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March 2, 2009 | by  | in Features | [ssba]

Who’s Afraid of the Global Recession?

Fresh-faced Salient Feature Writer Nina Fowler tackles the beast. A look into how and why we got into this mess and what it means for you, the student.

“If it wasn’t for the news,” says 22-year old BA student Rosie, “I wouldn’t even know it was happening.” She has a point. We’ve seen the headlines, read the daily roll of corporate casualties. Some of us may even be cracking recession jokes to explain why we can’t get that dream job/bargain/date. Yet, for the average New Zealand tertiary student, nothing really seems to have changed. Is the worst yet to hit? Is it all just media hype?

When the governments of Iceland and Latvia collapse, we know we’re dealing with something serious. Most commentators are now placing us in the middle of a global recession comparable to the Great Depression of the 1930s. There is little that can be done to avoid the downturn. However, a clear understanding of the situation will make it more difficult for politicians and lobby groups to use the “R” word as a scare tactic. With this aim in mind, I set out to map the causes and implications of the global recession.

Boom & Bust

Geoff Bertram, senior economics lecturer at Victoria University of Wellington, believes the current crisis arose from “boom-bust processes in the financial sector, which makes it comparable with the aftermath of the South Seas Bubble scam in the 1720s, the Long Depression of the 1870s-1880s, the Great Depression of the 1930s, and the minor stock-market hiccups of 1987 and 1997.”

Economics is an excitingly psychological game. Assets are rarely bought and sold at fundamental value, rather, investors seek to make a profit by buying low and selling high. This exchange of risk for reward is a driving factor of economic expansion. However, as John Maynard Keynes pointed out in The General Theory of Employment Interest and Money (1936), problems can arise when speculation becomes a disproportionately important part of an economy. “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.”

The prosperity of the ‘Roaring Twenties’ gave many investors a false sense of security. As the value of the Dow Jones Industrial Average rose steadily over a six-year period, speculation seemed like a direct route to profit. American investors borrowed heavily to ensure they received a piece of the action. This optimism drove share prices even higher, creating an economic bubble which peaked on 3 September 1929. A sharp, short drop in prices, though followed by a quick recovery, was enough to collapse the unrealistic expectations of amateur investors. A steady decline accelerated into “Black Tuesday” on 24 October, the market losing billions of dollars as stock prices crashed.

The Wall Street Crash of 1929 triggered the Great Depression, though debate over structural causes continues. Keynesian economics became the dominant paradigm and basis for President Roosevelt’s “New Deal”. Widespread bank and monetary reforms were passed to regain government control of the financial sector.

Unfortunately, according to Bertram, the lessons learned in the 1930s were quickly forgotten. “The lessons learned in the 1930s regarding bank regulation and the need for prudence in the financial system were forgotten once that generation of bankers and policy makers died out. The new generation saw huge opportunities for private profit and rent-taking if regulatory restraint could be removed or avoided; from 1980 on these financial-sector players—in alliance with neoconservative ideologues opposed to government per se—managed to neuter the Depression-era rules and regulations.”

Subprime Sinkhole

One of the most significant regulations laid down by Congress post-Depression was the separation of commercial and investment banks under the Glass-Steagall Act of 1933. This was partially repealed in 1999 by the GrammLeachBiley (GLB) Act. Single financial institutions could now engage in both banking activities (provision of cheque and savings accounts) and capital market activities (loans, mergers, security trading).

The GLB Act did not directly cause the current financial crisis. It is worth remembering that many other developed countries never had Glass-Steagall-type legislation to begin with. However, the GLB boosted the development of securitised lending, which allowed different types of debt obligations to be packaged for sale as “assets” on the global investment market.

As profit-seeking Wall Street wizards played with new ways to offload and manage risk, easy credit conditions were fueling a housing bubble in the United States. Residential real estate became flavour of the month, with speculation pushing housing prices well above the rate of inflation. Increased demand for credit led to high-risk lending and the creation of ‘subprime’ mortgages. This risky debt was packaged with other securities and sold to offshore investors.

These little parcels of mixed debt were initially left unrated by credit rating agencies. This kept them as a small corner of the global derivative market, limiting the potential for massive fallout. Luckily for investment sharks, innovative collaterised debt obligations (CDOs) could be used to bypass rating barriers.

CDOs basically allowed books of mortgages to be opened up and repackaged. Banks could buy dodgy hunks of debt, pluck out the best bits, and present it to rating agencies as low-risk. Once a coveted AAA credit rating was received (or purchased, given the juicy fees paid to credit rating agencies for their trouble), “good” CDOs became extremely profitable.

This left the problem of toxic debt—the dregs of the original mortgage packages. Banks could either sell these “bad” CDOs at heavily discounted rates, or hope that their other investments would cover the risk of holding on to them. Since only the very naïve or very reckless took the bait, a concentration of toxic debt accumulated in the asset pool of many major financial institutions.

It got worse. Certain unscrupulous characters saw the potential to make big bucks off the back of ‘Mum and Dad’ investors. ‘Bad’ CDOs were bought, opened up, and repackaged for a second or third time. It may have looked good on paper, but amateur investors around the world were left holding derivative assets about as secure as Chernobyl.

Countdown to Meltdown

Globalisation gave momentum to the developing crisis. Relaxed foreign investment controls allowed international credit flows, the lifeblood of developing countries and small economies, to circulate freely. This big, fluid money blob itself became the subject of speculation, leading to the Asian financial crisis in 1997 and the economic crisis in Argentina between 1999 and 2002.

There were a number of precursors to the current financial crisis. ‘Black Monday’, 19 October 1987, saw the largest one-day percentage decline in stock market history. A second global mini-crash occurred in 1997, in response to the economic crisis in Asia. According to Bertram, there was a key difference between these “minor hiccups” and the current crisis.

“The 1987 and 1997 busts affected investment spending rather than consumption, which meant their impacts on the macro-economy were relatively minor and could be met by cutting interest rates (the standard monetary-policy response to a recession of demand).”

“The 2007 bust was far more serious because it hit household balance sheets, as the unsustainable house-price boom unwound first in the US, then in Europe and NZ and Australia. With household wealth dropping and credit tightening, the effect was to slash household consumption spending, which is about 80% of aggregate private-sector demand, which resulted in a slump too big to be stopped just by orthodox monetary policy.”

Natural economic expansion and contraction have aggravated the current downturn. As pointed out by VUW senior economics lecturer Stephen Burnell, the recession in New Zealand has been overdue for years. “Over the last 3–4 years, everyone said ‘it is coming next year’ … since 1990, the world economy has been very benign; very few shocks and very little volatility in output. Right now we are paying for all the smoothing in one hit.”

The speculative shit hit the fan in late 2007. Major British mortgage lender Northern Rock was the first to seek liquidity support, triggering a bank run in mid-September. Fifteen US banks failed before the end of 2008, including top US mortgage lender IndyMac and global financier Lehman Brothers. Giants Bearn Stearns, Merrill Lynch, Fannie Mae and Freddie Mac were saved from collapse by government bailouts or competitor acquisition. Major financial institutions in Europe began experiencing similar problems.

During ‘Black Week’, 6–10 October 2008, the Dow Jones Industrial Average fell 18% in the worst weekly decline ever recorded. Many of the world’s stock exchanges followed suit, causing International Monetary Fund (IMF) head Dominique Strauss-Kahm to warn that the global financial system was on the “brink of systemic meltdown”.

The Fallout

OECD quarterly accounts show that most countries experienced a recession in 2008, with Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong, Singapore, Italy, Russia and Germany currently registering negative GDP growth. As major industries and corporate giants begin to suffer, the International Labour Organisation is predicting that global unemployment will increase by more than 50 million in 2009.

Several governments have responded with bulk bailout packages. The Obama administration has pledged US$787 billion, while the British bank rescue package weighs in at £500 billion. These whopper figures have launched a blistering blogosphere debate between neo-conservatives and Keynesians.

Professors Eugene Fama and Kenneth French, heavyweight guns from the University of Chicago and Dartmouth College respectively, emphasize that the money for the bailouts must come from somewhere. “The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources [unemployment], bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.”

The assumption that government spending will crowd out private investment is hotly contested by liberal US economist Paul Krugman. “What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics—interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line.”

Looking to our own academics, Geoff Bertram agrees that models used by critics of the fiscal stimulus tend to assume a closed economy when in fact “real-world economies are open, big-time.” Stephen Burnell says that, while government is able to soak up unemployment in the short-run, it is vital that government stay “smart” about infrastructure spending rather than simply “throwing money at the problem”.

At least the US and New Zealand still have options left. On 26 January, Iceland’s Prime Minister Geir Haarde announced his resignation following weeks of popular protest. Iceland, voted world’s most desirable country to live in by the UN in 2007, is now crippled by raging inflation and foreign debt—not least the repayment of a US$10 billion bailout loan from the IMF and foreign governments.

Latvia, until recently nicknamed the ‘Baltic Tiger’ thanks to rapidly expanding GDP, has become the second political casualty. Prime Minister Ivars Godmanis resigned on 20 February, after accepting US$2.4 billion from the IMF. Hungary, Serbia, Belarus and Ukraine have also received IMF bailouts, with Turkey next in line.

The Forecast

New Zealand has so far gotten off relatively lightly. Unemployment is rising, household consumption is down, retailers are suffering. Shares in household name Fisher & Paykel dropped 40% on 16 February, prompting John Key to announce a possible government intervention. The Treasury books are running an operating deficit NZ$1.1 billion worse than forecast, and the New Zealand Stock Exchange reached a five-year low on 25 February. While average house prices have dropped dramatically, the situation is not yet critical.

The government response has been equally mild. John Key has promised to spend NZ$5 billion to take the “rough edges” off the recession, and called a summit between unions, banks and employers’ groups on 27 February to discuss ways to limit unemployment. Most of our fiscal stimulus package will be invested in roading and other infrastructure, with project consent lubricated by recent changes to the Resource Management Act 1991. The Reserve Bank, for their part, have cut the official cash rate to 3.5% with further cuts to come.

So, how much worse is it going to get?

Economic weatherman Geoff Bertram predicts three years of acid rain. “Most New Zealanders still have not the faintest idea what is about to hit them. This is a big global downturn which will knock the stuffing out of our key export sectors—tourism and dairying. There will be very widespread bankruptcies or closures among small businesses serving these markets, plus bankruptcy for a lot of over-indebted dairy farmers. The New Zealand dollar will drop a bit further yet, which means prices for imported items like computers and books will be under upward pressure. House prices still have 20% or more to fall before there’s much chance of hitting any bottom—and they could go much further.”

Bertram’s advice? “There are at least three very grim years coming up, during which it will be a good idea to have vegetables planted in the back garden and a sewing-machine handy.”

The official line is somewhat more guarded. In the latest Treasury forecast, released on 18 December, two forecasts are put forward. In the pessimistic scenario, unemployment is set to peak at 7.2% in 2010, with national debt rising from about 20% to about 30% over the next two years. The optimistic scenario shows economic growth slowing rather than reversing, with unemployment rising to a more moderate 5.7% in 2010. As it is too soon to know what is more likely, the Treasury report leaves us sitting somewhere between thunderstorms and light drizzle.

The Reserve Bank are hoping for the latter. In an address to the Canterbury Employers’ Chamber of Commerce on 30 January, Alan Bollard and Tim Ng emphasize the relative stability of the New Zealand economy. “As a small, open economy with flexible product and labour markets, we should be better positioned than many others to re-orient production and income generation in response.” Bollard and Ng do, however, point out the significant risks associated with New Zealand’s reliance on offshore credit and volatile export commodity prices.

Economic Evolution

Though small consolation for those worst affected, it is worth remembering that the current problems are probably a necessary part of global economic evolution. New standards for ethical investment must be developed, and there is plenty of scope for bulk government spending to be directed towards some kind of ‘Green New Deal’.

While acknowledging that National’s ideological commitments tend to run in the other direction, VUW senior lecturer Ramon Das is positive. “The global crisis presents a real opportunity to think about very different ways of structuring an economy, ones that are geared much more toward the provision of basic needs for all and much less toward the massive accumulation of wealth for a few.”

Geoff Bertram is not so hopeful. “Undue influence for ACT will probably drive the government to counterproductive tax cuts, fiscal slash-and-burn, and privatisations that make no difference to aggregate demand but enrich political insiders.”

Seems it’s still too soon to tell. The best we can hope for is that dialogue between National and minor parties remains open, and that recession panic does not drive back hard-won environmental and social welfare advances.

Recession for Students

It’s a great time to be a student. Living costs have been pegged to inflation and National has pledged to continue interest-free student loans. Burgeoning student debt aside (total $10 billion and counting), students and recent graduates are far less likely to be locked into mortgage repayments or significant credit card debt. With few assets or business ventures to worry about, we are free to reap the benefits of recession-scare sales and specials. Even better, those beginning a three year course of study can relax in the knowledge that by 2012, surely, the worst will be over.

Many prospective students have reached the same conclusions. University of Auckland (AU) Deputy Vice-Chancellor Raewyn Dalziel told The New Zealand Herald on 20 January that AU had seen a 12% rise in applications across courses and a 24% increase in the number of applications for postgraduate study. While Victoria University figures have not yet been released, Student Administrator Director Pam Thorbum reports initial figures “well up over 2008 levels” and that this increase is “reflected across all faculties”.

For Tertiary Education Union spokeswoman Associate Professor Maureen Montgomery, enrolment growth is directly linked to the tight job market. “At a time of recession, it makes good sense for students to seek to improve their chances of employment by gaining tertiary qualifications. At the same time, a more highly skilled workforce will make an important contribution to New Zealand’s recovery from the recession and for the future.”

Graduate Blues

Recent university graduates are also hearing the call. Independent careers planner Tim Smithells has observed an influx of graduates returning to plan post-graduate study. “Lots of young people take a BA for interest, then find they need to add a specialist fourth year to give them leverage when job-hunting.”

Smithells is reluctant to pin increased post-graduate enrolment on the recession. “We’ve noticed it over the last 18 months, a longer period than the economic downturn.” Instead, he points to a mismatch of graduates with the labour market. “There are few restraints on entry to university, leading to a plentiful supply of degrees without an equivalent level of demand.”

Vic Careers Manager Liz Medford agrees. “People also need to remember that the last two years have been particularly buoyant. The number of graduate vacancies advertised were above average, to the point where we had more jobs than students applying.”

While not the root cause, the recession is likely to make that first ‘real job’ even more elusive for graduates. As corporations downsize, further pressure will be placed on a labour market already flooded with arts, marketing and management graduates. Architecture, another existing problem area, will also struggle as the building industry weakens.

This is no reason to abandon your BA or BArch and scurry for the nearest polytechnic. Smithells’ advice to university students in the face of the recession is to “make your career the best fit for your unique strengths, skills, interests, values and preferences. Stick with what you enjoy and then add an extra year of specialised graduate study if you need to.”

Medford is equally optimistic. “There are still plenty of opportunities out there.” She recommends that students take advantage of the Vic Careers services well before graduation, and make sure they gain some sort of work experience while studying. “We ran a careers week last year for the humanities and social sciences, and not a lot of students went. It makes it hard for us to attract employers back when we don’t get a good turnout and yet the students really need that information. You don’t need to be specific, you don’t need to target a specific job. You just need to start thinking about what skills are necessary in the workforce, and how you can present those skills to a potential employer.”

The most important tip Medford offers to students is to “use Victoria CareerHub via myVictoria or This is where all the summer internships and graduate recruitment programmes are advertised along with all the job search workshops, employer presentations and career expos.”

Get Your Bread

Nearly all students seek out part-time work to supplement their living costs. As the job market tightens, part-time unskilled jobs in the retail, hospitality, household and office/professional industries—bread and marmite for students—may become increasingly scarce.

Student Job Search, the most lucrative free employment service available to students, is reporting 20% fewer vacancies advertised than at the same time last year. “This is the first time in recent years where there’s been less jobs for students,” said SJS Marketing and Communications Manager Lorna McConnon. “The last time we noticed this trend was back in the late 1990s when the economy was also uncertain.”

This job shortage may be the result of increased student demand. Over one week in January, 58% of the positions that were listed with SJS were filled within 1–4 days. This was confirmed by SJS National Operations Manager Jill Wainwright as a pattern “consistent with our summer so far.” Students are advised to check on a daily basis, and be flexible in the work they seek.

Smithells recommends becoming “creative and entrepreneurial with your job hunting. Rather than an A4 CV, hand out printed business cards with a photo, your details, and the kind of work you’re after. These can be pinned up in the offices of prospective employers to keep you visible if work becomes available.” He also recommends that students return to holiday jobs once they find them, as students who stick with the same employer will be bumped up the payroll quicker than those who don’t.

Once basic expenses are met, students can sit back and enjoy the perks. Bertram explains, “There will probably be more part-time casual work available as companies dump full-time staff. Housing will become cheaper, which may mean lower rents for flats. Textbook prices may stop rising for a while, travel will probably become cheaper. Sex, drugs, and rock’n’roll will still be as much fun as ever…”

Good night, and good luck.


About the Author ()

Nina Fowler (BA), former Salient feature writer, is excited about Salient '10.

Comments (18)

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  1. Laura says:

    I wouldn’t know there was a recession if my damn American Apparel order weren’t so fucking expensive.

  2. Matthew_Cunningham says:

    Great article, Nina!

  3. Ruth says:

    Laura’s comment is quite indicative of the greed and self-centeredness that underlies capitalism and our current crisis: more, more, more for me, me, me. Complaining about expensive clothing and implying “Recession? What recession?” while others have no jobs and are losing their homes is quite infantile and self-centered. Come to think of it, her reactions are quite indicative of the general philosophy behind capitalism–“If I can get ahead and you can’t, it’s not my fault. As long as I make it, all others be damned.” Of course, I recall a famous French woman who was like that, too. Until . . .

  4. Matthew_Cunningham says:

    Ruth: I’m pretty sure Laura’s comment was meant as a joke. Even if she was serious, you can’t draw a line from a one sentence comment on a student magazine website to a complete and utter comdemnation of the entire capitalist system. That’s pretty spurious logic. Not all of those who support capitalism are selfish gits out for a quick buck at any cost.

  5. Laura says:

    Ruth, I think you misunderstood me. I was complaining about the exchange rate. Like many other New Zealanders, I barely notice the effects of the recession in my day to day life, outside of what the media is saying. The exchange rate makes it more difficult for thousands of Kiwis to go about their life, including as business owners, home buyers/owners, investors etc.

    Of course, your infantile rant shows that you’re uncapable of fully contemplating the affects on others, so me talking about American Apparel has suddenly become all about you. Self-burn.

  6. The Garbage Man says:

    Time 2 take out tha trash

  7. Moomama says:

    Not me coz I spent all my monies on shots and chards!


  8. Ruth says:

    Laura, My comments were not a personal critique, much less a personal attack. They weren’t about “Laura” but about “Laura’s comment.”
    The launching point for my “infantile rant” was the undercurrent of this whole mess, not your comment. The states of not just the world economy but of humanity–of the way we somehow glorify greed now rather than see it as the deadly “sin” it is, are my concerns.
    Looks as if we both misunderstood each other. My apologies. Peace to us all.

    And, Matt, you’re right. I’m not condeming capitalism based on one comment in a student magazine website. There’s ample evidence elsewhere to support my condemnation. No system is perfect, of course. But the ideas that the market always rules, which seems to be the direction capitalism points, in general, and that the market will correct itself don’t quite wash. For example, some US judeges are currently under indictment for sending jeuvenile offenders to prison AFTER they’d served their terms and/or when their convictions didn’t call for such punishment. The reason? Privately run prison systems were giving the judges kickbacks the more prisoners they sent their way. It seems the more prisoners these corporate jails house, the more profit they make. What I’m trying to say is that capitalism, while certainly not all evil, is certainly not the best system we can devise, either. It may very well be the best system we have at this moment in time. I just think we can do better—some day. The stepping stone to a better system involves seeing the flaws in the current economic systems and believing we can do better. As long as we glorify, perhaps even worship, the golden calf of the free market, we won’t know how much we can improve our economies and our world.

    Peace out.

  9. Peter Manglethwaite says:

    Ruth critically hits criticism with WALL OF TEXT.

  10. Matthew_Cunningham says:

    Ruth: if you want some ideas on alternate systems to capitalism, check out my full article from this week’s issue of Salient online at

    Whilst you raise a troubling point regarding privatised prisons in the U.S., your argument still lacks depth and impartiality. You’ve started with a foregone conclusion – that capitalism is a flawed system and needs to be replaced – and you have then proceeded to draw narrowly and selectively from history to ‘prove’ your conclusion. That’s not history – that’s a conspiracy theory.

    You’ve then justified this narrowed argument based upon unfair stereotypes of capitalism and those who support it. Asserting that capitalism is unanimously about ‘glorify[ing] greed’ and ‘worship[ping] the golden calf of the free market’ is unfair; similarly, arguing that its supporters believe that ‘the market always rules’ and that ‘the market will correct itself’ is equally biased. Capitalism is not a unified ideology, nor are its supporters an homogenous entity. It is a spectrum of contrasting (and often conflicting) ideas and practices, of which only a subset on the right claim that the ‘Invisible Hand’ of the market will always correct itself. A large proportion on the left, including social democrats, laborists, greens and others, advocate varying degrees of state intervention in the economy to regulate and guide capitalism to mitigate its excesses. Once again, I refer you to my above article, and to the comments section of another article of mine:

    If you want to advocate an alternative to capitalism, that’s your prerogative – there are plenty of ideas and groups out there that might suit you, only some of which are discussed in my article. But just make sure you do it from an informed position rather than one driven by foregone conclusions.


  11. Ruth says:

    Thanks for your comments. What you’re saying is that I’m begging the question–that I need to “prove” that capitalism is flawed before I move to my other points.
    Let me try to clarify once again. I don’t believe an existing economic system is perfect. Therefore, all have some flaws. I don’t think that’s a “forgone conclusion” but a fact. And, don’t get me wrong. I’m not anti- capitalism so much as I’m against letting capitalism run amok, as is the case when bankrupt companies’ CEOs exit with their golden parachutes at the expense of both the stock holders and the economy.
    I think we’re on the same page, really.

  12. Ruth says:

    Oops. I meant “. . . any existing. . .” not “an existing.”

  13. Matthew_Cunningham says:

    Ruth: Thanks for your clarification. I agree, no economic system is perfect, capitalism included. Your earlier posts gave the impression that you were completely condemning capitalism rather than merely aiming to address its flaws – hence my criticisms over what seemed to be a foregone conclusion in your argument. That’s not to say that someone couldn’t make a go of completely condemning capitalism (many have tried) – they would just need to scale their evidence to match their conclusion. Vast claims require vast evidence to back them up.


  14. Superior Mind says:

    Holy fucking crap McDonald’s cheeseburgers are now $2.20.

    This shit just got real.

  15. Jackson Wood says:

    I remember when you could get 10 for fifteen dollars.

    That shit is just whack.

  16. Graphical User Ynterface says:

    I used to work at McDonalds. I don’t eat there much. Although I always enjoyed the bacon and chicken burgers. Yum!

  17. Don V says:

    Good article. Lots of people being laid off.

    Join the conversation…tell your story at …..

  18. Blog says:

    I want blogette back.

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