The Grey Chronicles

2009.January.29

The Semantics of the Global Crises


Domino Effect

Domino Effect

First, it was called a downturn (Court, 2008); then it was renamed as a slowdown (Kotecha, et.al., 2008). Lately, it is acknowledged as a recession, or an economic downturn lasting at least two quarters or more with a decrease in the GDP. At present, pundits are saying that the world is on a Great Recession. Even Obama recently acknowledged on CNN that the U.S. facing “an unprecedented crisis.”

During depressions, prices and credit contract sharply, unsound positions are liquidated, unemployment swells temporarily, and then rapid recovery ensues. The 1920—1921 experience repeated a familiar pattern, not only of such hardly noticeable recessions as 1899—1900 and 1910—1912, but also of such severe but brief crises as 1907—1908 and 1819—1821 (Wells, 1937). Yet the Great Depression that ignited in 1929 lasted, in effect, for eleven years.

The collapse of Wall Street on September—October 1929 and the Great Depression which followed it made the Second World War possible. Rothbard (1963) debunked, however, some alternative explanations of depression, such as: the general overproduction; the acceleration principle; the dearth of investment opportunities; the Schumpeter’s business cycle theory; qualitative credit doctrines; and, overoptimism and overpessimism. Rothbard explained, “the “boom-bust” cycle is generated by monetary intervention in the market, specifically bank credit expansion to business.”

Duration of Crises (Bordo, 2001)

Table 1: Duration of Crises (Bordo, 2001)

Bordo et al. (2001) made a comparison of recent crises such as the European Monetary System crisis of 1992—1993, the Mexican crisis of 1994—1995, the Asian crisis of 1997—1998, the Brazilian crisis of 1998, the Russian crisis of 1998, and the Argentinian crisis of 2001 with earlier crises since 1880. Bordo, et.al. (2000) concludes:

“Banking crises, currency crises, and twin crises have occurred under a variety of different monetary and regulatory regimes. Over the last 120 years crises have been followed by economic downturns lasting on average from 2 to 3 years and costing 5 to 10 percent of GDP. Twin crises are associated with particularly large output losses. Recessions with crises were more severe than recessions without them.”

While several news reports attributed the global recession as the perceived and combined effect of a series of unfortunate contemporary events: 11 September 2001 Terrorist Attack in U.S., International Airport block in Thailand, the London attack, etc.; Judson (2008) simply explained that the current global predicament was triggered by the huge increases in housing prices from 1997 which culminated in housing subprime crises by 2007.

The bubble burst and the meltdown began in earnest when investment bank Bear Stearns had to close two of its hedge funds in June of 2007. Between July and August 2007, the Dow Jones Industrial Average plunged a thousand points, prompting commentators to warn of a 1929-style crash. The current liquidity crisis wasn’t actually the result of a lack of money in the system.

Brown (2007) elucidated the U.S. crisis evolved into a global one:

“The global credit crisis hit in England in September 2007, with the Northern Rock, Britain’s fifth-largest mortgage lender, incurred the worst bank run since the 1970s. . . . By January 2008, global markets took their worst tumble since September 11, 2001 and the precipitous drop was blamed on the threat of downgrades in the ratings of Fannie Mae and Freddie Mac, major mortgage bond insurers, followed by a $7.2 billion loss in derivative trades by Societe Generale, France’s second-largest bank. . . . The solution of the U.S. Federal Reserve, along with the central banks of Europe, Canada, Australia and Japan, was to conjure up $315 billion in “credit” and extend it to troubled banks and investment firms.”

On October 2008, Roubini (2008), predicted:

“The current economic contraction will last through the fourth quarter of 2009 with a cumulative 4% fall in GDP, even larger than the worst post-WWII recession. . . Given the size of the expected contraction in private aggregate demand (likely to be about $450 billion in 2009 relative to 2008) a fiscal stimulus of the order of $300 billion minimum (and possibly as large as $400B) will be necessary to partially compensate for the sharp fall in private aggregate demand.”

Worldwide through October 31, 2008, financial institutions have taken cumulative losses/write-downs of $685 billion. They have raised $688 billion in capital and cut 149,220 jobs (Barth, 2009). And the list is getting longer, not just financial institutions but almost all domains in business. On 28 January 2009, while the U.S. announced a $826 Billion stimulus package plus 3-4 billion job creation plan, more than 40 world leaders meet for the annual World Economic Forum in Davos, Switzerland to discuss primary topic: economic crises.

The usual joke, economists often quote, to explain the difference: Recession is when your neighbor losses his job; Depression is when YOU lose your job.


Notes:

Barth, James R. et.al. (2009) The Rise and Fall of the U.S. Mortgage and Credit Markets: A Comprehensive Analysis of the Meltdown. Book preview. John Wiley & Sons, January 2009. 51pp. back to text

Bordo, M., B. Eichengreen, D. Klingebiel and M. Martinez-Peria (2000). “Is the Crisis Problem Growing More Severe?Working paper, Berkeley: University of California, Berkeley. back to text

Bordo, M., B. Eichengreen, D. Klingebiel and M. Martinez-Peria (2001). “Is the Crisis Problem Growing More Severe?Economic Policy, April 2001, pp. 53—82. back to text

Brown, Ellen Hodgson, J.D. (2007) Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. 3rd Edition, Revised and Expanded. Baton Rouge, Louisiana: Third Millennium Press, March 2008. pp. 465-78 back to text

Court, David (2008). The downturn’s new rules for marketers, The McKinsey Quarterly, December 2008. 12pp. back to text

Judson, Bruce (2008). Understanding The Economic Crisis in Plain English. Powerpoint Presentation. Yale School of Management, 09 December 2008. back to text

Kotecha, Ashish A.; Josh Leibowitz, and Ian MacKenzie (2008). How retailers can make the best of a slowdown, The McKinsey Quarterly, September 2008. 12pp. back to text

Rothbard, Murray N. (1963). America’s Great Depression 5th ed. Alabama: The Ludwig von Mises Institute, 2008. 415pp. back to text

Roubini, Nouriel (2008) Written Testimony Hearing on Faltering Economic Growth and the Need for Economic Stimulus. Joint Economic Committee, 30 October 2008. back to text

Wells, O.V. (1937), “The Depression of 1873—79”, Agricultural History 11 (1937): p. 240. back to text

Disclaimer : The posts on this site are my own and doesn’t necessarily represent any organization’s positions, strategies or opinions.

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