Recession

According to Grant (2002), a recession is defined as a fall in gross domestic product of an economy over two consecutive quarters and is characterized by a slowdown in business activity, an increase in concerns over job security, slowdown in consumer spending, a fall in consumer confidence and rising unemployment (P.346). A recession may occur due to many reasons but the underlying cause remains a lack of confidence in the economy going forward. This lack of confidence may manifests itself in a fall in aggregate demand and may be due to consumer perception on spending being conservative which starts a chain reaction spilling venom into the minds of business managers as they plan conservatively too followed by concerns over job losses and hence more falls in consumer confidence.

Belief in business cycles is something mandatory for according to Grant (2002), empirical evidence suggests that they do exist (P. 348). The importance of credit to an economic expansion is enormous along with confidence in the prospects of an economy itself. According to Schweser (2009), Savings and investment is an important ingredient in achieving persistent economic growth (P.19). Thus, according to BPP (2008), financial intermediaries like commercial banks, investment banks and mutual funds act as vehicles for connecting those with excess money at hand but no opportunity to spend it with those who do not have money but have opportunities to spend or ideas on how to put the money to better use if they had any (P. 351).

This linkage through the credit mechanism allows the economy to grow as business and consumption opportunities are availed rather than wasted. For example, a factory which borrows money to expand its plant automatically creates direct employment for new workers while at the same time increasing the level of output and hence GDP in the economy. The act of expansion of business opportunities also creates employment in other areas (indirect employment). For example, an expansion at an automobile manufacturing plant would help in job creation in the paint industry. Thus, it can be effectively concluded that the amount of credit off take determines the consumption and investment in an economy, two fundamental factors in the growth of national income. Without credit, the economy would remain a stagnated one, with lots of opportunities and potential for development, but seldom availed.

The Obama administrations economic recovery plan is a two-pronged approach. The first half deals with massive investment in the factors of production, public infrastructure and new technologies to allow the United States to become more competitive and to raise aggregate demand in the economy. These measures aimed at propping up demand will be accompanied by a lax monetary policy with near zero interest rates that would be aimed at encouraging private sector credit off take and unfreezing credit markets. Under this fiscal stimulus plan, 787 billion will be spent to make the U.S economy more competitive and to raise demand.

The second leg of the economic recovery program is to restore confidence in and normalcy to financial markets. This involves a massive program to work with public and private partners and aim to prevent any other major bankruptcies, as was the case with Lehman and to work constructively with financial institutions through monetary and non-monetary measures so that those banks with toxic assets on their balance sheets become more secure and financial markets calm down.

Support for the Obama program is far reaching. If one picks up an economic textbook, the greatest admirer of Obamas policies right now would be Sir John Maynard Keynes, the greatest economist of the 20th century along with Milton Friedman. According to Grant (2002) Keynesian economics holds that recessions involve the private sector lacking confidence in the economy and hence households spend less and factories cut back on production. In such a situation, it is imperative that the government intervenes to spend so that the private sector matches the increase in demand by increasing supply so that overall stability is restored and confidence returns (P. 249).

However, there is ample opposition to the plan too. The size of the fiscal stimulus program coupled with the earlier Troubled Asset Relief Program worth 700B would lead to a huge budget deficit, difficult and costly to finance, exposing the country to a major structural shock going forward. Furthermore, according to Grant (2002), critics of the Keynesian school of thought argue that government intervention would only lead to a departure from the liassez faire principal, leading to inefficiencies creeping into the economy as businesses and corporations increasingly rely on state aid (P. 267).

All in all, the overall atmosphere across the world shows immense support from Obama. On a personal note, although we might differ from his tools at combating this economic downturn, the overall agreement remains that demand has to pick up so that the slide can be reversed. Only time will tell how successful the Obama administration is. I personally believe that the administration is on the right economic policy track.

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