange crisis in 1987, is not included in the “official list”. Although it had a serious magnitude of decline it was too short. It should be noted that while any economic crisis is a recession, not every recession is an economic crisis (just as any depression in the economy caused by economic crisis, but not every economic crisis is accompanied by depression) (Knoop 179).
In the United States, NBER (National Bureau of Economic Research) usually announces about the recession. This is a private, nonprofit organization was founded in 1920. Its economic researches are conducted by over one thousand leading economists, teaching at U.S. universities. In addition “the NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community” (National Bureau of Economic Research). In the NBER database, there are 33 recessions in the American economy beginning with 1854. Before the Second World War, the average U.S. recession was lasting 24 months. Starting from 1945 till 2007, the average recession in the United States was lasting 11 months. The longest “completed” recessions of the post-war period were during 1973-1974 and 1981-1982 years: 16-month period.
At the beginning of XX century, recessions in the United States were “calendar” phenomenon. They started only in April-May or September-October that is usually explained by the agricultural reasons. Since 1920’s, the crucial role for the U.S. economy was the situation on foreign markets, in the second half of 1940’s – the situation on the fronts of the Cold War, beginning with the 1973 – the level of oil prices, and starting from the 1990’s – general international situation (Knoop 186).
Since 2007 in the U.S. economy, it began appears signs of this very “recession”. It is well-known that December is the month of Christmas shopping. However, in December Americans spent less money than in the “calm” November. Next year, as well the amount of housing construction decreased sharply. In mid January, the largest bank Citigroup announced a huge loss for the fourth quarter. The second-largest bank, Bank of America, has reduced its profit in 2007 compared to the previous increasingly. The budget deficit remains huge. And finally “On November 28, 2008, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) announced that the United States has indeed been in a recession since December 2007” (Evans).
The recession in United State is a hit to the global economy. It is difficult to find a country that doesn’t depend on the U.S. market no matter in direct or indirect way. How does a shareholder, for example, of a Japanese car factory having heard about a recession in the United States behave? He is trying to sell shares immediately as he fears that tomorrow they might be devalued, because the demand for cars will fall. Will it fall actually? It still unknown, but increased supply of shares, in itself, send prices down. Holders of other shares is thinking in the same way that leads to the decline in stock indices that characterizes the average price of traded shares.
Such kind of scenario one can see in the world economy. U.S. authorities are aware of the danger and take immediate action. U.S central bank has cut the so-called discount rate gradually, “the discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility – the discount window” (“The Discount Rate”). Loans are becoming more accessible with the lowering of rates, and it creates a hope that more people and businesses put money into the economy. Stock exchanges around the world reacted to the decline in rates, but not very strongly.
How events will develop further? Frankly speaking, it is unknown, because the future depends on many factors, each of which is difficult to predict. Low interest rate is a cut both ways. The reason for today’s crisis is just a lower rate that was 5-6 years ago when Americans took cheap mortgage credits are now they unable to return them. According to economics professor at New York University, Mr Roubini, “America faces a ‘reverse cycle’ where a credit crunch has hit before the slowdown, a rare pattern. Normally, recession comes first, setting off credit troubles in its wake. We have a housing recession, an auto recession, a manufacturing recession, and a real investment recession already present. If all this happening in what the consensus terms as a ‘Goldilocks economy’, what would happen if the economy slows down?” (Evans-Pritchard).
Today, the whole world keeps an eye on situation in the country with the most advanced economy. In modern civilization, the countries’ economies depend on each other and negative processes transfer from region to region. Moreover, in many cases mass media as well as statements of politicians and experts stir up the situation.
Now the pace of world economic growth has slowed. However, if the market shows slowing of the economy that does not mean that it must transfer the global GDP growth in the negative zone. The decline in GDP growth over two quarters is a major sign of recession. Recessions of previous years (with the exception of the Great Depression) were quite soft, and the economy since those times are progressively developed and civilization gained experience, studying on their own mistakes.
Today we can say that the financial crisis, if not defeated, then its effect is largely mitigated. The matter is that now we have entered a phase of cyclical recessions, and each country one by one trying to decide how to fight it. Unlike the previous recessions, this one involves the whole world rather than individual regions. However, unlike the 1970’s recession, which also spread to the entire world, this one doesn’t provoke such a take-off of inflation and interest rates.
Virtually all of the world’s governments are now developing and take crisis measures, including collaboration with other countries to mitigate the possible effects of the economic downturn. Perhaps, it is due to the current crisis will occur soul-searching that bring together the positions of many politicians and economists. In the face of modernity such global economic crisis requires global action and concerted action by various countries. However, not everyone understands this fact continuing to swing the “boat” and risking themselves to “fall into the water”.
- Evans, Kelly. “Home Construction at Record Slow Pace”. The Wall Street Journal, 2009. 8 May 2009 http://online.wsj.com/article/SB123262983436405961.html
- Evans-Pritchard, Ambrose. “US mortgage crisis goes into meltdown”. Telegraph.co.uk, 2007. 8 May 2009 http://www.telegraph.co.uk/finance/2804846/US-mortgage-crisis-goes-into-meltdown.html
- Knoop, Todd A. Recessions and Depressions: Understanding Business Cycles. Praeger Publishers, 2004.
- National Bureau of Economic Research official site. 8 May 2009 http://www.nber.org/info.html
- Tarantino, Anthony and Deborah Cernauskas. Risk Management in Finance. John Wiley and Sons, 2009.
- “The Discount Rate”. 14 April 2009. 8 May 2009 http://www.federalreserve.gov/monetarypolicy/discountrate.htm