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Sunday, December 12, 2010

Some Whys Behind Economic Recession of 2008

In an earlier post Economic Recession of 2008 three questions were posed with the first one being - "1. First, why did this happen?" This post will analyze that question.

Impact of Recession

First and foremost one must understand what's the impact the recession had. Some of the key impacts are listed down:
  • Economic problems have become the topmost political issue these days. And that is why at every global meeting worth it's name such as World Economic Forum, any Gx meeting (G20, etc.) the primary agenda is how to turn around the world economy. This is a good move by all nations as all problems that affect most of the citizens of a country should rightly bubble up to become a political problem.
  • Companies have closed down and people have lost jobs. This unfortunately takes the whole world in a downward spiral. When there are job cuts, people who get the axe will, on their own, cut down all non-essential expenses immediately; but if they remain jobless for a longer period they will be eventually forced to even cut down on the essential expenses. This leads to further demand suppression requiring additional production cuts and eventually more job cuts!
  • Investments have become risky and virtually no-return propositions. The avenues left for investment, especially for the small investors with short pockets, have become very less. The returns on the amount invested have become lesser and riskier - in some cases even the capital runs risk of complete loss or in the best case scenario, steep devaluation.
There are many other impacts which have become evident. The above three are the key ones that impact everyone of us directly.

Reasons for Recession

Now coming to why this happened. Analyzed without using the associated economic buzzwords, these are the primary reasons:
  • Greed of a few individuals - remember what Mahatma Gandhi said about this... there's everyone for people's need but not enough for people's greed. The wealthy individuals desire to become wealthier. The promoters and investors want to earn as much as is possible, milking out even the last drop. The CEOs adopt innovative means to enhance stakeholder value which may have a long-term adverse impact. The source of the current economic problem lies in cheap loans being provided to those who were known to lack repayment capacity. Excessive greed to earn by disbursing loans in such cases is nothing but milking out even the last drop. The conversion of home loan mortgages into derivative securities is another example of that (howsoever innovative the idea may be).
  • Inadequate regulatory controls - this will hopefully be tightened in the days to come. The investors and businessmen may not like more controls (after SOX was firmly put in place - remember Enron scandal). But it must be understood that businesses should be governed by the political desire of the nation. Businesses must be forced by political will to pay attention to all the three Ps - Planet, People Profits. And strictly in the same order, since if there's no planet, there's can't be people and if there are no people what for the profits?
  • There are many more reasons which seem to have set the stage for the recession. Many of them involve analysis of complex economic data. The above two reasons, however, can be considered to be amongst the root causes. The first one is more important, as even if better regulatory controls are put in place unless as individuals we behave ethically and more responsibly, no control is going to be adequate in a complete sense.
The current economic problem that world is facing has to do less with economics but more with politics and even more so with simple ethics.

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