The Economic Recession of 2007
Introduction
What is Recession?
Recession as stated by economists is the condition in which the economic growth slowdowns and all the elements of economic growth start to fall down in terms of their average measurement. The question is if the economy does not perform for one or two months, then do we call it as a recessionary period. The answer to this is ‘No’. A standardized period for making sure that the economy is hit by recession is when the factors of production and the related elements begin to decrease and is constantly decreasing for two or more than two quarters.
The elements that are being referred to here are namely the following:
Gross Domestic Product or the GDP
Employment
Investment
Income
Expenditure
Because of the fall of the these elements there is a great impact on all business whether be it local or global and the revenue of the firms and their subsequent profits starts to decline. The global village is considerably hit as well as all the firms these days are multinational in nature and they interact and trade with firms of countries and buy or sell their products in various countries or are dependent in some or the other manner. Hence in a decline phase all the countries also suffer in different levels and degrees.
The story behind recession: Causes of Recession
The story of the recession on 2006 dates back to the period where Jimmy Carter was holding the presidency of the states (1978-1982). He had signed a bill which was named as the ‘Community Reinvestment Act’. This act made the house available to the poor people. During the last year of the presidency of Bill Clinton, he realized that the bill signed by Jimmy Carter was not enacted so seriously and he reinforced and strengthened this law.
Because of this law the banks were forced to give the home loans to borrowers who suffered from bad credit and did not have the ability to pay the debt. All that was needed to get the mortgage loan was a written statement that they have the capacity to pay for the loan that they are applying for. Due to this act, there was huge number of people who bought the houses at extreme low rates from the year 2000 till 2006. This was called the subprime mortgages and there were millions of such subprime mortgages which were given to people.
Hence, the housing market in the US was all bucked up with enthusiasm and excitement which led people to buy houses which otherwise they could not have afforded otherwise. The reason behind this is there were extremely low home mortgage charges, which was less that 4 percent. The people assumed that the prices of houses that they are purchasing on loan will definitely go up but apparently it did not. Then the Federal Reserve raised the interest rates from 1% to 5% and subsequently the home mortgage rate of interest rose to 7% and 8% in some of the cases.
In the year 2006 the housing prices declined and many people started to foreclose the debt which they taken for buying houses. This led to instability of the banks and hedge fund service who had done the ground work of getting the securities so that people can buy houses on loans. Hence many banks and hedge funds faced severe losses. By the end of August 2007, banks feared to give loans to other banks and the whole financial scenario became so much unstable. This had cost $700 billion bailout.
Many of the nationalized banks and hedge funds were on the verge of bankruptcy and many had already been bankrupted. The companies did not have enough money to pay to their employees and they started to lay off people. The unemployment rate rose sharply.
Some facts about the Economic Recession in 2008
1.- The oil prices stagnated and the crossed the price of $100 per barrel. This was due to the destabilization of the geopolitical environment, the decrease in the stock prices, cuts in oil production by the OPEC.
2.- There was a considerable increase in the stable foods prices. It ranged an approximate 15% rise in the prices.
3.- The inflation rate rose up to 6% and the foreign debt increase grew amazingly. It reached 2.5 million US dollars. The current account deficit rose to 15% of the Gross Domestic product. The state revenues dropped and subsequently the purchasing power of individuals.
4.- At the end of the year 2008 the increase in rate of unemployment increased to 12.5%.
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Impact of Recession on the Economic Growth of the Country
1. The Stock prices decreases and there is reduced inflow of cash into the economy.
2. Fluctuating and Inconsistent Credit Cycle of the companies: As the individuals did not have enough purchasing power they did not pay the debt in a timely manner which forced companies to restructure the credit policies or choose the refinancing option.
3. Unemployment: Employee layoffs are another major setback when one thinks about recession. The firms try to save and reserve money and they try to lay off their employees to do so.
4. Decrease in Gross Domestic Product or GDP
The decline in revenue and profits leads to decrease in the production of the goods that is produced.
5. Decrease in Quality of goods and service
The companies do not spend money on their personnel, research and development, quality production, marketing or advertising and hence there is sharp decline in the goods and service that the companies provide. The quality does not tend to remain the same as it was before and it declines.
What solution did the government apply to cure recession?
The government in the year 2009 launched a program called the Economic Stimulus Plan. According to the plan the government decided to spend $185 billion that year. Though it decreased the affect of recession to a considerable extent yet the situation was not eradicated completely in the same year. The unemployment rate started to decrease but it was still seen in many countries and companies and it persisted in the year 2011 as well.
Suggestions
There are some suggestive ways in which the companies can fight back recession when it comes. These methods and strategies cannot claim to eradicate the effect of the crisis but helps in stabilizing the firm when every other company is on the verge of decline and keeps the company in a healthy position.
1. Diversification
The company should not hold only on to one set of products that they sell in the market. They should try and foray into new products and services or foray into a completely new industry. This will help the company to reduce the risk.
2. Investment in R&D, Marketing, and Improvisation
Any investment that is done on research and development, marketing, connecting with the customer, branding, and improvising the product pays off well during the normal course of time and even when during the economic slowdown.
3. Customer Engagement
Keeping a large and loyal base of customer helps companies to fight back recession. The firm should lay down effective policies and plan to acquire and retain the customers. Investing in customer strategies is a good option.
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