Saturday, October 18, 2008

Current Recession: Policy Implications

Before going ahead with this weekend blog let me Congratulate PAUL KRUGMAN who has been honoured with the Noble prize for the year 2008 in Economics. His theoretical contributions to International trade and economic geography are detrimental in bagging the highest honour. In his recent piece in Newyork Times, the 2008 Noble Laureate in economics said that "it is politically fashonable to rant against government spending and demand fiscal responsibility.  But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold". In the following piece of my blog, i will try to relate his statement with the current global financial condition (I dislike to call it as "crisis").

Stock markets are finding new depths in most of the days, money markets, credit markets are vitually shut down. In addition to that we saw the falling retail sales so as the industrial production. All these prevailed conditions makes me to remember the recent recession of late 1990s resulting from technology bubble. The policy response to such recession was a success story.  The Federal Reserve could engineer that recession by cutting interest rate which resulted in the increased employment opportunites. But the current prevailing situation is different from that of the situation prevailed during late 90s in many ways. For quiete sometime Federal Reserve has been resorting to  interest rate cut to prevent the unemployment rates from raising for several other reasons of global slow down. This brought us to see the fed rate at around 1%, but there is no sign of declining trend in unemployment rates. Moreover, the decline in the retail sales caused the accumulated inventores, forced reduction of the industrial production and further retrenching of jobs. As per the old dated economic text books the current economic situation is precisely referred as the "Economic down turn" as a synonym to "recession".  How long our markets have to suffer from such epidemic? , is the trillion dollor question!!

In this situation there is not much can be done by the central banks. On the other hand, as J.M. Keynes advocates a lot that government can do through its fiscal measures - increasing the benefits to the unemployed (social security measures), infrastructure spending  to boost the aggregate demand. The agrument against infrastructure spending in the prevailing situation is that they take too long to show the impact, but such an arument has no validity as the chances that this slump will be over anytime soon are virtually zero.  Hence, it may be reasonable to get such projects get rolling and slowly injecting the confidence among the economic agents.!!

Constructive comments are honoured!!

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