Merry Crisis: Are Recessions and Depressions parts of market economy?

By: Bikal Dhungel 

Recession and even Depression has been a frequent visitor. Before 1929, we have no recorded data about the crisis but after 1929, recessions often happened, sometimes in a dangerous way, sometimes just giving a shock for a while but it has been a part of our life. The Great Depression itself, Asian Financial Crisis, Argentinean debt default, Ruble Crisis in Russia, Swedish crisis and so on to name a few. Crisis tends to affect every sector in an economy until the spiral is fully stopped. Economic consequences of these crises are calculable but social consequences however cannot be measured. 

The Great Depression was first felt in 1929 and went on till the end of World War II. Although there is no agreed argument about the consequences, the prominent economists like Milton Freedman and Barry Eichengreen believed that the actions of Federal Reserve, American central bank, are responsible for the mess. Some historians however argue that it was the bank’s failure. Whatsoever, it ended up being a global crisis with varied timing in different countries. The Great Depression had deadly effects in every country, virtually.  Two thirds of international trade slashed which resulted in reduced personal income, tax revenue and profits. Especially the countries that depend on heavy industries and export were hardly hit. Constructions, farming and primary businesses also suffered heavy losses. There was a big question if market economy will really function. Actually it functioned before the crisis and after the crisis when we review it today. However, some diagnoses were required and the financial markets as well as banks had to play the game within a rule. Some policies were taken into action which still continues today. Regulation to cut throat competition was enacted, minimum wages and labor standards were set in order to increase the purchasing power of all citizens. The president of the United States even supported the rising power of Trade Unions which improved the situation of working class by the increase of their wage. The Government and Businesses started to cooperate regarding price and other matters because a recession was a common enemy of governments as well as businesses and it should be a common responsibility to tackle it as well. We have all these rules today and we might wonder how these rules were brought into action but we can hardly believe that it took a Great Depression to enact these policies. 

Major economies of that time took different actions. Japan for example brought an idea of bailing out the banks. The finance minister thought, if the government could help the bank, it would again lend out the money but with tight regulations, and then it might bring the economy into running. This idea proved success and Japan came out of the recession in two years. Hence, it was the first bail out of banks in history. Same policy was taken in yet to come Recessions, every time it was successful. 

In Germany, Adolf Hitler was slowly coming to power. Millions of people were out of work. So, giving them work could bring him to the highest post. He promised 6 million jobs by building the highway and eventually he did it. Though, his initial plan was to transport the weapons. Nationalistic trends were taken which included expelling the Jews with various reasons. The result was catastrophic. It ended with the destruction of Europe, millions of lives and other consequences which we still feel today. 

There was similar effect in industrial powers of that time, the UK, Canada, France to name  few. 

 The second big crisis of our time was Asian Financial crisis, which started in 1997 after the collapse of Thai Baht. It was also seen as one of the most devastating. So called “Asian Tigers” were hit hard by the crisis. Thailand, Korea, Indonesia, Malaysia and Singapore were seriously hit but also China and Japan were hit in some degrees. The crisis started after the Thai government’s decision to float the currency. The hot money, which entered Thailand, also went out of the country overnight escalating the crisis further. The investors then looked for a similar country where the same crisis could arise. Then, Indonesia, Malaysia and Singapore had to suffer because of 'Domino Effect'. Unemployment rates in the countries mentioned above were around 3-4% prior to the crisis but within few months, it doubled and as a consequence, there were reductions in the value of currencies, stock markets and other asset prices. Businesses collapsed and millions of people were forced below the poverty line. We saw resignations of high profile politicians. Long ruling president of Indonesia, Suharto, also resigned after almost three decades in office. There was rarely a day, the western politicians didn’t praise him for his free market reform, who in fact was a terrible dictator. He made a personal fortune of around thirty billion dollars taking bribes from investors, divided the key industries among his friends, relatives and other sympathizers. During his regime, Indonesia topped the Transparency International list of most corrupt nations for many years. A market reformer however was obliged to end his legacy in the aftermath of Asian financial crisis. 

However, the most dangerous crisis after the Great Depression took place in 2008 after the Lehmann Brothers collapsed and others followed. The crisis, starting in the USA, virtually touched every nation. Lots of things were to blame. First and the foremost thing was the real estate boom. The housing market bubbled so fast that everybody could build or buy a house today and sell after several months making tens of thousands of dollars in profit. However, it was a political will in the USA, that everybody should have their own house. The Clinton administration brought some reforms that even the people with low incomes could have a mortgage from a bank. It was then easy to issue loan to the citizens because their houses were the securities to the bank. In 2007, when the housing market began to fall, debtors faced a great risk to default. The mortgage price was going down hence completely stopping the buying and selling. There were huge toxic assets. Second reason was deregulation and easy credit conditions, which was enacted under Bush Administration. Easy credit conditions encouraged subprime lending, which means lending to the business or any institution with very high rate of default or someone with bad history of payments. All these things were foreseeable but still the well known economists predicted that the crisis won’t come or at least not the recession because the US economy was just too big to fall.  At the end of the day, every person who had deposits in the US was hit hard. The financial crisis caused economic crisis and especially the exporting nation’s economy contracted by over five percent. Innocent victims of this crisis were however the developing nations who were dependent on remittances, tourism and other aids from rich countries. High unemployment, fall in tourism due to crisis and the rising food prices again put a big question mark on Globalization. Is it true that in Globalization, the real responsible ones will go free and the poor have to bear the burden at last? Or, are there some more dark sides in the free market economy? The answers are still to come.

 There are also ethical sides of this crisis to understand. If 2 percent more unemployment rate in the western world is more important that the question of life and death of other fellow humans in developing world, there must be something wrong in global justice system and it has to be changed. Specially, the poor should be saved in times of crisis. The responsible ones who started the financial mess should be brought to justice and the innocents should be given help in anyway it’s possible. This is the question of our future. Leaders, current and future should take these kinds of issues seriously and try to solve it with more international cooperation and transparency. It’s hard for the leaders of coming generation, not to address these issues. The people have understood it and we have the most informed public than any time in history. They won’t just let the things go what the previous generations did. So, we should just wait optimistically to see the world created by this ethical generation.