Economic Recession: Causes and Effects

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Economic Recession: Causes and Effects

An economic recession is a slowdown in economic activities such as employment, distribution, production, real income and real GDP. The 2008-2009 economic recession was the longest in duration and deepest in contraction since the great depression of 1929-1932, (Roberts, 2009). Its causes were mainly preventable through a series of legislations and so it can be avoided in the future. This paper champions the thesis that the recent economic recession was largely avoidable, but the application of inappropriate economic strategies as presented below caused its occurrence, and has so far had overarching effects on the world.

According to (Simpson, 2009), the recession was the direct and unavoidable result of the credit boom that preceded it. First, the credit boom was partly a result of low interest rates that lasted too long, facilitated by governments and their central banks. This resulted in the build-up of a credit bubble. Secondly, governments failed in the role of regulating the credit market. This encouraged borrowing of those who were least able to repay, resulting in an increase in demand of properties, (Bessler, Leatham and Zhang, 2006). Once demand had risen, property prices went up, attracting more investors into the market. Then the desire for profit was overtaken by the fear of loss as the market was flooded with properties. At this point, the credit bubble had burst. There were investors who had properties that were now lower in value. At this point, the lenders discontinued their lending based on the security of assets as they were uncertain. The recession had begun! The governments had to do something to ease the situation. Instead of using its funds on development, the governments had to help bail out some of the companies that were struggling, (Simpson, 2010)

To investors and producers, the effects were enormous. Investors were looking at losses from properties that were not moving anymore. On the other hand, the producers had other problems of their own. First, there was the money that had been lent to the consumers. With the recession now in place, it meant that now there were going to be many defaulters who would translate to losses on the part of banks and other lending institutions. The property market, on the other hand, went down. The property prices were getting lower every day making the business uncertain. When losses got too high, companies started to cut costs in terms of less advertising, closing down some of their branches, suing for bankruptcy and cutting down on labour (Pettinger 2013). The loss of jobs affected cash flow in a big way.

The consumers were also suffering intensely. First, some of them had lost their jobs and so they were working with a survival budget. According to (Simpson 2010), birth rates went low as people delayed having children in the face of the economic troubles. Divorces also went up due to financial conflicts. All these troubles then weighed on the children as parents could not afford them a decent living, so they would soon be suffering from stunted growth and poor performance in schools. Consumers also stopped investing their money and instead opted to save since the economic situation was uncertain. Consumers also reduced their budget to save what little they had for a later date or until the situation eased.

In conclusion, the recession was the ugliest economic situation seen in a long time. It was caused by situations that could have been avoided using proper legislations by the government. In future, governments should do proper legislations that will prevent another recession from taking place. The recession is now over and just about time business went back to normal. People should trust the current economic situation and use the available opportunities to improve on themselves. The producers on the other hand should move on with business, only more cautiously this time and ensure that development moves back on track.

References

Bessler, D. A., Leatham, D. A. & Zhang, J. (2006). Does consumer debt cause economic recession? Evidence using directed acyclic graphs. Applied Economics Letters, 13(7), 401-407

Pettinger, T. R. (2013, May 16). The great recession 2008-13. Retrieved from http://www.economicshelp.org/blog/7501/economics/the-great-recession/

Roberts, M. (2009). The Great Recession: Profit cycles, economic crisis: A Marxist view

Simpson, D (2009) The Recession: Causes and Cures, UK: ASI (Research) Ltd

Simpson S. (2010, November 12). 5 longterm consequences of the recession. Retrieved from http://www.forbes.com/sites/greatspeculations/2010/11/12/5-long-term-consequencies-0f-the-recession/