Global Recession: Causes

The truth is, we are going through the most severe global financial crisis since the days of Great Depression.

Originated in USA, economic recession is affecting all the major players of world economy. Governments and major policy makers of world economy have taken notice of the urgency of the situation and frantic steps are undertaken to stem the rot. At the core of the term ‘recession’, spirals of several financial mistakes are intermingled.

The biggest problem with economic turmoil is; it creates fear and panic amongst general people. Rumors are thick and they fly, resulting into even more fear amongst the households about their savings and hard earned income. Economic problem of 2008 was of gigantic proportions. If we look closely at the problem, we find few fundamental causes. Foremost among them is, complacent regulatory norms in USA. USA has enjoyed sustainable economic development with cushion of low inflation rates over last two decades. This resulted into complete ignorance of essential business cycle of economy. The first signs of this problem were visible 30 months ago when America was struggling with excess liquidity in the market. That was an ample sign of coming of real estate bubble and asset price inflation.

Another responsible factor is cushion enjoyed by private and investment banks. Taking their cue from good economic condition, most of these high flying banks took higher risks. Most of their business deals were highly leveraged transactions. The kind of risk undertaken by investment banks proved to be their nemesis as they failed to gather enough capital to support their risky investments. Third responsible factor is size of investment banks. Many of them witnessed huge growth when economy was on the rise. They made huge profits based on their high risk propensity ventures. These FIs (financial institutions) also contributed heavily to US corporate profits.

Another important reason was failure of top echelons of management to provide sense of direction to their deal makers. Greed took over and the rest is history. However, USA has started taking serious policy decisions to control the worsening situation. The $ 700 billion bailout package was first step in helping the doomed institutions. Apart from that, taking over of AIG, orchestrating Bear Stearns’ merger with JP Morgan, taking control of Fannie Mae and Freddie Mac, merging Merrill Lynch with Bank of America are other crucial steps. Though, all these steps won’t prove to be of much help in the short term. It is being said that, it will take another one year to stabilize the market and credit flow.

(Resource : Compilation from Some Internet articles)