Causes of Global Economic Recession

Subject: Economics
Pages: 3
Words: 646
Reading time:
3 min

The global economic recession was caused by poor banking policies adopted in the United States. The federal government deregulated the sub-prime mortgage industry and massive investments were experienced in the industry. Sub-prime mortgages have a high risk of default and investing in such portfolio can lead to economic failure. Many investors borrowed money from the banks to finance the sub-prime mortgages business. The massive investment in the industry caused an economic bubble and in 2006 the boom was at its peak.

At the beginning of 2007 the economy started to fall due to increase in oil prices and inflation caused rise in prices of basic commodities. Many sub-prime borrowers experienced hard economic situations and they started to default the loans they had borrowed from banks. Generally, the economy started to fall because the banks experienced major losses due to failure of many sub-prime mortgage companies. The other sectors of the economy were affected because the banking industry unites all other industries.

Other countries started to experience the economic meltdown because the economy of the U.S. serves many countries in the world. Other economies in the world were seriously affected and the entire world experienced the economic crisis. Trade among countries caused the economic crisis to spread quickly and the impacts of the recession could not be controlled. The economic crisis was at its peak in 2008 but measures were taken to reverse the effects of the crisis and by the beginning of 2009, many economies had started to experience an economic improvement.

To reverse the effects of the global economic recession, international organizations intervened by funding governments and improving trade among countries. Some of these organizations are the World Trade Organization (WTO), International Monetary Fund (IMF) and World Bank among others. By the beginning of 2010 many countries had recovered fully from the economic recession. Measures to improve global trade have been introduced to avoid the recurrence of such crises in future.

The global economic recession caused inflation in many countries. Inflation is the persistent increase in the prices of products for a given period of time. When the prices increased there was a decrease in the aggregate demand for goods and services. On the other hand, the increasing prices caused an increase in aggregate supply because manufacturers acquired more profits from the sale of products. Taking a country like Kenya (in Africa), the prices for products increased during this period and this caused their demand to decline.

For example, the price for food commodities was hiked by great margins and the common people could not afford such commodities. Many people lived a hand to mouth life because the meager incomes they had were entirely used in buying food products. On the other hand, manufacturers experienced a boom because they made more profits from the sale of their commodities. This resulted from the high rate of inflation which had set in the economy causing the prices of commodities to rise.

Many people in the country were seriously affected by poverty because their purchasing power was reduced. The government of Kenya took the initiative of reducing taxes on basic commodities to improve the living standards of the people. The policy of reducing taxes was adopted as a measure to encourage manufacturers to reduce the prices of basic commodities for the benefit of common people.

By adopting this policy, the government aimed at increasing the aggregate demand for goods and services in the country. The central bank of Kenya regulated prices of basic commodities to reduce the inflation that had affected the country during the period. The government continues to implement other measures such as improved regional trade as a measure of regulating inflation and improving the economy.