The global meltdown
The global economic downturn in 2008 was experienced in many developed and developing nations. Various financial stresses led to economic downturns encompassing the broader securities of banking and market systems of a number of advanced economies. The financial turmoil brought about by the banking sector distress was associated with severe episodes of stress that was centred mainly on securities and foreign exchange markets. Countries which had an arms length of monetary systems were more prone to the sharp contractions in the economic activities as their banking systems had greater procydicality of leverage.
The implications on the economy were huge and they led to the build up of financial imbalances in the economy and financial cycles sparking the global recession (Siegel, 2002). These business cycles influenced economic activities e.g. the growth of the GDP, employment rates and household incomes. This financial crisis was linked to uncontrolled and unsustainable lending practices that were not regulated or provided with security. This uncertain financial situation was made more complicated by the sharp rising costs of oil and food prices. Over-inflated prices of assets and other risky loans began to be exposed in the emergence of Sub-prime losses of loans in 2007.
This caused a major panic in the inter-bank loan market. In the United States, the deregulation combined with securitization of mortgages in real estate backed securities were hard to assess leading to a decline of share and housing prices in many large commercial and investment banks. These well established banks in Europe and the United States were suffering and facing bankruptcy and huge losses which resulted to massive public financial support. This resulted to a sharp rise of unemployment and a drop in international trade with a slump in commodity prices. Some of the conditions that were associated with the economic downturn were the characteristic exorbitant rise in prices of assets and the associated boom in financial demand. An economic downturn is fuelled when banks capital are eroded forcing them to be more reluctant in lending and thus forced to deleverage causing sharp economic downturns. The other area of analysis is the role of financial accelerators which varies with the type of economic system in the financial markets (Rajan, 2003). The economic crisis took many people by surprise as at that time, the U.S was making a booming business in the housing market.
Implications of the crisis
Most commentators and economists had predicted a collapse of the economy because there were public deficits and excessive money creation that led to negative household savings coupled with a huge US trade deficit. This saw a global explosion of prices in various commodities notably food and oil that caused a genuine panic. The economic damage threatened a reversal of globalisation and consequently stagflation. The housing bubble in many developed countries led to a worldwide rise in prices of houses and resulted in many owners to hold a negative equity. The global inflation also affected domestic inflation as there was speculation in price commodities, rising cost of imports and agriculture failure. Many countries tried to ease on monetary policies to tame the financial crisis.
The effects of this economic downturn affected the gross domestic products of many countries which were falling at an annualized pace. The capital investment was declining as the pace of residential collapse was picking up. There was a decline in domestic demand of commodities. The financial crisis affected trade and industrial production where the exporters could not acquire letters of credit because of the credit crunch affecting industrial production which was occurring in export-based economies.
Concerns were rising about tightening consumer spending that was prompting businesses to slow hiring and therefore limiting the wage increases which in turn was applying brakes to new consumer spending. Travel was also affected as it decreased because of the recession as a result of company travel policy changes, high airline prices and personal economics prompting many commuters to travel less for business which in turn prompted the hotels to respond by dropping their rates because of the downturn and negotiate deals for both tourists and business travellers. This crisis affected all countries in one way or another, but there were others who were vastly affected. The three factors that include currency devaluation, equity market and the sovereign bond indicated the financial devastation and captured the impact of the crisis. Some countries like Greece experienced civil unrest because of the political instability that was associated with the economic crisis. These unrests not only in Greece but around the globe could lead to great social upheavals or disrupted financial economies if there no urgent plan undertaken to change the trend.
Turn around Policies
Historically, it has been observed that a short term decline in economy is followed by a short term gain. The highs and lows observed over some period average to form the economic growth rate in various economic markets. There is need for constant re-assessment of situations and implications of different civil society interests also including the environment. Most economists think that a stimulus should be drawn when the economy recovers to draw a chart path of sustainable growth (Hendricks, 2008). Many governments have responded to the market conditions which are tumultuous as to re-invigorate recovery plans in the economy by seeking to create and maintain jobs and in turn that will stimulate growth in the economy. The governments focus is to make interventions that will prop up those sectors viewed to be strategically important examples including the financial and automotive sectors. All these plans are geared towards the green stimulus package policy response not only to resolve short term financial problems but to act by embolding strategies that link economic recovery with long term economic recovery and environmental sustainability (Barbier, 2009). Also these packages are being recognised at a time when it is critical to respond to climatic changes in particular to ensure the opportunity that will be taken to support low carbon economy transition. The stimulus also includes expanding broadband internet access to rural locations to spearhead the framework for rural development. Provisions for further additional funding for these global challenges which include water management, climate change mitigation and adaptation with biodiversity conservation are underway to the economic recovery plan.
Focussed growth
The current short-term plans to economic recovery are targeted to boost the economy but a more radical plan which calls for a fundamental and re-orientation of long-term global economy model that embeds firmly in environmental security combining with a strategy to generate wealth is needed. These mixes of policies are a case of the Green deal that seeks to alleviate financial collapse, depending on fossil fuels, degradation of environment, ecological and water scarcity that provide global challenges that are key at this time which require sustained, urgent and co-ordinated action. Policies in climate change should provide innovations to improve energy efficiency and in turn research and development in investment broadening its protection of ecosystems and alleviating poverty. This also promotes critique of contemporary capitalism which has aligned longer in establishing concepts like the ecological modernisation (Mol, 2001). The green deal has still to make any relevance in the sector of rural land use by its component in the environment with a radical departure in current policy framework but it may be relevant in terms of providing local forms of energy which are renewable and potential jobs with various sources of income. Investing in long-term prosperity compels reinvigoration in the infrastructure and the workforce components of the economic stimulus packages. The transformation of the outdated energy infrastructure around the platforms of efficiency and reduced carbon emissions represents a great driver in innovation of economic growth.
Economic stimulus
The government can in many ways boost the economy by creating jobs in the recovery program. Focussed investment in improving energy efficiency and development of new clean technologies can create spending even in the hardest hit economic sectors like the construction and manufacturing. Further smart policies in energy efficiency can free up income that will be used by consumers to spend on other goods or services and reduce household utility bills. Green investment has paved the road that will enable better management and sustaining economic recovery over the next few years. Capital-intensive green projects which are large like the mass transit may take one or two years to run and will be good job creators in a dependable domestic economy with the multiplier effect. Another important critical advantage of the green economic program are the investments focused primarily by increasing capacity of domestic production, improving infrastructure nationally and making the overall economy to be more effective over the long term.
The combined plan for economic stimulus and recovery will ensure an efficient public infrastructure that will provide greater improvements in financial performance compared to rebates on traditional energy sources. This will enable the country to have added benefits and move the country towards improved national security, avoiding economic and social devastating effects of global warming. More good jobs will be created in the stimulus recovery package with a host of positive outcomes in public health, climate stability and energy security. Focuses on strategies that will ensure funding that will bring near the timeframe that will be essential to jumpstart the economy should be more specific because they will drive new investments that can immediately handle the stimulus. The policies proposed should not be exhaustive in nature but reflect programs that are given the top priority and will cover all the sectors in the economy that entail workforce development, construction, transportation, building efficiency and neighbourhood revitalisation (Irons, 2008).
Federal policies should be designed by governments to provide stabilisation, recovery and stimulus to address the growth problems and to boost the economy by spurring demand and a creation of strong labour market to restore lost jobs. This will make further investments for long-term economic prospects that will restore the nations future confidently. Major changes that are fundamental to the stimulus recovery package must be addressed like the nations approach to energy, scientific research and innovation needed to jumpstart financial long-term growth. The governments will also have to increase investment in public education, development and research of new technology and modern infrastructure that is vital to a competitive economy. It must also address comprehensive and affordable health care in the public sector which will be in a fair and more progressive manner. Global initiative that will undertake the reforms of currency and financial regulations to serve the real economy with proper placed financial systems.
The global trade regime should accompany this strategy which will aim at reducing unsustainable imbalances in trade and ensure that all trade workers receive all the benefits in the participating countries. The governments will require substantial monetary expansion to revive the economy. The move to repair and modernize the intellectual and physical infrastructure will provide workers in most need temporary financial assistance leading to greater productivity.
Recovery plan initiatives
The initiatives on the recovery plan can be summarised by focussing on a core area of elements that include
The Green investment where it should be given the priority of the rising threat of global warming to reduce dependence on fossil fuels and improve energy efficiency by constructing smart systems of electricity by increasing solar and wind power (Friedman, 2007).
Repair and modernisation of infrastructure will generate jobs in investment and provide better foundation for greater productivity for factories and improved education for children and better health for everyone.
Investment in public education will dispense mechanisms that help to ease downward pressure on labour markets and bring potential students to school.
Research and development will increase productivity and national income growth and stimulate innovation and facilitate transmission to new technologies for the country to thrive and compete in the global economy.
Health care should be re-evaluated in the downturn crisis to provide for the opportunity to avail access to lower cost of health care and Medicaid that will support systematic changes that will develop quality and cost-effectiveness in care in long-term growth.
Aiding those that were hardest hit by the downturn will not only be morally right but it makes economic sense. Providing assistance to workers without jobs and upgrading the unemployment insurance structure would help families to cut their costs in health insurance and meet the contemporary workforce needs.
Tax cuts stimulus will provide the public investment stimulus that will adequately enable consumer buying and reinvigorate the deteriorating job market affecting the capacity to absorb the need for spending.
Addressing the housing crisis will require a series of staged measures that will modify and foreclose properties to productive use in families and protect neighbourhood housing values which in turn will stabilize the housing and credit markets. Money will be acquired to reconstruct and sustain mortgages on principal residences in bankruptcy.
Emergency and short-term responses should be applied as steps in avoiding risks of deflationary spiral and expand on money supplies.
Enactment of regulatory proposals to the crisis in subprime mortgage debates and foster long-term stimulus plan to protect consumers, providing cushions to banking and capital investments with financial support, executive pay and regulation of shadow banking system that will safely wind-down important institutions systematically.
Governments should work on fiscal expansions that work to construct spending and taxing policies that can make a difference during the economic recession and will enable a sustainable recovery at the end of the downturn.
Looking beyond the downturn makes governments to re-evaluate diminishing sectors that play a part in the economy an example being agriculture. This will be important to sustain growth in all environmental security parts in the economy at sufficient levels of funding and uptake to make sure the objectives are met. It will provide an opportunity in disguise for companies and countries to build labour and capital intensive effective measures that will be a component in the green recovery. The global slump is expected to decrease emissions that will drive the economy up and succeed by enhancing competitiveness for efficient energy and using the existing potentials more effectively and productively. A properly designed recovery program will not only help the economy get back on its feet, it will also provide a down payment for a more dynamic and just society.
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