It’s currently a time of great depression. Warning bells are ringing worldwide! Recessions have happened even earlier. In the past fifty years we have seen recessions of all hues. But this time it is going to stay much longer. It is going to etch its mark even in third world countries. In the capitalist business cycle, recessions are but common place. To some extent, recessions are good in the sense that they help wash out excesses in the system by clearing away inefficient companies in the fray. It paves way for new competitors who present competition to keep the demand and supply in perfect sync on a long term basis.
The fear was that the whole market would freeze up with the companies winding the day sans basic operations. The situation forecasted is grim with little hope. In the domestic front, the US, along with Japan and Europe are certain to fall into recession by the end of 2008. Jobs are being lost, companies face the threat of total lockout, many are fired, no further recruitments and those with education and skills are lurching in the dark.
There have been an estimated 159,000 jobs lost between September and October and reports of a 0.3% drop in U.S. gross domestic product in the third quarter surely is a condition to create panic. The numbers predict bad news, they harbor great economic depression. It will be all the more difficult if the economy is floated with cheap capital.
How did it all happen? Is it the poor governance and mismanagement that popped the bubble? It is said that the real cause that let loose this crisis was the inflated housing prices. The high prices forced people to go after mortgages from banks that they were sure they wouldn’t be able to repay. Both home buyers and loan lenders were eager to make cheap money. It is the aftermath of the global three-ring circus of leverage.
Hedge funds, investors and banks borrowed to buy more debt, stocks and commodities than they would have bought with their hard earned earnings. Pension funds, insurance companies, chief financial officers and money market funds based their capital in the borrowed money. This along with the unpredictability of anything purchased with borrowed money sent panic reactions all over the world driving even the big guns like Bear Stearns, Lehman Bros and Washington Mutual hesitant to invest. This resulted in the credit crunch of this dimension when even money lenders deciding to sit on cash rather than to spend on to reap a good harvest.
The Bush administration is trying all methods to tide over the crisis including a radical bailout plan with a jaw-dropping price tag. A takeover of worthless mortgages and other bad debt holding institutions, which they believe can bring in a half trillion dollars. Because of the federal action taken, the dow jones industrials average rose 368 points after surging 410 points the day before. The president has informed that the government has to intervene to rescue the trailing institutes. He also warns that if he remains idle, the catastrophe will be a thousand times worse than this. Congress is determined to take over damaged mortgages from banks and other companies.