Recession

How does the recession take place in the first place

Letto-Gillies (2010) viewed the crisis as an imbalance or a disequilibrium among the macro activities; demand, production and distribution. He used the terms ‘potential capacity’ and ‘actual capacity’ whereby potential capacity can only be realized into actual capacity if there is a demand to absorb it. In building up his argument, the author rightfully stated that the world’s potential capacity has been increasing in the last few decades, an increase that is supported by innovations in the production process. However, the actual capacity in the developed countries lagged its potential, which introduced the first broken link in the sustainability of this cycle. If the profits are to be invested again; potential capacity has to be realized into actual one to be translated to an actual income.

Looking at the demand constraint again the author argued that; if demand is to keep on growing with the potential capacity, income distribution has to be congenial. Nonetheless, this is not the case, there is a shift in the income distribution towards certain strata in the society, a stratum with low tendency to consume, therefore; reducing the probability of translating the potential capacity into an actual one. Now, this made investments in many sectors less appealing, bringing into light the appeal of the financial sector. A sector that proved to be profitable, without the need for extra capacity. The shrinking profitable business in other sectors made investors go and invest in the financial products, resulting in a booming financial sector that is based on an unstable real sector.

The above argument made, lead the author to argue that if the demand is properly shifted and income is distributed well, this should solve the demand part and would make things better. Therefore, leads to the argument that government’s increased expenditure, helps in restoring the equilibrium, and improves the demand. Letto-Gillies’s (2010) view over the financial section dominance was supported by Blankenburg & Palma (2009,p. 536) who emphasized the need to control the financial sector and restore back its original function of support rather than the new role it assumed dominating other sectors if a solution to the financial crisis is to be found . The authors cited UK’s prime minister, Gordon Brown, who admitted that politicians' previous concepts and beliefs in the hypothesis of ‘efficient market’ was wrong and there is a lack of clarity as to how to deal with the [2008/2009] global crisis because past experience didn’t exactly apply to that one, nonetheless, the authors argued that lessons can be drawn from previous downturns, and argued that the solution might be complicated because of other dimensions that might be related to politics rather than to mere financial reforms.

Panic, Panic, Panic…

The unfortunate wave of panic created by the meltdown, leads many businesses to target short term profits, misleading them to adapt severe conservative strategies in hopes to ride through the crisis. While this could be understood for a short term vision, however, organizations have to balance the usage of retention strategies and aggressive ones (Gulati, Nohria & Wohlgezogen 2010; Raghavan 2009). Many business executives in many organizations have not lived a financial turmoil before, and at the first considerable threat over their organizations' survival many executives went irrational.

The deficit some managements had on board was the lack of experience handling financial turmoil, and the financial crisis posed an extended period of instability for the management to navigate through, which could have generated a halo-effect of panic that spread within the country. Many of the decisions made within organizations are seen by the audience as irrational, morals went down and job security and survival became one of the top priorities and concerns for people

Next article will touch base whether the financial crisis is actually a risk or an opportunity,

References

Letto-Gillies G., ‘The current economic crisis and international business Can we say anything meaningful about future scenarios?’, Futures, 42(9), p.910-919.

Blankenburg S. & Palma J. G. (2009),’ Introduction : the global financial crisis’, Cambridge Journal of Economics, 33, pp. 531 – 538.

Gulati R., Nohria N. & Wohlgezogen F. (2010), Roaring out of recession, Harvard Business Review, March, p.63-69.

Raghavan A. (2009), ‘The economic downturn: Coping strategies and the way forward’, Vikalpa : the Journal for decision makers. 34 (3), pp. 67-71.