Question

Please discuss with the causes and effects of a possible recession in the next few years and suggest steps that will enable an economic recovery. Consider past relevant policies/programs that have been used to reform our economy since 1913 and on.

Answer 1

Loss of trust in investment. Loss of trust causes customers to stop buying and switch into defensive mode. Panic sets in once a critical mass heads towards the exit sign. Slow sales of retail. Businesses are advertising fewer job ads and the economy is generating fewer jobs. In response to falling orders, manufacturers are cutting back— the unemployment rate is rising.High-interest rates. As rates rise, liquidity is reduced. It's the amount of money to invest. The Federal Reserve was the biggest culprit, which often raised interest rates to protect the dollar's value. The Fed boosted stagflation fighting prices, sparking the depression of 1980. It did the same to protect the relationship between dollar and gold, exacerbating the Great Depression

Prices for housing and sales fall. It forces a cutback in spending as homeowners lose equity because they can no longer take out second mortgages. It will result in foreclosures over time. It was the initial spark, but for various reasons, which set off the Great Recession. Banks lost money on the complex derivatives dependent on the underlying values of the property.

Slowdowns in the post-war period. After the Korean War, the economy slowed. This caused the recession of 1953. Similar reductions caused the recession of 1945 after World War II.

Crunch of the credit. This happened when Bear Stearns reported losses due to the collapse of two of his own hedge funds. The funds have been invested heavily in collateralized debt obligations. As Moody's downgraded its debt, it terrified banks in a similar over-invested environment. They halted each other's loans, creating a massive credit crunch.

When the bubbles of capital break. Bubbles occur when an item's price is over-inflated, such as gold, stocks, or housing. This is when, beyond their economic value, the values of internet companies, shares or houses are inflated. The bubble itself sets the stage when it collapses for a depression to occur. Just where the next recession will take place is hard to say. But you can bet that some low-interest rate mix would trigger excessive investor exuberance. If the Fed raises rates too fast or too rapidly, the bubble will pop up, causing panic and recession.

The response to the crisis by the Federal Reserve evolved over time, taking a number of non-traditional avenues. Initially, the Fed used "traditional" policy actions by reducing the federal funding rate from 5.25% in September 2007 to a range of 0-0.25% in December 2008, with much of the decrease occurring in January to March 2008 and in September to December 2008. The sharp decrease in those periods represented a marked decline in economic outlook and increased downside risks to both production and inflation (including deflation risk). Another collection of non-traditional policies consisted of schemes to buy large-scale property (LSAP). The asset purchases are introduced with the federal funds rate close to zero to help push down long-term public and private borrowing rates. The Fed announced in November 2008 that it would buy U.S. mortgage-backed securities (MBS) and housing debt linked U.S. government agencies