Global Recession: What, Why and How?

  • SumoMe

The crash of the Wall Street has had its repercussions on the whole world. Even the superpower of the world, the United States of America, could not be resistant from the evil aspects of capitalism.

Essentially, what transpired that a massive company like Merrill Lynch and a major investment bank, Lehman Brothers, collapsed? Fannie Mae and Freddie Mac, giant government sponsored mortgage lenders, were also debt-ridden. How come the insurance giant, American Insurance Group, renowned for insuring others, could not insure itself?

It all happened mainly because of the housing bubble in the US. The banks kept giving loans to people who were not even credit worthy enough to pay it back. With more and more people borrowing money, the banks were accumulating increasing funds. Every thing seemed rosy at that time. The Republican government under George Bush did not put enough regulations on the banks. Consequently out of greed, the banks kept lending money and people kept on borrowing.

The economic analysts knew that this doom was coming. So the crash was not a shock, because it was something that was anticipated by the government. Finally when the doomsday came, it hit the financial markets across the world. This is a globalizing world, or for some, it is even an Americanization of the world. After all, the US does enjoy 1/4th of the world Gross Domestic Product (GDP) and so a recession in the US has hampered the growth of other countries too.

Economies across the world found it hard to sail through. All the stock markets of the world felt the heat, from the DOW and the Nikkei, to our very own NIFTY. Even the United Kingdom could not remain unscathed. Ireland is also suffering from terrible recession.

As far as India is concerned, our former finance minister, Mr.P.Chidambaram, first chose to pretend to be unassailed by the US meltdown, but it was actually a façade.

Foreign Institutional Investors (FIIs) have disinvested around $10 billion from the Indian shores. Our economy was already writhing under the travails of inflation and as if this was not enough, recession has jolted our markets.

Exports in the month of October were 12% lower than their rate in October 2007. The Indian rupee has hit an all-time low in comparison to the dollar. This means that even though our exports are bringing in more foreign exchange, our imports have become costlier.

Moreover, our export orders are reducing. Thus, our local markets have to pay the price. Foreign companies like Walmart, Target, Gap etc., which have their rudimentary units in India, are asking their Indian partners to pay less to the workers on account of the growing recession. Therefore, the incomes of skilled artisans have plunged.

In urban areas, job lay-offs are happening. The Jet Airways lay-offs struck the headlines of many newspapers. Our government has finally realized that we were affected too. So the same government that was reducing liquidity in the economy some months back, has reversed its policies. The Government has started bringing in more and more liquidity. The repo rate, the rate at which the Reserve bank of India (RBI) grants loans to other banks, was reduced. The Cash Reserve Ratio- the ratio of money which banks have to store with the RBI, was also pushed down. In this way, the credit needs were somehow met.

The US salvaged its sagging economy by the Paulson plan. It injected $700 billion to buy the bankrupt companies. It again gathered much flak because while in the time of prosperity the companies enjoyed their profits alone, the bailout plan was made out of the taxes of the common man. The companies had anticipated this debacle and so the CEO’s had already been bloating on heavy salaries. So, ‘profits were privatized, losses were socialized’ unjustifiably.

The Republicans self- invited more criticism, which was just the final blow needed by Democrat nominee, Barack Obama. Consequently, the people of America voted him as the President-elect and not the Republican nominee, John McCain.

Back home in India, things are bad, but are certainly better than in many other countries. This happened because ours is a mixed economy; we have both public and private sector undertakings and therefore, capitalists here do not find a free flow. So even as our economy is affected, it is not in so bad a plight as that of other nations.

Our economy is still expected to have one of the strongest growth rates, as was suggested by Usha Thorat, RBI deputy governor. Besides this, the global recession has also declined the soaring oil prices and this has certainly benefited India.

The state of economies across the world is bad. However, this meltdown has certainly taught some important lessons. Capitalism cannot be given a free play. There is a need for some censorship. If India today is in a better position, it is because of the control that the government of India exercises on the private sector.

The commercial majors look for their own profits only. This was very much visible recently when Anil Ambani gifted his wife, Tina Ambani, a private aircraft. This habit of conspicuous consumption has filled the common man with resentment. While on one hand, the lives of people across the world are disintegrating, the rich are becoming richer and the poor are becoming poorer. Even in the US, the common man had to bear the brunt of it all. The companies became fat before and became fatter still, even after incurring losses.

The recession is nowhere expected to end in the coming months, but the governments across the world have to somehow contain this crash. The best that we can expect from this defeat is to only learn not to repeat the same mistakes again.

Sakshi Denis

 

[Image source:http://www.flickr.com/photos/myeye/2928893949/]

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