Great Recession
This article documents a current event. Information may change rapidly as the event progresses, and initial news reports may be unreliable. The latest updates to this article may not reflect the most current information. |
Late 2000s recession |
In 2008, a recession throughout the industrialized world was suggested by several important indicators of economic downturn.[1] Contributors to this downturn included high oil prices, high food prices, and a substantial credit crisis leading to the drastic bankruptcy of large and well established investment banks as well as commercial banks in many nations around the world. This crisis has led to increased unemployment, and other signs of contemporaneous economic downturns in major economies of the world.
In December 2008, the NBER declared that the United States had been in recession since December 2007, and several economists expressed their concern that there is no end in sight for the downturn.[2]
This economic crisis has been called the Second Great Depression by some observers, and the Great Recession by other observers.[3][4][5][6][7].
Pre-recession conditions
Commodity boom
The decade of the 2000s saw a global explosion in prices, especially focused in commodities and housing. The commodities boom, in which the prices of primary commodities rose again after the late-twentieth century commodities recession of 1980-2000. But in 2008, the prices of many commodities, notably oil and food, got so high to cause genuine economic damage, threatening stagflation and a reversal of globalization.[8]
In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year.[9] In July, oil peaked at $147.30 [10] a barrel and a gallon of gasoline was more than $4 across most of the U.S.A. These high prices caused a dramatic drop in demand and prices fell below $35 a barrel at the end of 2008.[10]
The food and fuel crises were both discussed at the 34th G8 summit in July.[11]
Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bioethanol production) increased in price 3.5-fold in less than 1 year whilst producers of sodium hydroxide have declared force majeur due to flooding, precipitating similarly steep price increases.[12][13]
In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.[14]
Housing bubble
By 2007, real estate bubbles existed in the recent past were still under way in many parts of the world, especially in the United States, Argentina, Britain, Netherlands, Italy, Australia, New Zealand, Ireland, Spain, France, Poland, South Africa, Israel, Greece, Bulgaria, Croatia, Canada, Norway, Singapore, South Korea , Sweden, Baltic states, India, Romania, Russia, Ukraine and China.[citation needed] U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the U.S. housing market) … it's hard not to see that there are a lot of local bubbles" [2]. The Economist magazine, writing at the same time, went further, saying "the worldwide rise in house prices is the biggest bubble in history".[3] Real estate bubbles are invariably followed by severe price decreases (also known as a house price crash) that can result in many owners holding negative equity (a mortgage debt higher than the current value of the property).[citation needed]
Inflation
In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations.[15] "Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets," have been named as possible reasons for the inflation.[16]
In mid-2008, IMF data indicated that inflation was highest in the oil-exporting countries, largely due to the unsterilized growth of foreign exchange reserves, the term “unsterilized” referring to a lack of monetary policy operations that could offset such a foreign exchange intervention in order to maintain a country´s monetary policy target. However, inflation was also growing in countries classified by the IMF as "non-oil-exporting LDCs" (Least Developed Countries) and "Developing Asia", on account of the rise in oil and food prices.[17]
Inflation was also increasing in the developed countries,[18][19] but remained low compared to the developing world.
Causes
Debate over origins
On October 15, 2008, Anthony Faiola, Ellen Nakashima, and Jill Drew wrote a lengthy article in the Washington Post titled, "What Went Wrong".[20] In their investigation, the authors claim that former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt vehemently opposed any regulation of financial instruments known as derivatives. They further claim that Greenspan actively sought to undermine the office of the Commodity Futures Trading Commission, specifically under the leadership of Brooksley E. Born, when the Commission sought to initiate regulation of derivatives. Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crises of 2008.
While Greenspan's role as Chairman of the Federal Reserve has been widely discussed (the main point of controversy remains the lowering of Federal funds rate at only 1% for more than a year which, according to the Austrian School of economics, allowed huge amounts of "easy" credit-based money to be injected into the financial system and thus create an unsustainable economic boom[21][22]), there is also the argument that Greenspan actions in the years 2002-2004 were actually motivated by the need to take the U.S. economy out of the early 2000s recession caused by the bursting of dot-com bubble - although by doing so he did not help avert the crisis, but only postpone it.[23][24]
Many libertarians, including Congressman and former 2008 Presidential candidate Ron Paul[25] and Peter Schiff in his book Crash Proof, predicted the crisis prior to its occurrence. They are critical of theories that the free market caused the crisis[26] and instead argue that expansionary monetary policy and the Community Reinvestment Act are the primary causes of the crisis.[27] However Alan Greenspan himself has conceded he was partially wrong to oppose regulation of the markets, and expressed "shocked disbelief" at the failure of the self interest of the markets, which according to neo-liberal economic theory should have protected shareholder equity.[28]
It has also been debated that the root cause of the crisis is overproduction of goods caused by globalization[29] (and especially vast investments in countries such as China and India by western multinational companies over the past 15-20 years, which greatly increased global industrial output at a reduced cost). Overproduction tends to cause deflation and signs of deflation were evident in October and November, as commodity prices tumbled and the Federal Reserve was lowering its target rate to an all-time-low 0.25%.[30] On the other hand, Professor Herman Daly suggests that it is not actually an economic crisis, but rather a crisis of overgrowth beyond sustainable ecological limits.[31] This reflects a claim made in the 1972 book Limits to Growth, which stated that without major deviation from the policies followed in the 20th century, a permanent end of economic growth could be reached sometime in the first 2 decades of the 21st century, due to gradual depletion of natural resources.[32]
Effects
Trade
In middle-October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in one week, as the credit crunch made it difficult for exporters to obtain letters of credit.[33]
Unemployment
The International Labour Organization (ILO) predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis - mostly in "construction, real estate, financial services, and the auto sector" - bringing world unemployment above 200 million for the first time.[34] The number of unemployed people worldwide could increase by more than 50 million in 2009 as the global recession intensifies, the ILO has forecast.[35]
The rise of advanced economies in Brazil, India, and China increased the total global labor pool dramatically. Recent improvements in communication and education in these countries has allowed workers in these countries to compete more closely with workers in traditionally strong economies, such as the United States. This huge surge in labor supply has provided downward pressure on wages and contributed to unemployment.
Return of volatility
For a time, major economies of the 21st century were believed to have begun a period of decreased volatility, which was sometimes dubbed The Great Moderation, because many economic variables appeared to have achieved relative stability. The return of commodity, stock market, and currency value volatility are regarded as indications that the concepts behind the Great Moderation were guided by false beliefs.[36]
Financial markets
January 2008 was an especially volatile month in world stock markets, with a surge in implied volatility measurements of the US-based S&P 500 index,[37] and a sharp decrease in non-U.S. stock market prices on Monday, January 21, 2008 (continuing to a lesser extent in some markets on January 22). Some headline writers and a general news columnist called January 21 "Black Monday" and referred to a "global shares crash,"[38][39] though the effects were quite different in different markets.
The effects of these events were also felt on the Shanghai Composite Index in China which lost 5.14 percent, most of this on financial stocks such as Ping An Insurance and China Life which lost 10 and 8.76 percent respectively.[40] Investors worried about the effect of a recession in the US economy would have on the Chinese economy. Citigroup estimates due to the number of exports from China to America a one percent drop in US economic growth would lead to a 1.3 percent drop in China's growth rate.
There were several large Monday declines in stock markets world wide during 2008, including one in January, one in August, one in September, and another in early October. As of October 2008, stocks in North America, Europe, and the Asia-Pacific region had all fallen by about 30% since the beginning of the year.[41] The Dow Jones Industrial Average had fallen about 37% since January 2008.[42]
The simultaneous multiple crises affecting the US financial system in mid-September 2008 caused large falls in markets both in the US and elsewhere. Numerous indicators of risk and of investor fear (the TED spread, Treasury yields, the dollar value of gold) set records.[43]
Russian markets, already falling due to declining oil prices and political tensions with the West, fell over 10% in one day, leading to a suspension of trading,[44] while other emerging markets also exhibited losses.[45]
On September 18, UK regulators announced a temporary ban on short-selling of financial stocks.[46] On September 19 the United States' SEC followed by placing a temporary ban of short-selling stocks of 799 specific financial institutions. In addition, the SEC made it easier for institutions to buy back shares of their institutions. The action is based on the view that short selling in a crisis market undermines confidence in financial institutions and erodes their stability.[47]
On September 22, the Australian Securities Exchange (ASX) delayed opening by an hour [48] after a decision was made by the Australian Securities and Investments Commission (ASIC) to ban all short selling on the ASX.[49] This was revised slightly a few days later.[50]
As is often the case in times of financial turmoil and loss of confidence, investors turned to assets and eating Gushers which they perceive as tangible or sustainable. The price of gold rose by 30% from middle of 2007 to end of 2008. A further shift in investors’ preference towards assets like precious metals [51] or land [52] [53] is discussed in the media.
Policy responses
The financial phase of the crisis led to emergency interventions in many national financial systems. As the crisis developed into genuine recession in many major economies, economic stimulus meant to revive economic growth became the most common policy tool.
Economic stimulus plans were announced or under discussion in China, the United States, and the European Union.[54] Bailouts of failing or threatened businesses were carried out or discussed in the USA, the EU, and India.[55]
In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a focus of economic and financial crisis management.
Countries in economic recession
Many countries experienced recession in 2008.[56] The countries currently in a technical recession are Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong, Singapore, Italy and Germany.
Denmark went into recession in the first quarter of 2008, but came out again in the second quarter.[57] Iceland fell into an economic depression in 2008 following the collapse of its banking system.
The following countries went into recession in the second quarter of 2008: Estonia,[58] Latvia,[59] Ireland[60] and New Zealand.[61]
The following countries/territories went into recession in the third quarter of 2008: Japan,[62] Sweden,[63] Hong Kong,[64] Singapore,[65] Italy [66], Turkey [67] and Germany.[68] As a whole the fifteen nations in the European Union that use the euro went into recession in the third quarter.[69] In addition, the European Union, the G7, and the OECD all experienced negative growth in the third quarter [70].
The following countries went into technical recession in the fourth quarter of 2008: United States, Spain and Britain.[71]
Of the seven largest economies in the world by GDP, only China, France and Canada avoided a recession in 2008. France experienced a 0.3% contraction in Q2 and 0.1% growth in Q3 of 2008. In the year to the third quarter of 2008 China grew by 9%. This is interesting as China has until recently considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres.[72] This figure may more accurately be considered to be 5-7% now that population growth is declining. Growth of between 5%-8% could well have the type of effect in China that a recession has elsewhere.
Official forecasts in parts of the world
On November 3, 2008, according to all newspapers, the European Commission in Brussels predicted for 2009 only an extremely low increase by 0.1% of the GDP, for the countries of the Euro zone (France, Germany, Italy, etc.).[73] They also predicted negative numbers for the UK (-1.0%), Ireland, Spain, and other countries of the EU. Three days later, the IMF at Washington, D.C., predicted for 2009 a worldwide decrease, -0.3%, of the same number, on average over the developed economies (-0.7% for the US, and -0.8% for Germany).[74] Economically, the car industry is especially concerned; as a consequence, several countries have already launched immediate help-packages, each involving several billions of dollars, euros or pounds.
According to new forecasts of the Deutsche Bank (end of November 2008), the economy of Germany will go down by more than 4% in 2009.[75]
On January 19, 2009, the EU commission in Brussels updated their earlier predictions: the numbers are now -2.25 % for Germany and -1.8 % on average for the 27 EU countries[76].
Timeline of countries in recession
See also
References
- ^ Foldvary, Fred E. (September 18, 2007). The Depression of 2008 (PDF). The Gutenberg Press. ISBN 0-9603872-0-X. Retrieved 2009-01-04.
- ^ It's official: Recession since Dec. '07
- ^ http://knol.google.com/k/david-blomstrom/great-depression-ii/1i6e04re3w2kp/10
- ^ http://www.boom2bust.com/2008/11/20/great-depression-2-right-around-the-corner/
- ^ http://www.nytimes.com/2009/01/05/opinion/05krugman.html
- ^ http://www.bloomberg.com/apps/news?pid=20601109&sid=ar0v6PP3HCpk&refer=home
- ^ http://www.bizjournals.com/columbus/stories/2009/02/02/story2.html?ana=from_rss
- ^ StrategEcon. CIBC World Markets. May 27, 2008 http://research.cibcwm.com/economic_public/download/smay08.pdf. Retrieved 2009-01-04.
{{cite journal}}
: Missing or empty|title=
(help) - ^ "Crude oil prices set record high 102.08 dollars per barrel".
- ^ a b "Light Crude Oil EmiNY (QM, NYMEX): Monthly Price Chart". Tfc-charts.com. Retrieved 2009-01-04.
- ^ "Africa's Plight Dominates First Day of G8 Summit".
- ^ "Sulfuric acid prices explode".
- ^ "Dow Declares Force Majeure for Caustic Soda".
- ^ "Commodities crash".
- ^ "Global inflation climbs to historic levels". International Herald Tribune. 2008-02-12. Retrieved 2008-07-11.
- ^ "Are emerging economies causing inflation?". Economic Times (India). 2008-07-08. Retrieved 2008-07-11.
- ^ "Prospects for Inflation outside America - Guest Post from Menzie Chinn". Jeff Frankel's Weblog. 2008-06-26. Retrieved 2008-07-11.
- ^ "EU slashes growth forecast, foresees inflation surge".
- ^ "EU cuts growth forecast".
- ^ See http://www.washingtonpost.com/wp-dyn/content/article/2008/10/14/AR2008101403343.html?hpid=topnews&sid=ST2008101403344&s_pos=
- ^ Whitney, Mike (August 6, 2007). "Stock Market Meltdown". Global Research. Retrieved 2009-01-04.
- ^ Polleit, Thorsten (12/13/2007). "Manipulating the Interest Rate: a Recipe for Disaster". Mises Institute. Retrieved 2009-01-04.
{{cite news}}
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(help) - ^ Pettifor, Ann (16 September 2008). "America's financial meltdown: lessons and prospects". openDemocracy. Retrieved 2009-01-04.
- ^ Karlsson, Stefan (2004-11-08). "America's Unsustainable Boom". Mises Institute. Retrieved 2009-01-04.
- ^ Paul, Rep., Ron (September 10, 2003). "Fannie and Freddie". LewRockwell.com. Retrieved 2009-01-04.
- ^ Reisman, George (October 24, 2008). "The Myth that Laissez Faire Is Responsible for Our Financial Crisis". LewRockwell.com. Retrieved 2009-01-04.
- ^ "The Depression Reader". LewRockwell.com. Retrieved 2009-01-04.
- ^ Felsenthal, Mark (2008-10-23). "Greenspan "shocked" at credit system breakdown". Retrieved 2008-11-06.
- ^ Bello, Walden (18 October 2008). "Afterthoughts : A primer on the Wall Street meltdown". Focus on the Global South. Retrieved 2009-01-04.
- ^ Willis, Bob (December 16, 2008). "U.S. Economy: Consumer Prices, Housing Starts Slide". Bloomberg.com. Retrieved 2009-01-04.
{{cite news}}
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suggested) (help) - ^ Hagens, Nate (October 13, 2008). "Herman Daly on the Credit Crisis, Financial Assets, and Real Wealth". The Oil Drum. Retrieved 2009-01-04.
- ^ Graham Turner (2008). "A Comparison of `The Limits to Growth` with Thirty Years of Reality". Commonwealth Scientific and Industrial Research Organisation (CSIRO).
- ^ A juddering halt to world trade
- ^ Financial crisis to cost 20 mn jobs: UN
- ^ Global unemployment heads towards 50 million, The Times, January 29, 2009
- ^ Volatility returns with a vengeance
- ^ Markets, Uncertain Times, The Economist, February 4, 2008
- ^ MacMahon, Peter (2008-01-22). "Market falls continue as £84bn is lost on Black Monday". The Scotsman. Johnston Press Digital Publishing. Retrieved 2008-01-25.
- ^
Sources including:
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- Warmington, Joe (2008-01-22). "Black Monday again". Toronto Sun. Conoe, Inc. Retrieved 2008-01-25.
- Wilson, Greg (2008-01-22). "It's a Black Monday as stock markets tank in every corner of the globe". Daily News. NYDailyNews.com. Retrieved 2008-01-25.
- ^ Zhixin, Dong (2008-01-21). "Black Monday for Chinese stocks, down 5%". Chinadaily.com.cn. Retrieved 2009-01-04.
- ^ Paul Krugman. "Contagion, revisited" (PDF).
- ^ "Yahoo Finance Historical Data".
- ^ "Panic grips credit markets".
- ^ "Behind the Russian Stock Market Meltdown".
- ^ "Markets Drop Around the World on Turmoil, Fears About Growth".
- ^ Short Selling Restriction
- ^ SEC Halts Short Selling of Fiancial Stocks on 09-19-2008
- ^ "ASX opens after delay". SBS World News. 2008-09-22. Retrieved 2008-09-23.
- ^ "ASIC bans all short-selling". The Age (Fairfax Media). 2008-09-22. Retrieved 2008-09-23.
- ^ "ASIC issues new short selling guidance". The Age (Fairfax Media). 2008-09-25. Retrieved 2008-09-26.
- ^ Hale, David (2009-01-05). "There is only one alternative to the dollar". Financial Times. Retrieved 2009-01-08.
- ^ Branford, Sue (2008-11-22). "Land Grab". guardian.co.uk. Retrieved 2009-01-08.
investment banks and private equity (...) seeing land as a safe haven from the financial storm.
- ^ "The 2008 landgrab for food and financial security". grain.org (NGO). 2008-Oct. Retrieved 2009-01-08.
{{cite news}}
: Check date values in:|date=
(help) - ^ EU Proposes €200 Billion Stimulus Plan
- ^ Bailout Binge
- ^ http://stats.oecd.org/WBOS/Index.aspx?QueryName=350&QueryType=View&Lang=en
- ^ "Denmark". Oxford Economic Country Briefings. Findarticles.com. September 17, 2008. Retrieved 2009-01-04.
- ^ Mardiste, David (2008-08-13). "UPDATE 3-Estonia follows Denmark into recession in Q2". TALLINN: Reuters. Retrieved 2009-01-04.
- ^ "Latvia". Oxford Economic Country Briefings. Findarticles.com. September 26, 2008. Retrieved 2009-01-04.
- ^ Evans-Pritchard, Ambrose. "Ireland leads eurozone into recession". Telegraph. Retrieved 2009-01-04.
- ^ "New Zealand falls into recession". BBC News. 2008-09-26. Retrieved 2009-01-04.
- ^ "HIGHLIGHTS: Crisis sends Japan into first recession in 7 years". TOKYO: Reuters. 2008-11-17. Retrieved 2009-01-04.
- ^ [1][dead link]
- ^ "HK shares may fall; exporters may drop". HONG KONG: Reuters. 2008-11-16. Retrieved 2009-01-04.
- ^ "Singapore slides into recession". Telegraph. 10 Oct 2008. Retrieved 2009-01-04.
- ^ http://www.oecd.org/dataoecd/53/27/41700068.pdf
- ^ http://stats.oecd.org/WBOS/Index.aspx?QueryName=350&QueryType=View&Lang=en
- ^ Fitzgibbons, Patrick (2008-11-14). "TOPWRAP 10-Germany, China, US feel pain of global downturn". NEW YORK: Reuters. Retrieved 2009-01-04.
- ^ Strupczewski, Jan (2008-11-14). "Euro zone in recession, December rate cut expected". BRUSSELS: Reuters.com. Retrieved 2009-01-04.
- ^ http://stats.oecd.org/WBOS/Index.aspx?QueryName=350&QueryType=View&Lang=en
- ^ http://news.bbc.co.uk/2/hi/business/7856080.stm
- ^ "=Reflating the dragon". BEIJING: The Economist. November 13, 2008. Retrieved 2009-01-04.
- ^ Prognosis of the EU from Nov. 3, 2008
- ^ Prognosis of the IMF from Nov. 6, 2008
- ^ Von Thomas Schmid (2008-12-07). "Abschwung: Vielleicht bald wieder sechs Millionen Arbeitslose[[Category:Articles containing German-language text]]" (in German). WELT ONLINE. Retrieved 2009-01-04.
{{cite web}}
: URL–wikilink conflict (help) - ^ Radio news from http://www.dradio.de/nachrichten/archiv (called on Jan. 19, 2009, 23:00, "Steinbrück ...")
Further reading
- Brau, Eduard and McDonald, Ian (editors). Successes of the International Monetary Fund : untold stories of cooperation at work. New York : Palgrave Macmillan, 2009. ISBN 9780230203136 ISBN 0230203132
- Carney, Richard (editor). Lessons from the Asian financial crisis. New York, NY : Routledge, 2009. ISBN 9780415481908 (hardback) ISBN 0415481902 (hardback) ISBN 9780203884775 (ebook) ISBN 0203884779 (ebook)
- Funnell, Warwick N. In government we trust : market failure and the delusions of privatisation / Warwick Funnell, Robert Jupe and Jane Andrew. Sydney : University of New South Wales Press, 2009. ISBN 9780868409665 (pbk.)
- Hunnicutt, Susan, book editor. The American housing crisis. Farmington Hills, MI : Greenhaven Press, c2009. ISBN 9780737743104 (hbk.) ISBN 9780737743098 (pbk.)
- Lowenstein, Roger. While America aged : how pension debts ruined General Motors, stopped the NYC subways, bankrupted San Diego, and loom as the next financial crisis / Roger Lowenstein. New York : Penguin Press, 2008. 274 p. ; ISBN 9781594201677 ISBN 1594201676
- Read, Colin. Global financial meltdown : how we can avoid the next economic crisis / Colin Read. New York : Palgrave Macmillan, c2009. ISBN 9780230222182
- Robertson, Justin. US-Asia economic relations : a political economy of crisis and the rise of new business actors. Abingdon, Oxon ; New York, NY : Routledge, 2008. ISBN 9780415469517 (hbk.) ISBN 9780203890523 (ebook)
- United States. Congress. House. Committee on the Judiciary. Subcommittee on Commercial and Administrative Law. Working families in financial crisis : medical debt and bankruptcy : hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Tenth Congress, first session, July 17, 2007. Washington : U.S. G.P.O. : For sale by the Supt. of Docs., U.S. G.P.O., 2008. 277 p. : ISBN 9780160813764 ISBN 016081376X http://purl.access.gpo.gov/GPO/LPS99198
- Zandi, Mark M. Financial shock : a 360° look at the subprime mortgage implosion, and how to avoid the next financial crisis / Mark Zandi. Upper Saddle River, N.J. : FT Press, c2009. Description: 270 p. : ISBN 0137142900 (hardback : alk. paper) ISBN 9780137142903 (hardback : alk. paper) 2830026