The great recession cannot be associated with free markets. The banks had a lot to do with the economic imbalance. People deposited money and as their legal obligation, banks received the money and kept it. Banks believed that they were doing their own private business. It became rare for people to withdraw the money they had deposited. This is because everybody was determined to have some savings. The banks held the money as a means of survival. This reduced the circulation of money and consequently inflation. Without a doubt, inflation is the main cause of recession. The banks did not find anything wrong with keeping their customers money safe.
The great recession was also fueled by banks irresponsible behavior and fraudulent mechanism. Since they held money and prevented its circulation, their profits declined. As a result, they had to recover and make profit so as to remain in business. The banks used fraction reserves as a scheme to increase credit in an unsustainable manner. To achieve this, they deducted their customer’s money by 2% at the time of withdraw. This means that if a customer’s savings was $10,000, upon withdrawal he/she received $9,800 (Official Documentary: “why the great recession happened”). This deduction was uncalled for and thus fraudulent. Customers were used to carry the cross of recession as they kept the banks running. This caused recurrent boom and bust cycles. Logically, it is not possible to insert ones hand in a hole that it was previously bitten. Therefore, it was hard for customers to take their money to the bank again after subjected to shortage. This contributed to recession.
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Bad policies in the economy also contributed to the great recession. The fraction reserves are an example of a bad policy. Such policies focus only on the short-term and the current well-being of the entities involved. This leaves no concern over the long-term as the policies could not give back to the economy. Holding money in the banks was also a form of bad policy. Banks should have focused more on investment such as mortgages. This would have earned them profit and help them stop deducting money from customer’s savings. It was an irony to deduct money from deposits instead of adding interest to them. This policy contributed to making people poor. Purchasing became difficult as prices of commodities and services went up.
Fraction reserves left companies with no profits. This led to unemployment as the companies tried to cut down the costs. Also, individuals curtailed expenditures to trim costs. This caused a decline in the gross domestic product. The fall of the economy into recession can trace its roots in unemployment and decline of GDP. People and businesses tend to save the little money they have in their pockets. When people stop spending, businesses close down and there is no circulation of money. Unemployment leads to a rise in rates of crime. This affects the economy as investors evade areas associated with crime.
Conclusively, the irresponsible behavior of banks to apply fraction reserves on customer’s savings was the main cause of the recession. People incurred losses from deposited money. It could have been the injustice to associate other factors such as exchange rates with the recession. When banks hold money, inflation goes up and this affects the business world. The price of the commodity goes up and people spend more for less. This causes recession that hits the economic world.
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