FAQ Category: Financial Crisis

A recession is a fall in real GDP/ negative economic growth. To avoid a recession, the government and monetary authorities need to try and increase aggregate demand (consumer spending, investment, exports). There is no guarantee that they will work. It will depend on the policies and also the causes of the recession.

The primary policies will be

Loosening of monetary policy – cutting interest rates to reduce cost of borrowing and encourage investment

Expansionary fiscal policy – increased government spending financed by borrowing will enable an injection of investment into circular flow

Ensure financial stability – in a credit crunch, government intervention to guarantee bank deposits and major financial institutions can maintain credibility in the banking system.

If the recession is caused by very high-interest rates, then cutting interest rates may help avoid a recession. But, if you have a large fall in asset prices/bank losses (often called balance sheet recession) it is more difficult because even if you cut interest rates, banks may still not lend.

Keep a track on repayment of the debts, as the heap keeps piling up along with the delayed time! To avoid making the debt into the unpayable burden, build a separate fund for repaying the debts. This practice will help you to manage the debts efficiently and save you from loterm liability.

Increase capital requirements for shadow banks and depository institutions and make them countercyclical.

Eliminate liquidity requirements.

Improve consumer literacy and restrict consumer leverage.

Create a Chapter 11 bankruptcy for banks.

Design a more integrated regulatory structure.

However, your financial crisis can be remedied by regaining your self-control and taking solid actions. The financial benefits of dealing with financial crisis—saving more, paying down debt—will improve not just your self confidence, but your overall mood as well.