Late 2000s recession

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The Recession and the countries affected.      Countries in recession as of December 2008      Severely affected countries While the eurozone as a whole suffers from a recession, the economies of France, Belgium, Slovakia, and Greece have not yet receded.

The great asset bubble:^[1]

1. Central banks gold reserves - $0,845 tn.
2. M0 (paper money) - - $3,9 tn.
3. traditional (fractional reserve) banking assets - $39 tn.
4. shadow banking assets - $62 tn.
5. other assets - $290 tn.
6. Bail-out money (early 2009) - $1,9 tn.

In 2008, a recession throughout the industrialized world was suggested by several important indicators of economic downturn.^[2] Contributors to this downturn included high oil prices, high food prices and a substantial credit crisis leading to the bankruptcy of large and well established investment banks as well as commercial banks in many nations around the world. It was argued that huge increases in commodity prices came as a consequence of extended period of easily available credit and the primary cause of the downturn was exceptionally financial.^[3] 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.^[4] The recession could be the worst since the Great Depression of the 1930s.^[5][6]

Since October 2008 a global financial crisis led to the bankruptcy of many financial institutions in the USA and European countries, threatening the global financial system.

[edit] Pre-recession conditions

[edit] Commodity boom

Further information: 2000s energy crisis and 2007–2008 world food price crisis

See also: 2008 Central Asia energy crisis and 2008 Bulgarian energy crisis

Brent barrel petroleum spot prices, May 1987 – Oct. 2008. The red dot indicates the price as of 24 December 2008

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.^[7]

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.^[8] In July, oil peaked at $147.30 ^[9] 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.^[9]

The food and fuel crises were both discussed at the 34th G8 summit in July.^[10]

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.^[11][12]

In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.^[13]

[edit] Housing bubble

UK house prices between 1975 and 2006.

Further information: Real estate 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" ^[14]. The Economist magazine, writing at the same time, went further, saying "the worldwide rise in house prices is the biggest bubble in history".^[15] 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]}

[edit] 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.^[16] "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.^[17]

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.^[18]

Inflation was also increasing in the developed countries,^[19][20] but remained low compared to the developing world.

[edit] Causes

Further information: Financial crisis of 2007–2009

[edit] 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".^[21] 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),^[22][23] 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.^[24][25]

Many libertarians, including Congressman and former 2008 Presidential candidate Ron Paul^[26] 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^[27] and instead argue that expansionary monetary policy and the Community Reinvestment Act are the primary causes of the crisis.^[28] 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.^[29]

It has also been debated that the root cause of the crisis is overproduction of goods caused by globalization^[30] (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%.^[31] 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.^[32] 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 two decades of the 21st century, due to gradual depletion of natural resources.^[33]

[edit] Effects

[edit] 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.^[34]

In February 2009, The Economist claimed that the financial crisis had produced a "manufacturing crisis", with the strongest declines in industrial production occurring in export-based economies.^[35]

[edit] 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.^[36] The number of unemployed people worldwide could increase by more than 50 million in 2009 as the global recession intensifies, the ILO has forecast.^[37]

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.

[edit] 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.^[38]

[edit] Financial markets

Main article: Global financial crisis of 2008

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,^[39] 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,"^[40][41] 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.^[42] 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.^[43] The Dow Jones Industrial Average had fallen about 37% since January 2008.^[44]

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.^[45]

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,^[46] while other emerging markets also exhibited losses.^[47]

On September 18, UK regulators announced a temporary ban on short-selling of financial stocks.^[48] 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.^[49]

On September 22, the Australian Securities Exchange (ASX) delayed opening by an hour ^[50] after a decision was made by the Australian Securities and Investments Commission (ASIC) to ban all short selling on the ASX.^[51] This was revised slightly a few days later.^[52]

As is often the case in times of financial turmoil and loss of confidence, investors turned to assets which they perceived 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 ^[53] or land ^{[54] [55]} is discussed in the media.

[edit] Insurance

A February 2009 research on the main British insurers showed that most of them do not consider officially to rise the insurance premiums for the year 2009, in spite of the 20% raise predictions made by The Telegraph or The Daily Mirror. However, it is expected that the capital liquidity will become an issue and determine increases, having their capital tied up in investments yielding smaller dividends, corroborated with the £644 million underwriting losses suffered in 2007.^[56]

[edit] Policy responses

Please help improve this article or section by expanding it. Further information might be found on the talk page. (January 2009)

Further information: 34th G8 summit, 2008 G-20 Washington summit, and Energy law

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.^[57] Bailouts of failing or threatened businesses were carried out or discussed in the USA, the EU, and India.^[58]

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.

[edit] Countries in economic recession

Main article: Timeline of countries in recession

Many countries experienced recession in 2008.^[59] The countries currently in a technical recession are Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong, Singapore, Italy, Russia and Germany.

Denmark went into recession in the first quarter of 2008, but came out again in the second quarter.^[60] 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,^[61] Latvia,^[62] Ireland^[63] and New Zealand.^[64]

The following countries/territories went into recession in the third quarter of 2008: Japan,^[65] Sweden,^[66] Hong Kong,^[67] Singapore,^[68] Italy ^[69], Turkey ^[59] and Germany.^[70] As a whole the fifteen nations in the European Union that use the euro went into recession in the third quarter.^[71] In addition, the European Union, the G7, and the OECD all experienced negative growth in the third quarter ^[59].

The following countries went into technical recession in the fourth quarter of 2008: United States, Spain and Britain.^[72]

Of the seven largest economies in the world by GDP, only China, France, Canada and Australia 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.^[73] This figure may more accurately be considered to be 5-7% now that the main growth in working population is receding. Growth of between 5%-8% could well have the type of effect in China that a recession has elsewhere.

The following country went into technical depression in the fourth quarter of 2008: Japan, with a nominal annualized GDP growth of -12.7% .^[74], and Taiwan, with a nominal annualized GDP growth of -33.4% ^[75].

[edit] 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.).^[76] 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).^[77] 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 contract by more than 4% in 2009.^[78]

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^[79].

On February 18, 2009, the US Federal Reserve cut their economic forecast of 2009, expecting the US output to shrink between 0.5% and 1.5%, down from its forecast in October 2008 of output between +1.1% (growth) and -0.2% (contraction)^[80].

[edit] Comparisons to the Great Depression

On January 4, 2009, Nobel prize winning economist Paul Krugman wrote that "This looks an awful lot like the beginning of a second Great Depression."^[81] On February 20, 2009, Paul Volcker, an economic adviser to US President Barack Obama, said that the current crisis may be worse than the Great Depression, stating "I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world."^[82] On the same day, investor George Soros said that the current crisis may be worse than the Great Depression and compared it to the collapse of the Soviet Union.^[83]

[edit] See also

2000s energy crisis 2007–2008 world food price crisis 2008 Russian financial crisis Ravi Batra Bear Stearns subprime mortgage hedge fund crisis China Stimulus Plan Crisis of capitalism Derivative (finance) Economic bubble Economic collapse Federal takeover of Fannie Mae and Freddie Mac Financial crisis of 2007–2008

Global financial crisis of 2008 Great Depression The Keynesian Resurgence of 2008 / 2009 Bankruptcy of Lehman Brothers List of entities involved in 2007–2008 financial crises Post-capitalism Savings and Loan crisis Statistical Arbitrage: Events of Summer 2007 Subprime crisis impact timeline Subprime mortgage crisis United States housing market correction The Limits to Growth

Wikinews has news related to: Canadian dollar reaches parity with US dollar Fears grow about U.S. dollar stability Worldwide markets fall precipitously Economics portal Wikiversity has learning materials about Late 2000s recession at: 2008 global economic crisis

[edit] References

[edit] 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
• Woods, Thomas E. Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse / Washington DC: Regnery Publishing 2009. ISBN 1596985879
• 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

[edit] External links

• UK in Recession ongoing coverage from BBC News
• Recession Britain ongoing coverage from The Guardian