Question

Investigate the main cause of the recession that began in 2007 and how was that recession could be different from impending recession on corona virus as many financial experts predicts.

Answer 1

A financial recession takes place in an economy, when the general price level of goods and services in the country sees a steep decline. This happens because of various economic cycles which a country is subject to and the prevailing conditions in the global economy also have a deep effect on its happening.

Furthermore, it is important to decipher an economic crisis which is caused by banking negligence as in the case of 2007-2008, to the present scenario wherein a natural calamity has caused economics to fail.

In the year 2007, it was observed that real estate prices begin falling as a result of which, people gave away their pledged assets to banks instead of repaying their debt. The bank on its part found it extremely difficult to find a buyer for the asset and the non-profit making assets of the bank grew many folds. This resulted in a situation of recession wherein the banks did not have enough money to provide to the industries and expansion of business topped causing unemployment and labour issue therefore.

The current situation on the other hand is quite different in the sense that it happened as a result of a natural catastrophe, which caused direct implications for the demand and supply of all goods and services which were in the non-essential category. This led to a situation wherein, demand fell and so did supply and unemployment as is expected. However, with the banking sector still strong it is expected that it would not take long for the economy to revive once it is opened.

Thus, we may conclude by saying this, that recession caused by the corona virus is not structural and in 2007 it was banking sector collapse and structural in nature.

Please feel free to ask your doubts in the comments section if any.