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A business cycle is a description of the vicissitudes of economy. A business cycle explains the decline and growth of economy via four phases, namely: prosperity phase, recession phase, depression phase and the recovery phase.
A marked expansion and improvement in incomes, process, employment levels, output and profits, characterizes the prosperity phase. The common features of this phase are high levels of demand, output, trade, employment levels, income and marginal efficiency of investment and capital. Other features include rising interest rates, inflation, improved bank credits and general, high optimism in business. This period sees a maximum in the Gross National Product and makes economy reach its peak. The phase is a boom period (Bernard 20).
This is a gap between depression and prosperity. It is the turning point from a period of the boom to a period of depression. The common feature of this phase is that there is slowing down of economic activities. Demand falls leading to a subsequent fall in production. Output declines and profits reduce. Business persons lose confidence in the economy and become pessimistic. Further business expansion stops and stock prices fall. The overall income levels decrease leading to an increase in unemployment levels. Recession is a short period phase (Bernard 21).
This phase sees a continuous slump in business. Income, output, employment, demand, profits, prices deteriorate continuously. Interest rates fall and bank credits contracts. There is a complete underutilization of resources, which leads to a fall in the Gross Domestic Product. The economic activity falls thoroughly and eventually reaches its lowest point, the trough (Bernard 22).
This phase marks the transition from depression to prosperity. Enactment of sound economic policies and controls lead to an increase in the economic activity. Demand starts rising, production increases and business investments soon increase. Business persons regain their confidence and adopt an aura of business optimism. Lending institutions expand their credit base, businesses expand and stock prices start rising. Employment levels, income and the overall cost of living also start rising (Bernard 22).
The recent greatest recession began in December 2007 and officially ended in June of 2009. These official dates are stated according to Business Cycle Dating Committee, which is a branch of the National Bureau of Economic Research. This recession took record for eighteen months, and it is the greatest recession after the 1930s great recession. The magnitude and the effects of this recession make it mandatory to study the key causes of this recession, in order for the world economy to be better prepared in the future (Cooke n.p).
The various causes of the recession are not quite well known, but economists attribute this recession to the then debt level in the United States of America. In the years prior to 2007, there was a boom in the real estate market in America. Everybody wanted to own or trade in houses. These scenarios made many people go for houses that they could afford to neither live in nor buy. The obvious solution was to take mortgage loan from lending institutions to finance their ambitions.
In 2006, however, housing prices started to decline sharply. Many of those in real estate panicked after realizing that they will incur huge losses on these properties, or risk losing them for nothing. Their only other alternative was foreclosure, which most of them took. Banks and lenders to these homeowners also panicked as they also realized they would make monumental losses. Banks stopped lending to each other, further worsening the economy (N.p. 2009).
How did mortgages contribute to this downfall? Many of these homeowners defaulted in their mortgage payments, a scenario that started the crisis. The high default rates resulted to low quality mortgages. These low quality mortgages were the fire for the recession. Economic inequalities in the United States are also to blame for the scenario. The rich transferred their properties into the market in order to continue with their standards of living. This led to inflation, one of the features of a recessionary economy mentioned above (N.p, 2012).
After the dawn of the recession, there was instability in the political environment worldwide. This is as citizens started losing confidence in their governments' capability to manage their economies. This pessimism only served to worsen the existing recession. The masses were not welcoming any ideas the government was proposing to stop the recession, the result was further and severe recession.
The period prior to the recession also saw a whopping increase in the activities of stock markets. Americans were making millions of dollars from the stock markets. As is the case with real estate, many people took loans to buy stocks. The increase in demand of shares led to a sharp fall in the share prices. Investors made prodigious losses that they were unable to finance leading to financial panics by citizens and financial institutions.
The recession of 2008 will go down in history books as the greatest depression after the Great Depression. This is through considering the duration of the recession. The depression took record for 18 months. In comparison, the other massive depression of 1973- 1975, only took sixteen months. The recent recession of 2001 only took eight months. This recession did not only affect America, but its effects were all over the world, something uncommon with other recessions (N.p, 2012).
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