Impact of the 2008 Economic Recession
The 2008 financial crisis has always been associated with a huge
loss in terms of economic output, personal wealth, unemployment, mental stress and increased government intervention.
For starters, USA bore the maximum brunt of the crisis. According to a conservative figure, it is estimated that each household lost between $50,000 to $120,000 worth of output during the 18 months that the crisis lasted. It also caused trauma amongst other negative consequences which was thought to be worse than what had been experienced during the 1930s' recession.
As a country, USA had to give up on output that was more than the value of its GDP over a span of one year. The crisis caused the real estate sector to collapse and revealed some serious credit shockers. When the home market nose-dived, the stock market crashed too. This in turn caused the commodity prices to tumble, subsequently leading to loss of jobs and tightening of regulations pertaining to credit.
Following are some of the ways in which its impact reverberated in US and beyond -
Fall In Total Wealth
As a result of the crisis, household wealth like human capital and future wages, which cannot be directly observed, suffered a massive decline. Because the total household wealth was trending downward, the excessive consumption that was a key element in the crisis, ground to a halt.
Reduced Capacity and Trauma
Recession is an economic phenomenon and while its impact on consumption is measurable, the same does not hold true for mental stress and trauma that ensue. Not only did the nonfarm payrolls fall by more than 6.3% but unemployment also touched the 14.7-million mark for the first time in decades. Thousands of workers lost their jobs and remained laid out for a longer duration with some of them quitting the labor force altogether.
Having a stable job creates a sense of accomplishment that is imperative for a high self-esteem. It generates optimism, strengthens belief in a better tomorrow and also motivates those who are out of employment to seek work. Unfortunately, the 2008 crisis took away the job security and created a big dent in the household income. People were forced to alter their lifestyle for the worse when they realized that their finances did not permit the excessive consumption that they were used to in the past.
Unemployment had an adverse effect on society and the situation worsened due to loss of output. It dampened the hope that one could find another job, increased unhappiness and led to family issues such as divorce and separation.
The US government took a severe beating in terms of trust courtesy of government institutions and the capitalist system having suffered a major setback. To save face, the government had to prevent a total collapse by engaging in bailouts and providing assistance to financial institutions that were going under, all of which imposed an unfair burden on the American tax payers.
In addition, the fiscal and monetary action following the panic may have prevented a full blown depression but it also came with significant costs. Federal debt continued to swell and set a precedent for future interventions.
As a result of the 2007-2009 meltdown and its impact on consumption, economic and financial wealth, the nation had to bear the burden of additional costs. Reduced economic activity, rising unemployment and increased government intervention were taking their toll and it is estimated that the US lost between $6 and $14 trillions, an amount equivalent to its one year worth of output.
Commodity Price Increase
Following the crash of real estate sector, the demand for hard assets that served as feeders to real estate bubble remained. Investors were forced to reallocate away from the real estate and this in turn triggered an increase in commodity prices. Consumers were forced to pay more for the same basket of goods they could earlier buy for $1.
2008 crisis had many implicit costs. The federal debt increased and aggravated to a point wherein it was difficult to manage. Central Bank was under immense pressure to monetize so as maintain the public confidence.
It is equally true that the 2008 financial crisis increased the federal debt by a big margin. While national debt escalated to $10 trillion by 2008 mostly owing to the crisis, there was a significant increase in direct and indirect taxes.
Repercussions beyond US
Even though the impact of the 2007/2008 crisis was the most in USA, other countries suffered too.
Apart from a few countries wherein the effects of recession were hardly felt, most of the European nations felt the pinch of the 2008 financial crisis in form of rising debt and growing unemployment. While countries like UK, Spain, Portugal, Italy and Iceland reeled under lack of job opportunities for people, some like Greece suffered mounting public debt. France remained relatively well-cushioned against the setbacks characteristic of the crisis and Germany was the only exception which was able to gain foothold on the situation before it spiraled out of control.
Nations that managed to avoid recession
In the European Union, two east European countries namely Slovakia and Poland completely escaped the impact of recession while Asian countries like China, India, Iran and Korea experienced a slightly slower rate of growth but were successful in skirting recession.