Economic Recovery Vs Great Recession

The end of capitalism has begun. The world spirals deeper into an economic downfall which it will not recover from and it is all because of the capitalistic system. These beliefs were common, uneducated, public opinion on the economy during both the Great Depression and the Great Recession of 2008 (Bartlett, 2009). Although these pessimistic voices of disbelief in the current system had a certain gravity surrounding them, the men and women in charge of making economic decisions worked hard to ensure the economy would recover. The questions that arise are, how exactly was this recovery made? What has humankind learned from The Great Recession? Were the central bank expansionary monetary policies enacted, truly decisions made with wisdom and
Lastly, by analyzing fiscal policy maneuvers, it is also observed that fiscal policy can indeed help the economic situation in a deep recession. Overall, it is undeniable that a mixture of the two policies would be the best way towards economic recovery and well-being in a deep recession such as the 2008 recession. Firstly, expansionary monetary policy is a timely, quick and effective way to help improve and provide immediate relief to the economy during a recession. In 2008, the FED made multiple public announcements, accompanied by swift decisions and explained that expansionary monetary policy can help to prevent an adverse feedback loop. This occurs when a recession creates uncertainty about asset values (valuation risk). As a result, firms are not confident enough in their financial position to engage in spending and investing activities. Such a situation could lead to greater uncertainty and cause a further deterioration in macroeconomic activity and this continues. This mechanism is also referred to as the financial “accelerator” by economists (Ben Bernanke, Mark Gertler, and Simon Gilchrist, 1999). If a timely, decisive and flexible policy is implemented by
The first limitation arises from something known as the zero-bound limit. Interest rates cannot go below zero in conventional monetary policy. Additionally, in the band around zero, the effectiveness of monetary policy decreases. This is because consumers and firms alike choose to save their money. The reasoning behind avoiding bonds and investing is that interest rates will soon rise. As a result, bonds will devalue and hence consumers do not wish to hold bonds. This is known as the liquidity trap (Blanchard, 2000; Eggertsson, Gauti and Michael Woodford, 2003). Also, drawing a parallel with the U.S to Japan, it is seen that lowering interest rates has little to no effect when rates are near zero. This is proven when Donner and Peters say, “Since interest rates could not fall below zero, Japanese monetary policy proved nearly impotent” (Donner and Peters, 2010). In recent times, an idea to solve this problem proposes applying negative interest rates to overnight deposits. However, one can present the argument that in Japan, Sweden and Switzerland negative rates have not done much to increase growth. They have, at best, caused a decrease in foreign investment (into bonds), decreased demand for currency and created a devalued domestic currency. This may make the exports industry more productive, but when one factors in the downsides of negative rates, the overall effect is uncertain (Irwin, 2016). Lastly, especially in