Global Economic Recession- Lessons and Impacts

As phrased by President Obama, “our economy is shrinking, unemployment rolls are growing, businesses and families can’t get credit and small businesses can’t secure the loans they need to create jobs and get their products to market.”

The global financial upheaval that started around two years ago and influences our daily shopping sprees even today has been called by various names depending on the aspect of economy it affected, subprime crisis, banking crisis, liquidity crisis, financial crisis etc. It is the biggest economic catastrophe since the Great Depression of 1930s, one that redefined the way the world’s economy was conducted. The origins of the financial crisis remain ambiguous as economists and politicians continue to debate on the why it happened. As a consequence, the jury is divided over the diagnosis and only superficial medicines in the form of stimulus packages and reduction of central bank interest rates are being administered by various governments across the world, leading to the uncertainty of a complete economic recovery. However, some common threads of transgressions and excesses can be seen running through the whole fabric of banking and financial institutions of the developed economies starting with the largest economy, USA. These transgressions were initially started in different pockets of the economy as minor financial aberrations and slowly before anybody knew it, had engulfed the whole financial system. This happened mainly because the market and financial regulation was relegated to the back seat leaving the market forces to decide the outcome of these actions prompted greatly by personal greed and short term gains. This credit crisis presented the central banks across the world with their biggest challenge since their inception and questioned their ability to perform the primary duty of keeping financial stability and price stability in the economy. Inadequate financial supervision by central banks especially in developed countries, have contributed to this crisis as much as the excessively low interest rates and loose rating of borrowers leading to the subprime crisis. Therefore, the two major causes of the financial crisis were the macroeconomic policies of the developed economies, majorly USA, and flaws in the national and global financial regulation and supervision. Firstly, policy makers and heads of financial institutions got carried away by the euphoric rise in asset prices especially housing that happened without reason. The consequent policy changes further deteriorated the situation, such as reducing interest rates and excessive lending without verifying the borrowers’ capacity. It has to be noted that anything that goes up irrationally has to come down often without a reason because “there’s no free lunch.” Measures should have been taken to stabilize prices and the reasons for the sudden increase in asset price should have been investigated. Secondly, the reduction in growth has not been limited to advanced economies. The impact of the financial disorder first showed on the largest economy in the world where stocks plummeted and major companies went into losses in successive quarters and even liquidation of financial giants. It was only after this crisis that it was implicit how globalization has made economies across the world an interconnected system and there is in fact, no decoupling of world economies. There have also been many types of stress tests applied on various banks to test their ability to withstand such crises. Every country should be in a position to successfully handle financially stressful situations with their own judicious selection of policies. This will limit its vulnerability in a crisis such as that faced by keeping inflation at reasonably low levels, comfortable internal and external debt positions and stable currency exchange rate. The country’s policies should be adjusted so that sufficient counter-measures to reverse or slow down the effect of financial stress are taken. Since recession is the result of reduction in the demand of products in the global market especially in the developed economies, with falling prices, companies across the world have resorted to various cost-cutting measures. Many of the existing projects have been kept on hold and new investments put-off such as indefinitely postponed steel mills in north-eastern India. The heavily affected industries are IT, financial sectors and real estate. As per FICCI (Federation of Indian Chambers of Commerce and Industries), due to the global recession, export industries like garments, gems, textiles, chemicals and jewelers had cut production up to 50%. Consequently, the employment rate gone down drastically, people have been laid-off and promotions and salary raises have been frozen.

Since India’s financial markets are not as open as other Asian and American markets, the effect of the US recession on the Indian economy has not been that serious. Indian banking regulators have been successful in establishing sufficient risk management systems and competencies and this has ensured that our banking system has been resilient enough to withstand these external shocks to a great extent. This makes the Indian financial and banking system an object of envy to their peers in other advanced economies. An important lesson to be learnt is that proper checks and balances should be in place before complete liberalization and integration with external financial markets, to be better prepared to face a financial crunch.

Another positive impact of this crisis has been that Indian firms have learnt to cut-costs and become more efficient in their processes and operation. They have successfully carried out many innovative ideas and out-of-box strategies to be competitive in a ruthlessly beaten down market and many have come out with flying colors. Today most companies, especially those in the export sector, are in a far better position competitively than they were before the recession. This opens up immense opportunities for these companies to flourish in the post-recession era.

The financial turmoil and ensuing struggle is an opportunity in disguise for economies especially the developing around the world, to emerge with stronger fundamentals for “with hope and virtue, let us brave once more the icy currents, and endure what storms may come.”

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