What is a recession?

A recession is when GDP growth slows, businesses stop expanding, employment falls, unemployment rises and housing prices decline. For those reasons, many experts say the US is actually in a recession now:

~ GDP is slowing
~ businesses are expanding more slowly
~ Employment is falling
~ Housing prices are down 10%

Many experts state that it is only an economic when GDP growth is negative for two consecutive quarters or more. However, for all practical purposes a recession starts when there are several quarters of slowing but still positive growth. Often a quarter of negative growth will occur, following by positive growth for several quarters and then another quarter of negative growth.

A good example was the stock market crash and subsequent economic downturn in 2000. This was not a recession in technical terms because GDP growth was negative in Q3 2000, Q1 2001 and Q3 2001, none of which were consecutive. However, anyone who lived through it knows that it felt like a recession during all that time. And in fact, GDP growth did not reach over 3 % until Q3 2003.

About the only good thing about a recession is that it will cure inflation. The balancing act the federal reserve must pursue is to slow economic growth enough to prevent inflationwithout triggering a recession. Currently, it must do this without the help of fiscal policy, which is generally trying to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring current account deficits.

Source: http://useconomy.about.com

How the IMF Helps to Resolve Balance of Payments Difficulties

Balance of payments difficulties can arise—and, in the worst case, build into crises—even in the face of strong prevention efforts. The IMF assists countries in restoring economic stability by helping to devise programs of corrective policies and providing loans to support them.

Why do balance of payments problems occur?

Bad luck, inappropriate policies, or a combination of the two may create balance of payments difficulties in a country—that is, a situation where sufficient financing on affordable terms cannot be obtained to meet international payment obligations. In the worst case, the difficulties can build into a crisis. The country's currency may be forced to depreciate rapidly, making international goods and capital more expensive, and the domestic economy may experience a painful disruption. These problems may also spread to other countries.

The causes of such difficulties are often varied and complex. Key factors have included weak domestic financial systems; large and persistent fiscal deficits; high levels of external and/or public debt; exchange rates fixed at inappropriate levels; natural disasters; or armed conflicts or a sudden and strong increase in the price of key commodities such as food and fuel. Some of these factors can directly affect a country's trade account, reducing exports or increasing imports. Others may reduce the financing available for international transactions; for example, investors may lose confidence in a country's prospects leading to massive asset sales, or "capital flight." In either case, diagnoses of, and responses to, crises are complicated by _link_ages between various sectors of the economy. Imbalances in one sector can quickly spread to other sectors, leading to widespread economic disruption.
How IMF lending helps

IMF lending aims to give countries breathing room to implement adjustment policies and reforms that will restore conditions for strong and sustainable growth, employment, and social investment. These policies will vary depending upon the country's circumstances, including the causes of the problems. For instance, a country facing a sudden drop in the price of a key export may simply need financial assistance to tide it over until prices recover and to help ease the pain of an otherwise sudden and sharp adjustment. A country suffering from capital flight needs to address the problems that led to the loss of investor confidence: perhaps interest rates that are too low, a large government budget deficit and debt stock that is growing too fast, or an inefficient, poorly regulated domestic banking system.

Before a member country can receive a loan, the country's authorities and the IMF must agree on a program of economic policies. A country's commitments to undertake certain policy actions are an integral part of IMF lending. They are designed to ensure that the funds will be used to resolve balance of payments problems. They would also help to restore or create access to support from other creditors and donors. A country's return to economic and financial health allows the IMF to be repaid, making the funds available to other members.

In the absence of IMF financing, the adjustment process for the country would be more difficult. For example, if investors become unwilling to provide new financing, the country has no choice but to adjust—often though a painful compression of imports and economic activity. IMF financing can facilitate a more gradual and carefully considered adjustment.

IMF loan programs are tailored to the specific circumstances of individual countries. In recent years, the largest number of loans has been made through the Poverty Reduction and Growth Facility (PRGF), which provides funds at a concessional interest rate to low-income countries to address protracted balance of payments problems. However, the largest amount of funds is provided through Stand-By Arrangements (SBA), which charge market-_base_d interest rates on loans to assist with short-term balance of payments problems. The IMF also provides other types of loans including emergency assistance to countries that have experienced a natural disaster or are emerging from armed conflict.

Globalization has vastly increased the size of private capital flows relative to official flows and IMF quotas, albeit unevenly so. Many emerging market countries currently see an unmet need for insurance against large and volatile capital flows. In recent years, the IMF has been re-examining its instruments that help prevent and respond to crises to ensure they continue to meet emerging-market members’ needs. Low-income countries have differing needs. Some require debt relief, and others concessional financing. Meanwhile, some no longer need financing, but seek the reassurance of policy support and signaling.

Financial crisis highlights need for adequate national policy space

The side event on Financial Crisis, Global Imbalances and National Policy Space, which was co-organized by UNCTAD and the Government of the Netherlands, attracted a great level of interest, with more than 60 representatives of delegations, non-governmental organizations and academia in attendance.

The debate led to a consensus that appropriate responses to financial and economic crises required adequate national economic policy space. On the other hand, the current financial crisis underscored the need for better international monetary and financial governance. Increased efforts were therefore necessary to strike the right balance between national policy autonomy and international rules and regulations.

It was suggested that in a globalized economy, national policy space was constrained by both de jure and de facto elements.

De jure constraints mainly stemmed from commitments arising from multilateral, regional and bilateral trade agreements. Legal constraints also existed in the macroeconomic and financial area, through the conditionality attached to support from international financial institutions. It was observed that such conditionality, including the requirement of restrictive monetary and fiscal policies and narrow limits for public bail-out operations, had often impacted negatively on developing countries during previous crises. By way of contrast, governments today in the major industrialized countries had no difficulty in undertaking unprecedented financial and macroeconomic rescue packages.

De facto constraints of national policy space were _link_ed to countries´ integration into the globalized economy, in particular financial liberalization, which had increased instability and the procyclicality of the financial system. Better rules and regulation in the area of international finance could help widen national policy space by generating greater stability in international monetary and financial relations. It was suggested that better management of the global economy required greater involvement of government. However, that must not come with double standards: adequate policy space was needed for all countries, not just a few. Yet such rules might need to take into account the different levels of institutional capacity available across countries, and in many developing countries that capacity had to be significantly improved.

The financial crisis has been one of liquidity. This refers to the ability of an asset to be converted to cash. It is important for banks because if there was a sudden decline in deposits, they need to have cash on hand to cover their reserves. They acquire this cash by selling assets such as investments, securities, or now most famously, collateralize debt obligations (CDOs). CDOs are where the trouble began. Many CDOs were secured (collateralize) by mortgages. When, due to the plunge in housing values, those CDOs became totally worthless (most investors were totally unwilling to buy them), a lot of banks were stuck with them. The value of these assets continued to drop and banks started needed cash to cover it. Had these bad debts been easily liquidated, we wouldn't be in this situation. Now we need to get liquidity back into the markets. Banks are still strapped for cash and we are starting to witness a decline in lending. This causes businesses to have to cut back. This is why we are now seeing an increasing unemployment rate.

Realizing that answer does not directly answer the question, we have to ask ourselves "How do we get liquidity back into the market?". That is not as easy as some suggest it to be. Economists refer constantly to the "pushing on a string" analogy when it comes to government policy effects on the economy. It is very very easy for government to pull back on the economy and slow it down or even stop it (pulling on a string) but it is extremely difficult for government to push the economy forward (pushing on a string). Government policies cannot grow the economy very easily. Nor can they solve this crisis easily.

Revoke the charter of the Fed and set up a new national banking system that is constitutional and reflects a sound money policy. Texas Rep. Ron Paul has been trying to get congress to face up to this issue for years.

There are many things that drive an economy, but one certainly is consumer confidence. If people have a belief in future success they will invest their time, energy and capital in ways that will restore the economy to a growth path. Confidence has been undermined in many ways over the last two decades. One of the greatest problems has been the lack of investment in manufacturing in this country. The result has been a loss of what the politicians term "good jobs". A series of articles discusses the problem and things to be considered in a long term solution. Please see the related _link_s below.

Tax cuts! Further reduce individual and corporate tax rates across the board and announce that there will be no tax increases for at least two years. Do this at both the Federal and state levels. This will increase the confidence of individuals and businesses, will increase trade, investment, business growth, and hiring. As businesses and individuals all become more successful, even low tax rates applied to a higher volume of trade will actually bring in more income to governments, not less. When the capital gains task rate was recently lowered, revenue to the government increased!

The crisis is a lack of trust among banks. We still don't know the sleeping dogs. The first step would have to be a total transparency of large interbank loans, similar to stocks. Since banks don't like this, only government can order disclosure of essential loan data. Pouring money into the system does not solve the problem. There is enough liquidity, it is just not being used.

Sources: http://wiki.answers.com