Ans1:
The Global financial crisis of 2007-08 played a significant role in the failure of key businesses, declines in consumer wealth due to fall in the stock markets, and a downturn in economic activity leading to the 2008–2012
global recession and contributing to the European sovereign-debt crisis. While the US and Eurozone have both been heavily affected by the 2008 financial crisis, the US has recovered much better than the Eurozone did. For example, the real GDP per capita in the Eurozone is still lower than it was in 2007 and over 10% below what is was supposed to be by now. This difference is mostly due to the differing approaches they both followed to recovery.
USA’s approach-
They mostly stayed true to Keynesian economics for recovery which state that deficit spending is actually a good thing in a depressed economy. The Federal Reserve stuck to its low interest rate plan believing that
this wouldn’t cause inflation as unemployment was still high. Recovery was channeled through Obama's 2009 stimulus package, known as the American Recovery and Reinvestment Act.
A host of other jobs measures contributed to the economic recovery, including the extensions of unemployment insurance, the payroll tax cut and other tax cuts for business investment and hiring. Investments in social safety net programs that helped keep millions of Americans out of poverty.
Eurozone’s approach-They acted upon the belief that cutting deficit spending in a depressed economy actually creates jobs, because it boosts confidence. The ECB took inflation warns as a sign and raised interest rates in 2011 even while the unemployment rate was high.
Lessons for India
1. Strict Regulation- Whereas banks in the UK and Europe were exposed heavily to the mortgage-backed securities offered by the US financial system, banks in India have avoided such exposure. This has to do
with prudential regulatory norms in India.
2. Government intervention is required- Deficit spending during a crisis isn’t bad at all. However, inflation will have to be kept in check.
3. India needs to implement effective social safety net programs. At present, the Indian social security system provides retirement and insurance benefits to those working in the organized sector. As announced in the 2015 budget speech, this safety net will have to be extended to the vast unorganized sector (employing 93% of Indian working population) in order for it to be an effective protective measure against poverty.
Ans2:
US way of Dealing with Depression
US took the Old macroeconomic model that is Keynesian way , which ask that in order to increase the employment , and fight depression , Lowering inflation , and infusing money , Boosting the demand and deficit spending [ Spending beyond pocket ] . This caused policy of quantitative easening or Cheap money , low interest money . This proved sound and successful if one connects the dots from now in 2014 to 2008 . unemployment is low , Growth is taking upward curve vis a vis EU condition
EU way of dealing 2008 crisis - It took new innovative approaches, which were based on principles of spending cuts , reducing govt spending , austerity measure . Such was based on principle that austerity will drive confidence which will spurn growth . However none happened and EU now is taking similar approach which US did the then. that is old macroeconomic Keynesian path of deficit spending
Lesson to India
~ Tight monetary policy in low growth environment can actually decreased confidence
~ Deficit financing is good but for investment /capital investment and not for consumption to Housing /infrastructure bubble as in Case of China or US [ before depression]
~ Loans to those sector which can actually have ability to repay in order to avoid recession rather curing it
~ Regulation of financial sector to avoid such mishap . BN krishna Unified single regulator and consensus among regulator can be used
Ans3:
America and Eurozone were most affected by the ‘2008 Financial Crisis’. Though America seems to have recovered much of the lost ground, Eurozone’s recovery is quite bad.
America had followed the basic textbook models of standard Keynesian economics and has performed fairly well, since the crisis in 2008. It continued to believe in the textbook proposition that deficit spending is actually a good thing in a depressed economy. The Federal Reserve of USA stuck to its view that its low-interest-rate policies wouldn’t cause inflation as long as unemployment remained high.
On the other hand, Eurozone preferred alternative innovative approaches. They pursued ‘expansionary austerity’; they believed it would boost confidence & the confidence would create growth. The European Central Bank, contrary to the actions of Federal Reserve, to overcome inflation, raised interest rates in 2011 even though unemployment was still very high. This approach has not yet yielded high growth for the Eurozone.
India’s growth rate has been low for the last few years. We could pursue deficit financing, as was done by USA and since the inflation has already been brought under control, RBI could lower the interest rates to provide more liquidity for the business to grow. The financing could
be used for the government’s ‘Make in India’ initiative to make India a manufacturing hub and for the financing of 100 Smart Cities.
Ans4:
Post 2008 crisis,U.S. followed an expansionary monetary policy whereas eurozone followed contraction art monetary policy with focus on austerity whereas US focus was on reviving demand.
Looking at present situations US strategy seems to have worked as US economy is steadily growing at 2%,unemployment rates are falling,US dollar is strengthening and also eurozone has now resorted to quantitative easing just like USA did.Earlier contractionary policy by Europe resulted in weakening domestic demand,fall in trade volumes volunes of Europe and eurozone crisis of 2011.
From the experiences of these two regions,there are few policy,structural and regulatory lessons for India as follows:
1.Regulation is key in spotting weaknesses in financial sector.
2.India should focus more on growth in core sectors of economy rather than than building up the bubble of financial assets.
3.Tovrevive domestic demand loose monetary policy is the key,but given india's cost-push inflation,this could prove to be a double whammy
4.In times of weak demand,following tight monetary policies could further weaken the economy affecting our reviving chances.
The Global financial crisis of 2007-08 played a significant role in the failure of key businesses, declines in consumer wealth due to fall in the stock markets, and a downturn in economic activity leading to the 2008–2012
global recession and contributing to the European sovereign-debt crisis. While the US and Eurozone have both been heavily affected by the 2008 financial crisis, the US has recovered much better than the Eurozone did. For example, the real GDP per capita in the Eurozone is still lower than it was in 2007 and over 10% below what is was supposed to be by now. This difference is mostly due to the differing approaches they both followed to recovery.
USA’s approach-
They mostly stayed true to Keynesian economics for recovery which state that deficit spending is actually a good thing in a depressed economy. The Federal Reserve stuck to its low interest rate plan believing that
this wouldn’t cause inflation as unemployment was still high. Recovery was channeled through Obama's 2009 stimulus package, known as the American Recovery and Reinvestment Act.
A host of other jobs measures contributed to the economic recovery, including the extensions of unemployment insurance, the payroll tax cut and other tax cuts for business investment and hiring. Investments in social safety net programs that helped keep millions of Americans out of poverty.
Eurozone’s approach-They acted upon the belief that cutting deficit spending in a depressed economy actually creates jobs, because it boosts confidence. The ECB took inflation warns as a sign and raised interest rates in 2011 even while the unemployment rate was high.
Lessons for India
1. Strict Regulation- Whereas banks in the UK and Europe were exposed heavily to the mortgage-backed securities offered by the US financial system, banks in India have avoided such exposure. This has to do
with prudential regulatory norms in India.
2. Government intervention is required- Deficit spending during a crisis isn’t bad at all. However, inflation will have to be kept in check.
3. India needs to implement effective social safety net programs. At present, the Indian social security system provides retirement and insurance benefits to those working in the organized sector. As announced in the 2015 budget speech, this safety net will have to be extended to the vast unorganized sector (employing 93% of Indian working population) in order for it to be an effective protective measure against poverty.
Ans2:
US way of Dealing with Depression
US took the Old macroeconomic model that is Keynesian way , which ask that in order to increase the employment , and fight depression , Lowering inflation , and infusing money , Boosting the demand and deficit spending [ Spending beyond pocket ] . This caused policy of quantitative easening or Cheap money , low interest money . This proved sound and successful if one connects the dots from now in 2014 to 2008 . unemployment is low , Growth is taking upward curve vis a vis EU condition
EU way of dealing 2008 crisis - It took new innovative approaches, which were based on principles of spending cuts , reducing govt spending , austerity measure . Such was based on principle that austerity will drive confidence which will spurn growth . However none happened and EU now is taking similar approach which US did the then. that is old macroeconomic Keynesian path of deficit spending
Lesson to India
~ Tight monetary policy in low growth environment can actually decreased confidence
~ Deficit financing is good but for investment /capital investment and not for consumption to Housing /infrastructure bubble as in Case of China or US [ before depression]
~ Loans to those sector which can actually have ability to repay in order to avoid recession rather curing it
~ Regulation of financial sector to avoid such mishap . BN krishna Unified single regulator and consensus among regulator can be used
Ans3:
America and Eurozone were most affected by the ‘2008 Financial Crisis’. Though America seems to have recovered much of the lost ground, Eurozone’s recovery is quite bad.
America had followed the basic textbook models of standard Keynesian economics and has performed fairly well, since the crisis in 2008. It continued to believe in the textbook proposition that deficit spending is actually a good thing in a depressed economy. The Federal Reserve of USA stuck to its view that its low-interest-rate policies wouldn’t cause inflation as long as unemployment remained high.
On the other hand, Eurozone preferred alternative innovative approaches. They pursued ‘expansionary austerity’; they believed it would boost confidence & the confidence would create growth. The European Central Bank, contrary to the actions of Federal Reserve, to overcome inflation, raised interest rates in 2011 even though unemployment was still very high. This approach has not yet yielded high growth for the Eurozone.
India’s growth rate has been low for the last few years. We could pursue deficit financing, as was done by USA and since the inflation has already been brought under control, RBI could lower the interest rates to provide more liquidity for the business to grow. The financing could
be used for the government’s ‘Make in India’ initiative to make India a manufacturing hub and for the financing of 100 Smart Cities.
Ans4:
Post 2008 crisis,U.S. followed an expansionary monetary policy whereas eurozone followed contraction art monetary policy with focus on austerity whereas US focus was on reviving demand.
Looking at present situations US strategy seems to have worked as US economy is steadily growing at 2%,unemployment rates are falling,US dollar is strengthening and also eurozone has now resorted to quantitative easing just like USA did.Earlier contractionary policy by Europe resulted in weakening domestic demand,fall in trade volumes volunes of Europe and eurozone crisis of 2011.
From the experiences of these two regions,there are few policy,structural and regulatory lessons for India as follows:
1.Regulation is key in spotting weaknesses in financial sector.
2.India should focus more on growth in core sectors of economy rather than than building up the bubble of financial assets.
3.Tovrevive domestic demand loose monetary policy is the key,but given india's cost-push inflation,this could prove to be a double whammy
4.In times of weak demand,following tight monetary policies could further weaken the economy affecting our reviving chances.
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