The economic difficulty faced in the global markets due to reduction in consumption is known as financial crisis. The global economy faced financial crisis post recession of 2000. U.S. faced a hitch in their economy after the recession of 2008 which till date takes toll on the employment and growth rate of the nation (Shiller 2012).
The main reason which can be cited for the collapse of the US economy is the “Dot Com Bubble” of 1997 that lasted till 2003 and the global financial crisis of 2007-08. Many new start-up companies cropped up in the market with huge amount of capital investment. Failure of these start-up companies to sustain along with a sudden cut back in investment led to the bubble crisis (Anderson 2016).
This essay tries to find out the cause behind this crisis and the impact on the US economy. It also focuses on the impact of Industrial capitalism on the economy.
The world faced 8 major crises in the past forty years which had devastating effect on the global economy. US economy faced two major economic crises within a short span of 10-11 years which affected the economy to such an extent that it could not revive back till now (Anderson 2016).
The upward surge in the internet and technology’s stock price of U.S helped few share-holders to become millionaires overnight (Eichengreen et al. 2012). Investors started pouring lot of money in this sector and the economy saw growth of many new start-up companies. Those start-up companies were more engrossed in earning profit rather than establishing a well planned business. The result of such step was downfall of those companies and loss of faith of the investors in the market. Investment shrink dramatically and many people became a pauper overnight. It has been recorded as one of the largest bankruptcy in U.S. This incident is known as the Dot-Com Burst or Bubble (Gross 2016).
The Financial crisis of 2008 led to major collapse which has affected the entire world. The root of this crisis is a sudden downfall in the price of real estate market which was till then sky-high (Stock and Watson 2012). The collapse of the banking system of U.S was another reason for this depression. Housing prices declined around 31.8% whereas the stock market also crashed and the Dow Jones Industrial Average declined 733 points on 29th September 2008. These summed up the background of the great financial crises that rocked the entire world (Huddleston 2015).
The top-notch companies of the world have been following the model of industrial capitalism from long time. As the companies are privately owned they always try to maximize profits but at the same time reduce the cost to the company. While doing so the companies often end up exploiting their employers as well as the people of the economy in different ways (Kumar 2015).
Industrial capitalism is a situation where the economy is characterized by the dominance of private sector over public sector. The firms and industries are owned and controlled by private entrepreneur who has the sole motive of maximizing their profit (Kumar 2015). This system can efficiently work only under certain stringent parameter like:
These parameters also act as the barriers in growth of the business and often lead to the economy’s downfall.
U.S is the most well-known capitalist nation in the world. There is dominance of private sector in every genre of this economy. Their profit making motives surpasses the people’s ethics and approach towards humanity. Through this part of the essay the effect of such well established industrial capitalism on the economy has been portrayed.
U.S economy was ransacked in the financial crises of 2007-08. According to a press release of CNN Donald Trump commented that the economy might be going to experience its worst crises since 1929 (Chang et al. 2013).
The financial institutions lent out loans by keeping sub-prime mortgages. Sudden upward escalation in the price of real estate change in the interest rate led the people bankrupted. People were either not bothered to go through the details of the legal papers or were so reluctant to buy a home that they did not consider their capability of repayment (Eichengreen et al. 2012). Hence they were thrown out of their homes and made a pauper by the financial and insurance industry. The unemployment rate reached as high as 10% during October 2009. The basic after effect was that post recession U.S economy faced unemployment rate higher than the global average.
The failure of the housing sector and the sub-prime mortgage market of the U.S economy were so cataclysmic that it created a ripple effect and destroyed the entire global economic balance. Several economists financing agents government officials and even the common men were in doubt whether the economy was going into another Great Depression. Financing legends like Donald Trump daily news like Wall Street Journal was of the opinion that the existing model of capitalism was to be blamed for the economic catastrophe (Stock and Watson 2012).
Economists tried to find out if at all the normal business cycle could be blamed for the steep downfall. With the sudden rise in unemployment along with the recession people who had jobs also panicked about job loss. The monetary instruments got paralyzed. The diagram below shows the pre and post economic condition:
Figure 1: Unemployment Rate of U.S (2000-2016)
Source: Bureau of Labor Statistics US
Through this graph the rate of unemployment pre and post recession has been constructed. It is clearly visible that there has been an increase in the unemployment rate after 2000 and it increased to more than 6% during 2003-2004 just after the dot-com bubble. It got reduced after 2004 but again popped up sharply since 2008. From this graph it can be clearly seen that even after 8 years of global recession there has been a downturn in the unemployment rate but still the economy has high level of unemployment. Hence it can be connoted that though the root of the economy got jolted but it was not an end of the industrial capitalism era. There is continuation of the previous capitalist model but the economy is improving in terms of its unemployment rate.
Historical data suggests that there have been 8 major global economic crises in the past 40 years. The dot-com crisis and the U.S financial crises occurred back to back and still it is seen that the industry is using the old model of capitalist industrialism. The crises took away wealth worth trillions of dollars employment of more than 8 million people and few thousands of people lost their shelter as well. Statistical data reveals that suicide toll increased sharply as a shock from the crisis (Chang et al. 2013). The other economies worldwide had not been able to regain back its position till now. It can be concluded that even after this chaotic situation the economy made no alteration in their capitalist attitude and henceforth can expect to face further major crisis in near future.
Anderson S. (2016). A history of the past 40 years in financial crises. IFRe. Retrieved 30 November 2016 from https://www.ifre.com/a-history-of-the-past-40-years-in-financial-crises/21102949.fullarticle
Chang S. S. Stuckler D. Yip P. and Gunnell D. (2013). Impact of 2008 global economic crisis on suicide: time trend study in 54 countries.
Eichengreen B. Mody A. Nedeljkovic M. and Sarno L. (2012). How the subprime crisis went global: evidence from bank credit default swap spreads. Journal of International Money and Finance 31(5) 1299-1318.
Gross A. (2016). Why The Dot-Com Bubble Is Key To Understanding California’s Growing Public Employee Pension Debt. Capradio.org. Retrieved 30 November 2016 from https://www.capradio.org/articles/2016/09/19/why-the-dot-com-bubble-is-key-to-understanding-californias-growing-public-employee-pension-debt/
Kumar K. (2015). The limits and divisions of industrial capitalism. Industrial Societies (Routledge Revivals): Crisis and Division in Western Capatalism 16.
Pooi A. H. and Koh Y. B. (2016). Prediction of the Start of Next Recession. Journal of Accounting 6(1) 21-29.
Shiller R. J. (2012). The subprime solution: how today's global financial crisis happened and what to do about it. Princeton University Press.
Stock J. H. and Watson M. W. (2012). Disentangling the Channels of the 2007-2009 Recession (No. w18094). National Bureau of Economic Research.
Tom Huddleston J. (2015). These Were the Dow's 10 Worst Single-Day Losses Ever. Fortune. Retrieved 30 November 2016 from https://fortune.com/2015/08/24/stock-market-august-decline/
Unemployment rate. (2016). Bureau of Labor Statistics. Retrieved 30 November 2016 from https://www.bls.gov/
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