The global recession conundrum

Recently we have been bombarded with bad news on the world economy, but are things really as bad as we are being told?

No-one really knows, and I believe that this is part of the problem. People look towards politicians, commentators and writers to give us answers to problems, but this is different. It is clear that nobody has the answers to solve the recession conundrum, and this is where the real problem lies.

One of the biggest problems is confidence, and this goes to the heart of the banking system. On a personal level, you would not let a friend borrow money if he/she could not pay it back. In the past, money was lent to people that realistically had no chance of paying it back. The sub-prime mortgage market in the US is a good example of this, and is often the one event that people trace this whole crisis back to. Whereas risk used to be a commodity that was sold off globally, financial institutions are no longer willing to take these risks, and as a result the wheels of credit have ceased up. What is interesting about this recession, is that it need not have happened if lending had been conducted responsibly. However, as financial capitals such as London became richer and richer people lost sight of the simple principles of lending.

The result of these decreased risk margins, is that many businesses are going to the wall, as they no longer have access to the levels of credit that they had become accustomed to. In a way, these calamitous circumstances which will undoubtedly end in many job losses are a necessary evil. The former Chancellor Norman Lamont was lambasted for saying that unemployment was a price worth paying, back in 1991, and of course this can not be agreed with. However, it is inevitable that this will happen, as non-profitable businesses close down, and indeed this needs to happen in order to put the economy back on its feet. Capitalism works because it rights itself by shedding the non-functional weaker parts of the economy. Take Woolworths for example in the UK. This was a failing business that needed to close. Keeping it open by bailing it out would not have done anyone any favours. The workforce may have stayed in place, what at what price? Without boom and bust, Capitalism would not work, and Gordon Brown was foolish to claim he had eradicated it in the year 2000.

In the US, the car business is a classic example. Here, an out-dated business model ran into trouble and had to be bailed out at huge cost to the taxpayer. The problem however, much like British Leyland in the 1970s, is that the consumer does not want the cars that are being manufactured. The bail out was implemented in order to save jobs, but in the longer term these jobs may have to go anyway. This may have bought the President some time, but it could be too late for this particular industry, and it will be the taxpayer that will foot the bill for their failings.

Another problem though, is that markets are now increasingly global. In the case of the UK, the government can do little to improve the economic situation if the US situation does not improve. Gordon Brown has taken the risky step of borrowing large amounts of money to jump-start the economy, but there are little signs of things improving on any noticeable level. The Prime Minister said today at Prime Minister's Questions that British banks were now beginning to lend more, but without the presence of American money, there is a gaping hole in the market.

If the world economy is to improve, then a world solution needs to be reached. Domestic policies can help but these must be implemented without encouraging protectionism. Otherwise this recession could be far deeper than it needs to be and far harder to get out of.