Austerity and Stimulus - Recession

Austerity and Stimulus - Recession

Introduction

The world economic crisis which entered into the global crisis in 2008 deepened it roots over the period the severity of the crisis was not realized until and unless it bankrupted the companies and countries who then seek the bailout projects in order to save the jobs and the industry. Two major global economic segments were severely affected during the crisis Europe and North America. The crisis became so anemic that it affected the global economy because of the interoperability and dependency of the economies on each other. Thriving economies like India and China were also affected and the growth rate fell by almost 50%. Sovereign debt crisis of Europe and the paralysis of the economies commonly known by the name of PIIGS affected the whole continent.

US and EURO Crisis

United States suffered primarily of the subprime mortgage crisis along with the Credit Default Swaps which had fallen apart. The mortgage brokers who were severely involved in the subprime lending of the US real estate and property market to the borrowers who were not having excellent credit history. The CDS has deepened the roots into the financial system and the banks who have obtained a CDS tranches had also provided a CDS tranches. The borrowers failed in making repayment which leads to the collapse of the whole real estate market (Harrington, 2009). The houses which placed as collateral devalued due to high level of non-payments as a result the debt market crashed along the real estate and the whole financial system was crippled. The Greek politicians were facing the issue of ageing population due to which politicians increased the pension payments of the retired beneficiaries. The whole expense was borne by the governments. The debt pileup resulted in more demand for debt from neighboring countries which made the problem contagious. The whole Euro zone collapsed due to several borrowing from ECB and the Euro countries. Eventually the whole system collapsed (Amadeo, 2012).

Stimulus packages and austerity measures

Stimulus packages and austerity measures were adopted and implemented, however severe consequences had and were met with resistance. The companies in United States which were bankrupted due to CDS collapse were also issued bailout packages in order to save jobs and production of the economy. AIG, Lehman Brothers, GMC and many other financial institutions were provided relief funds. Euro area met with more serious consequences, as Germany has opposed the austerity measures and Mario Draghi, President of European Commercial Bank has been able to launch the OMT (Outright Monetary Transaction) that is the program for buying the bonds from the market in order to stimulate the markets and provide them with the liquidity. The currency crisis loomed over Greece and it was inevitable that Greece might leave Euro Currency and go back to Drachma. Along with the stimulus package austerity measures were also adopted in Europe and the public resisted and protested against the austerity measures which have been implemented by the government as they are increasing ...