Recession of 2009: Difference between revisions

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:''(The title of this article reflects the fact that the full intensity of the recession did not develop until 2009 and the fact that recovery was incomplete at the end of that year''
Downturns in economic growth rates were  apparent early in 2008, and  the subsequent intensification of the financial [[crash of 2008]]  led to a general expectation of worse to come. The resulting loss of confidence by investors and consumers  contributed further to the severity of the reduction in world economic growth, and it was apparent by the end of 2008 that the economies of the United States and several European countries had for some time been in recession. An impending collapse of the international financial system was averted by policy actions introduced in the winter of 2008, but credit availability had been only partly restored by the spring of 2009.
==Sources==
Sources of statements in this article  are provided on its subpages. Economic statistics not otherwise referenced appear on the [[/Tutorials|Tutorials subpage]]. Events in particular  regions  are summarised - with links to sources - on the [[/Addendum|Addendum subpage]] and a sequential list of principal events - with links to further information - appears on the [[/Timelines|Timelines subpage]].
Definitions of terms shown in italics, are provided in  the glossary on the [[/Related Articles|Related Articles subpage]]
==The downturn==
Throughout the period from mid-2007 to mid-2008, the growth of the world economy was hampered  by increases in oil and food prices, and by a crisis in the financial markets. Oil prices rose  from  $75  to  $146 a barrel and food prices rose sharply, forcing  householders to cut their spending on other products. On the financial markets, the [[subprime mortgage crisis]]  developed into the [[crash of 2008]], as a result of which the availability of credit to households and businesses was curtailed, leading to  further reductions  in household spending and business investment. In the nine months to the middle of 2008, the advanced economies had grown at an annual rate of only one  per cent (compared with two and a half per cent in the previous nine months) and the growth rate of the developing economies had eased from eight per cent to seven and a half per cent. According to the OECD <ref>[http://www.oecd.org/dataoecd/60/54/41812368.pdf ''Economic Survey of the United States'', OECD December 2008]</ref> the US economy was by then already facing substantial difficulties. Households had borrowed at an unprecedented rate during the previous  15 years, and their saving rates had fallen nearly to zero as they  increasingly relied on  housing wealth to finance consumption. With the housing market suffering the severest correction for 50 years,  household wealth was declining, and  with credit conditions getting tighter, households had been forced to reduce their reliance on borrowing, and job losses and mortgage foreclosures were rising.
The prospects of a recession in the United States and of substantial reductions in economic  growth elsewhere  were becoming apparent when the world economy was hit by another shock.  The failure  of  the Lehman Brothers investment bank in September raised doubts about the  creditworthiness of major global financial institutions,  and the ensuing ''banking  panic''  threatened a collapse of world’s financial system. Attempts by banks to restore their capital adequacy, resulted in capital hoarding, and the resulting liquidity shortage (or ''credit crunch'')  undermined consumer and business confidence, and triggered a further contraction in demand.  Falls in demand, together with credit shortages led to a massive reduction in world trade.
Many industrialised and developing  countries suffered  reductions of economic activity. Economies with relatively large financial sectors - such as those of Britain and Iceland  - suffered directly from the banking crisis.  Economies with relatively large export  sectors  - such as those of Japan and Germany  and many developing countries - suffered indirectly  from the reduction in world trade. There were widespread increases in unemployment. Budget deficits grew during the downturn, mainly as a result of the operation of ''automatic stabilisers'' and, to a lesser extent, as a result of discretionary fiscal policy, and  the levels of debt owed by the governments of the industrial governments were forecast to rise to an average of 120 percent of gdp by 2014.
==The policy response==
Massive financial support to their banks in the closing months of 2008 by the governments of the industrialised  countries averted a threatened  collapse of the international financial system, but failed to restore the supply  of credit to businesses and householders, and further action was taken to tackle the growing recession. In a departure from accepted practice, the governments of the G20 group of major economies agreed to use [[fiscal policy]] in order to stimulate demand by tax cuts and increases of public expenditure. Fiscal stimulus packages were adopted that amounted to 4.8 percent of GDP in the US, 3.4 percent in Germany, 1.5 percent in the UK and 1.3 percent in France<ref>IMF estimates, see paragraph 1.4 of the [[/Tutorials|Tutorials subpage]]</ref>.  Supportive [[monetary policy]] action was also taken by the major central banks by  making massive reductions in their  ''discount rates'',  followed - in a further departure from accepted practice -  by  injections of liquidity into their economies, mainly  by the purchase of securities from their private sectors (''quantitative easing'' or ''credit easing''<ref>[http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm Ben Bernanke: ''The Crisis and the Policy Response'', Speech at the London School of Economics, January 13, 2009]</ref>). The Federal Reserve Bank reduced its discount rate to 0 to 0.25 percent and made security  purchases amounting to 12 percent of GDP; the Bank of England reduced its bank rate to 0.5 per cent and made asset purchases amounting to 6 percent of GDP; and the European Central Bank reduced its discount rate to 1.0 percent and made asset purchases amounting to  0.6% of Eurozone GDP.
==The economic recovery==
Although in purely technical terms the [[recession]]  ended in several countries in the summer of 2009, levels of activity remained substantially below normal levels and there was considerable uncertainty about future prospects. In view of a continuing credit shortage, there were few expectations of an early return to pre-recession growth rates, and there were some fears of a long period of near-stagnation such as that suffered by Japan during the period 1990 to 2005. The American economist Paul Krugman  argued that what happened in Japan may have been due to a reluctance to spend on the part of householders impoverished by collapses of housing and stock market bubbles<ref>[http://www.guardian.co.uk/business/2009/jun/14/economics-globalrecession ''Paul Krugman's fear for lost decade'', Interview with Will Hutton, The Observer, Sunday 14 June 2009]</ref>, and the  Japanese economist, Richard Koo applied  the term "balance sheet recession" to a situation in which companies as well as householders  reduce  spending in order to repay debts and rebuild reserves<ref>[http://www.scribd.com/doc/13970982/Richard-Koo-Presentation Richard Koo: ''The Age of Balance Sheet Recessions'', What post-2008 USA, Europe and China can learn from Japan 1990-2005,  Nomura Research Institute, March 2009]</ref>. Reports of increases in household saving ratios in the United States<ref>[http://www.frbsf.org/publications/economics/letter/2009/el2009-16.html#3 ''U.S. Household Deleveraging and Future Consumption Growth'', Federal Reserve Bank of San Francisco Economic Letter 2009-16; May 15, 2009]</ref> and Britain<ref>[http://www.statistics.gov.uk/pdfdir/qnabrief0909.pdf ''Quarterly National Accounts briefing note, 2009 Quarter Two, National Statistics Office]</ref>  tended to add to those fears, but it has been argued that Japan's experience is unlikely to be repeated by the United States or the  other indebted economies because their bubbles were proportionately smaller, their banks tend to be more profitable, and prompter action has been taken to recapitalise their banks<ref>[http://www.economist.com/surveys/displaystory.cfm?story_id=14530146 ''A special report on the world economy'', The Economist, Oct 1st 2009]</ref>.
==Fiscal recovery==
There was general a recognition in the industrialised countries that levels of national debt had reached unsustainable levels and medium-term plans to reduce them were being formulated in the course of 2009.
==The policy debate==
===Overview===
A conflict about [[fiscal policy]]developed towards the end of 2008 between those who feared that the proposed  expansion would be insufficient to counter growing ''output gaps'' -  and those who considered fiscal expansion to be unnecessary or ineffective.  Among the first group were  the Nobel prize-winners  Paul Krugman <ref>[http://www.nytimes.com/2009/01/09/opinion/09krugman.html?partner=rssnyt&emc=rss Paul Krugman ''The Obama Gap'', New York Times blog  8 January 2009]</ref>, and Joseph Stiglitz <ref>[http://www.project-syndicate.org/commentary/stiglitz110/English Joseph Stiglitz "How to Fail to Recover", Project Syndicate, 2009.]</ref>. Among the others were the Chicago School's Eugene Fama, and a group of eminent British economists who argued that "occasional slowdowns are natural and necessary features of a market economy" and that "insofar as they are to be managed at all, the best tools are monetary and not fiscal ones"<ref>[http://www.iea.org.uk/record.jsp?type=pressArticle&ID=376 ''Keynesian Over-spending Won't Rescue the Economy", Letter by IEA economists in the Sunday Telegraph, 26 October 2008]</ref>. Further controversy developed in the course of 2009 between those who favoured  reductions in national debt in the course of 2010 in order to avert fears of ''sovereign default'',  and those who advocated the  continuation of  fiscal expansion until the recovery was firmly established.
===Fiscal policy===
====The consensus view====
By October 2008, policy-makers in most industrialised countries had accepted that in order to avoid the development of  persistent and unmanageable [[deflation]] such as occurred in the [[Great Depression]], early corrective  action would have to be taken,  going beyond the necessary restoration of activity in the financial system.  Most countries had long abandoned the  use of reductions of taxation and increases in public expenditure to ward off economic downturns in favour of the use of interest rate reductions <ref>For an account of the reasons for  use of interest rates  for economic stabilisation, see the paragraph on monetary policy in the article on [[macroeconomics]], and for a description of the techniques that are employed, see paragraph 3 of the article on [[banking]]., and in other</ref>, but there were doubts whether  monetary policy would be sufficiently powerful, or sufficiently  quick-acting in view if the severity and imminence of the current deflationary threat. In the United States, in particular, the ''federal interest rate'' had already been reduced to 1 per cent - leaving little scope for further reductions, and banks there and elsewhere had become reluctant to pass on central bank reductions of interest rates.
The consensus view among economists, as expressed by  the Chief Economist of the OECD was that :
:Against the backdrop of a deep economic downturn, additional macroeconomic stimulus is needed. In normal times, monetary rather than ''fiscal'' policy would be the instrument of choice for macroeconomic stabilisation. But these are not normal times. Current conditions of extreme financial stress have weakened the monetary ''transmission mechanism''... In this unusual situation, fiscal policy stimulus over and above the support provided through ''automatic stabilisers'' has an important role to play<ref>[http://www.oecd.org/dataoecd/4/50/39739655.pdf Klaus Schmidt-Hebbel: ''A Long Recession" ,Editorial to OECD Observer No 270, December 2008]</ref>.
The  International Monetary Fund noted that fiscal policy can quickly boost spending power, whereas  monetary policy acts with  long and  uncertain lags
<ref>[http://www.imf.org/external/pubs/ft/weo/2008/02/pdf/c5.pdf ''Fiscal Policy as a Countercyclical  Tool'', IMF World Economic Outlook, Chapter 5 ,  October 2008]</ref>, and a 2009 IMF Staff  Position Note demonstrated that an internationally  coordinated programme of fiscal expansion, combined with accommodative monetary policies, could have significant multiplier effects on the world economy <ref>[http://www.imf.org/external/pubs/ft/spn/2009/spn0903.pdf Charles Freedman, Michael Kumhof, Douglas Laxton, and Jaewoo Lee: ''The Case for Global Fiscal Stimulus'', IMF Staff Position Note SPN/09/03, International Monetary Fund, March 6 2009]</ref>. However, the IMF also advised that fiscal expansion could do more harm than good  in heavily indebted countries such as Japan and Italy stimulus,  and suggested that further expansion should be confined to countries with more modest levels of national debt,  such as the United Kingdom, China, France, Germany, and the United States <ref>[http://www.imf.org/external/np/pp/eng/2009/020109.pdf Mark Horton and Anna Ivanova: "The Size of the Fiscal Expansion: An Analysis for the Largest Countries", IMF Fiscal Department Note, February 2009]</ref>.
After some early misgivings, the case for fiscal expansion  gained near-universal political acceptance, and by early 2009, nearly all the G20 countries had introduced fiscal stimulus programmes <ref>[http://www.brookings.edu/articles/2009/03_g20_stimulus_prasad.aspx Eswar Prasad: ''Assessing the G-20 Stimulus Plans: A Deeper Look'', Brookings Institution May 2009]</ref>.
In 2009, as signs of impending recovery began to emerge, the debate about the future of fiscal policy was resumed and, although there was general recognition of the eventual need for an offsetting  fiscal contraction,  views differed about the timing of such action. In October 2009 the IMF cautioned against haste:   
:"Notwithstanding already large deficits and rising public debt in many countries, fiscal stimulus needs to be sustained until the recovery is on a firmer footing and may even need to be amplified or extended beyond current plans if downside risks to growth materialize"[http://www.imf.org/external/pubs/ft/weo/2009/02/pdf/text.pdf].
The outcome of that debate in most industrialised countries was  a decision to postpone further fiscal expansion unless and until the need became apparent, and to develop medium-term plans for fiscal contraction in 2011 and beyond
<ref>[http://www.imf.org/external/np/pp/eng/2009/030609.pdf "The State of Public Finances: Outlook and Medium-Term Policies After the 2008 Crisis" IMF March 6 2009]</ref>.
====Objections====
Professor Eugene Fama of the University of Chicago  argues that consumers do not respond to tax cuts  because of awareness that they will eventually be paid for by tax increases (the argument known to economists as ''Ricardian Equivalence''). He also argues that all forms of ''fiscal stimulus''  are ineffective because they merely move resources from private investment to government investment or from investment to consumption, with no effect on total current resources in the system or on total employment <ref>[http://www.dimensional.com/famafrench/2009/01/bailouts-and-stimulus-plans.html. Eugene Fama: ''Bailouts and Stimulus Plans'' January 2009]</ref> (the argument known as ''crowding-out''). Others have  argued that the danger  of incurring unsustainable debt <ref> The conditions for ''fiscal sustainability'' are set out in paragraph 4.1 of the article on national debt [http://en.citizendium.org/wiki/National_Debt#Fiscal_sustainability]</ref>, makes fiscal stimulus a risky option, especially  for countries with high levels of national debt. There is also a danger that even relatively modest levels of debt can become unsustainable if investors perceive a risk of default on its repayment, because they would then add to the problem by adding a risk premium to the interest rates needed to finance the debt.  Another objection arises from the fear that expansionary fiscal and  monetary policies would not be reversed in time to avoid [[inflation]] (that objection was expressed by the economist Allan Meltzer  <ref>[http://www.nytimes.com/2009/05/04/opinion/04meltzer.html Allan Meltzer: ''Inflation Nation'', New York Times op-ed, 3rd May 2009]</ref> in the same issue of the New York Times in which the economist Paul Krugman was advocating a further stimulus in order to avert the danger of [[deflation]] <ref>[http://www.nytimes.com/2009/05/04/opinion/04krugman.html Paul Krugman: ''Falling Wage Syndrome'', New York Times op-ed, 3rd May 2009]</ref>).
===Monetary policy===
===Monetary policy===


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<ref>[http://www.ft.com/cms/s/0/2da17b26-4f9c-11de-a692-00144feabdc0.html Bertrand Benoit Ralph Atkins: ''Berlin breaks the unwritten rule'', Financial Times, June 2 2009]</ref><ref>[http://blogs.ft.com/brusselsblog/2009/06/merkel-derides-the-bank-of-englands-little-line/ Tony Barber: ''Merkel derides the Bank of England’s “little line”'', Financial Times Brussels Blog, June 5, 2009][http://www.bundeskanzlerin.de/nn_4900/Content/DE/Rede/2009/06/2009-06-02-merkel-insm.html]</ref>  
<ref>[http://www.ft.com/cms/s/0/2da17b26-4f9c-11de-a692-00144feabdc0.html Bertrand Benoit Ralph Atkins: ''Berlin breaks the unwritten rule'', Financial Times, June 2 2009]</ref><ref>[http://blogs.ft.com/brusselsblog/2009/06/merkel-derides-the-bank-of-englands-little-line/ Tony Barber: ''Merkel derides the Bank of England’s “little line”'', Financial Times Brussels Blog, June 5, 2009][http://www.bundeskanzlerin.de/nn_4900/Content/DE/Rede/2009/06/2009-06-02-merkel-insm.html]</ref>  
<ref>[http://globaleconomydoesmatter.blogspot.com/2009/05/quantitative-easing-lecb.html Claus Vistesen: ''Quantitative Easing à l´ECB'', Global Economy Matters, May 2009]</ref>
<ref>[http://globaleconomydoesmatter.blogspot.com/2009/05/quantitative-easing-lecb.html Claus Vistesen: ''Quantitative Easing à l´ECB'', Global Economy Matters, May 2009]</ref>
==Prospects==
==References==
<references/>

Revision as of 09:26, 15 October 2009

Monetary policy

Ben Bernanke has explained the increases in the money supply resulting from quantitative easing may be expected to lead investors to rebalance their portfolios, reducing yields on long-term assets and thus stimulating economic activity[1]

[2].

[3]

[4][5] [6]

  1. ↑ Ben Bernanke: Conducting Monetary Policy at Very Low Short-Term Interest Rates, Paper presented to the American Economic Association at San Diego, California, January 3, 2004
  2. ↑ Charles Bean: Quantitative Easing: An Interim Report, Speech to the London Society of Chartered Accountants London, 13 October 2009
  3. ↑ Ben Bernanke: The Federal Reserve's Balance Sheet: An Update, Federal Reserve Board Conference on Key Developments in Monetary Policy, Washington, D.C. October 8, 2009
  4. ↑ Bertrand Benoit Ralph Atkins: Berlin breaks the unwritten rule, Financial Times, June 2 2009
  5. ↑ Tony Barber: Merkel derides the Bank of England’s “little line”, Financial Times Brussels Blog, June 5, 2009[1]
  6. ↑ Claus Vistesen: Quantitative Easing à l´ECB, Global Economy Matters, May 2009
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