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Keynesian Explanation of Recession Essay


Keynesian Explanation of Recession

Keynesian scientists view world economic recessions as part of developed economies. This is unlike what classical scientists believe. Keynesian scientists argue that many investors are constantly looking for new ways to make money. These new ways may not be water-proof. This means that there is a possibility for something to go wrong. In 2008, there was a global recession which originated in the United States. This recession was triggered by the lending market in the United States.

Keynesian scientists argue that it is wrong to blame the players in that field for that problem. Instead, the government should bear the blame. The point is that the government should have put in place proper policies to guide the manner of doing business.

In 2008, Keynes argues, there was little policy put in place to effectively monitor, discipline and guide the financial institutions that were the central players in that field. Hence, as noted earlier, they engaged in all manner of possibilities to make profits. It might have worked in the past, but they exceeded the limit which triggered the economic recession (Hossein-Zadeh, 2009).

Keynes, therefore, does not rule out such instances in the economy at times. This is especially true when the government does not do enough to regulate most of its branches to ensure proper conduct. Hence, Keynes largely blamed the government for the failure in United States banks.

However, the manner in which the government responded to the crisis is Keynesian. The argument is that since the risk that the institutions take benefits the government, it should come to their rescue when they get stuck in such recessions. It is in tandem with Keynes recommendations to bail out the agents as the government did in the wake of the crisis.

The response of the government: the economic stimulus package is supported by the current crop of new Keynesian scientists. However, they argue that the amount that the government set aside is too little to revive the economy. The amount is supposed to have a multiplier effect on the spending of consumers. But consumers, the scientists argue are spending on long-term investments as opposed to the ‘quick spending’. Therefore, the scientists argue that the governments may not be able to revive economic growth form this front.

The scientists are however in unison when it comes to the long term expectations. They say that what the economy is experiencing is a host of short term fluctuations. In the long run these fluctuations will be weighed down by market forces. These forces will drive the economy into equilibrium.

They include price changes, consumer awareness and government policies: macro for that matter. In conclusion, Keynesian theory of economic healing in the wake of a crisis was greatly employed. Although it was tailored to the current situation by efforts of the new Keynesian economists.

However, the cause of the economic crisis had been cited by the original Keynesian theory of economics. The government was largely to blame for failing to regulate the financial markets. This is despite the fact that it has been hailed by many following its response. However, others still criticize the government’s perceived rewarding of the banks for their mistakes at the expense of the taxpayers. They argue that taxpayers should have been given the bail out money because they suffered in its wake.

Double Dip

This is a recession that is witnessed after a short-lived momentum of economic growth. Usually, this growth happens for a quarter or two quarters of a year. It is always preceded by economic down turn. The causes vary from cutbacks in spending because of the preceding downturn, job layoffs to offset costs and a fall in the demand for goods and services as people cut on their budgets.

Bond Vigilante

This is a business person who reacts to unfair policies: both fiscal and monetary. This triggers an increase in yields and hence the cost of borrowing. This is helpful and healthy to an economy. It serves as a restrain for the government to overspend or borrow too heavily. These two actions affect the economy and hence, the government treads carefully acting as a balance.

Qualitative Easing

This is method used by central banks to lower interest rates. It is considered bad and it is not recommended by economists. The government basically prints money and purchases assets in the economy. This lowers their yield because of the immediate demand. Hence many investors shy away from purchasing them.

When there are many people who want to buy certain assets, their prices increase. This lowers interest rates. Hence, it triggers borrowing. It is quite effective where the monetary policy fails or is perceived not to work (Mankiw, 2009).

Robert Skidelsky

He is a professor of political economy at Warwick University. He has constantly criticized the various governments’ handling of the economic crisis. This is especially true for the UK government. He writes for the guardian and most of his latest articles are critical of the manner in which the government is handling the economic crisis. He argues that the application Keynesian way of handling this economic turmoil is not working.

He argues that qualitative easing that the government of UK is applying is actually failing in the United States. Consumers are not spending, despite efforts towards that by the government. Instead, they are saving to deleverage as mentioned by Skildelsky. He also argues that governments are misallocating their bail out money by buying liquid assets instead of real investments. This is working to benefit only the banks that got the country in this mess in the first place (Skidelsky, 2011).

In a separate article he handles the issue of inflation. There have been arguments that in time to come thee will be an inflation ‘tsunami’. This is in light of the amounts of money the government of England and US are printing to help sinking banks and financial institutions. He, however, argues that it is rather unlikely that is going to happen.

This is because; many people are not actually spending the money on the intended arenas. Most of them are saving for real investments such as buying a house lost during the recession. Therefore, if the effect will be felt, it will be on a significantly lower degree (Skidelsky, 2011).

He goes down the memory lane by looking at the history of banks. He says that they have benefited since 1930 global recession and the ones that followed. It is like they benefit for their misdeeds. Again, his argument that it is the high time they are not bailed out again. This is in contrast with Keynes who says that it is not the fault of the banks: it is governments (Skidelsky, 2010).

In another article he argues that the economic world has wallowed in the waters of theoretical thinking for long. He says it is time for reality to prevail. He justifies this by looking at the banking sector. He says that the players in the sector have information about the likelihood of economic downturn occurring way before it occurs. While it catches many by surprise, the players have measure in place already to shelve against its impact. When it occurs, they cut spending which throws the economy into a tailspin (Skidelsky, 2011).

Paul Krugman

He is an American economist who writes a column with New York Times. He is a fierce critic of the manner in which the government is handling the economic crisis. His arguments are a sharp contrast of the Keynesian theory. He does not see the need to bail out banks. He sees them as the major cause of the crises. His argument is that these multinationals always have prior information concerning the likelihood of occurrence of an economic crisis (Krugman, 2010).

He says that they may even create one to benefit from it. He says that the people who suffer in the long run are the Americans who are left stranded in the wake of these crises. The manner in which the government is handling the crisis is a disaster in itself.

He says that bond vigilantes are going to be the undoing of the American economy on the wake of continued spending witnessed from the government. He argues that the government should have instead focused on paying off debt that people had with the banks. This way it would have stimulated the desired growth from bottom up. The risk would have been smaller, also compared to the current situation (Krugman, 2010).

Reference List

Hossein-Zadeh, I., Beyond Mainstream Explanations of this Recession, State of nature, 2009. Web.

Krugman, P., Congress Seems To Have Forgotten America’s Millions Of Unemployed, New York Times, 2010. Web.

Krugman, P., The Conscience Of A Liberal, New York Times, 2010. Web.

Krugman, P., , New York Times, 2010. Web.

Mankiw, N., Money Supply and Money Demand, Macroeconomics (5th ed.), Worth, pp. 482–489, 2009.

Skidelsky, R., , Guardian, 2011. Web.

Skidelsky, R., . Web.

Skidelsky, R., , 2011. Web.

Skidelsky, R., , Guardian, 2011. Web.

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IvyPanda. 2020. "Keynesian Explanation of Recession." January 13, 2020. https://ivypanda.com/essays/economic-recession/.

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IvyPanda. (2020) 'Keynesian Explanation of Recession'. 13 January.

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