Analyzing the global financial crisis: 2007-2009

(Term Project towards the partial fulfilment of the assessment in the subject of
International Economics)
 TABLE OF CONTENTS

TABLE OF CONTENTS.....................................................................................................2
ACKNOWLEDGMENT.....................................................................................................3
I. INTRODUCTION........................................................................................................4
II. CAUSES OF THE FINANCIAL TURMOIL..............................................................6
A. Boom and bust in the housing market......................................................................6
B. Speculation...............................................................................................................8
C. High risk loans and lending practices.......................................................................8
D. Securitization............................................................................................................8
E. Inaccurate credit rating.............................................................................................9
F. US Government Policies...........................................................................................9
G. US Central bank policies........................................................................................10
III. OVERVIEW OF CONSEQUENCES AND GLOBAL RESPONSES TO THE
CRISIS...............................................................................................................................11
IV. IMPACT OF THE CRISIS ON INDIA..................................................................13
1. Information Technology.............................................................................................13
2. Exchange Rate............................................................................................................14
3. Foreign Exchange Outflow........................................................................................14
4. Investment..................................................................................................................15
5. Real Estate..................................................................................................................15
6. Stock Market..............................................................................................................15
7. Exports.......................................................................................................................16
8. Banks..........................................................................................................................16
V. INDIA'S POLICY RESPONSE TO THE CRISIS.....................................................17
Monetary Policy Responses...........................................................................................17
Fiscal Policy Responses.................................................................................................18
CONCLUSION..................................................................................................................20
BIBLIOGRAPHY..............................................................................................................21

2
 I. INTRODUCTION

On February 7, 2007 one of the worlds largest banks, HSBC, announced losses related to
U.S. subprime mortgage loans. A couple of months later, on April 3, New Century
Financial, a subprime specialist, filed for Chapter 11 bankruptcy. In June, Bear Stearns
told an incredulous financial community that two of its hedge funds suffered large losses
related to subprime mortgages. Other Wall Street standard-bearers also started reeling
from bad investments, including Merrill Lynch, JPMorgan Chase, Citigroup and
Goldman Sachs. Before the end of August the crisis had spread to some French and
German banks, and prompted the Federal Reserve and the European Central Bank to
pump liquidity into the banking system and to reconsider their interest-rate policies.1

These were only the beginnings of a truly global financial and economic crisis
that marked the end of one of the greatest financial expansions in history. The recession
officially started in December 2007. By mid 2009, the crisis had brought to their knees
major bank and non-bank financial institutions, causing several to collapse, and led to a
severe economic contraction, plummeting trade, rising unemployment, and price
deflation. The crisis quickly acquired global proportions after hitting Western and Eastern
Europe, Japan, Latin America, and the rest of Asia.2

The crisis is widely considered to be second in severity to only the Great

Depression of the 1930s. Sardonically coined as the Great Recession by commentators
and media alike, what began as a housing crisis in the United States rapidly degenerated
into a systemic mess that wrecked brand-name financial institutions, led to government
bailouts and in some cases, liquidation. The crisis reduced consumer wealth in the region
of trillions and sparked off a series of recessions in both the developed and developing

1
Mauro F. Guilln, , Sandra L. Surez, (2010), The global crisis of 20072009: Markets, politics, and
organizations, in Michael Lounsbury, Paul M. Hirsch (ed.) Markets on Trial: The Economic Sociology of
the U.S. Financial Crisis: Part A (Research in the Sociology of Organizations, Volume 30 Part A) Emerald
Group Publishing Limited, pp.257 - 279
2
Id.

3
world. The global ramifications of this crisis were largely unforeseen and have forced a
rethinking of international financial linkages.3
In this project, I will look at the causes, evaluate the measures taken to contain it
and examine some of the underlying discourses that plied the timeline of the recession.

3
Kristin Forbes et al., The Global Financial Crisis: Project Synopsis, available at:
http://pdfstori.com/pdf/12593_the-global-financial-crisis-mit-massachusetts-institute-of

4
 II. CAUSES OF THE FINANCIAL TURMOIL

The first hint of the trouble came from the collapse of two Bear Stearns hedge funds early
2007. Subsequently a number of other banks and financial institutions also began to show
signs of distress. Matters really came to the fore with the bankruptcy of Lehman Brothers,
a big investment bank, in September 2008. The reasons for the crisis are varied and
complex. I have discussed some of here:
A. Boom and bust in the housing market:

The crisis actually started with the bursting of housing bubble that began in
2001 and started growing at a rapid rate until it reached its peak in 2005. The housing
bubble occurred due to rapid increase in the rate of the valuation of real property until the
prices of the property reached the unsustainable level as can be seen in the following
table. The factors that led to the rapid increase in the demand for house price are: low
interest rate and the huge inflow of foreign capital from countries such as China, Japan
U.K. Also, subprime loans added fuel to the fire, further increasing the demand for
houses.4

Graph showing Rapid Increase in House Prices in the US

4
Claudio Borio, The Financial Turmoil of 2007: A Preliminary Assessment and Some Policy
Considerations, BIS working paper 251, 2008.

5
 Moreover, the Federal Reserve Board cut the short-term interest rate from 6.5
percent in 2000-01 to 1 percent in 2003-04. A. Greenspan, the Governor of Federal
Reserve, accepted in 2007 the fact that housing bubble was fundamentally endangered
by the decline in real long-term interest rate.5

Against this background, the home ownership rate increased from 64 percent in
1994 to an all time high peak of 69 percent in 2004. This rise in demand pushed the
prices of house by leaps and bounds. Between 1997 and 2006, American home prices
increased by 124 per cent. Further, U.S. consumers lured by the increasing value of their
homes went on borrowing spree. They started borrowing money for consumption by
mortgaging their property.6

Further, Americans spent $800 billion per year more than they earned. Household
debt grew from $680 billion in 1974 to $14 trillion in 2008. During 2008, the average
U.S. household owned 13 credit cards, and 40 percent of them carried a balance up from
6 percent in 1970.
But overbuilding during the boom period and rise in interest rate led to the
bursting of the bubble. Between 2004 and 2006 the Federal Reserve Board raised the
interest rate by 17 times, up from 1 percent to 5.25 percent. Also, overbuilding during the
boom eventually led to a surplus inventory of houses, causing home prices to decline,
beginning in summer, 2006.7
As a result, foreclosure and default rate increased. About 8.8 million homeowners
(10.8 percent of total homeowners) had zero or negative equity as of March, 2008,
meaning their houses were worth less than their mortgage. Sales of houses decreased by
26.4 percent in 2007 compared with the previous year.8

5
Barrel, R, EP Davis, D Karim and I Liadze, 2010, Was the Subprime Crisis Unique? An analysis of the
factors that help predict banking crises in OECD countries, National Institute of Economic and Social
Research Discussion Paper No. 363
6
Id.
7
Id.
8
Dokko, Jane, Brian Doyle, Michael T. Kiley, Jinil Kim, Shane Sherlund, Jae Sim and Skander Van den
Heuvel, Monetary Policy and the Housing Bubble, Finance and Economics Discussion Series 2009-49,
Federal Reserve Board, Washington, D.C.

6
 B. Speculation:

Another important cause of housing crisis is speculation in real estate. It was

observed that investment in housing sector yield high return compared to other traditional
investment avenues. As a result, investment in housing sector increased. During 2006, 22
percent of homes purchased (1.65 million units) were for investment purposes, with an
additional 14 percent (1.07 million units) purchased as vacation homes. Nearly 40
percent of home purchases were not for primary residences. A whopping 85 percent of
the houses purchased in Miami were for investment purposes.9

C. High risk loans and lending practices:

The subprime loans were highly risky, as these loans were offered to the high risk
borrowers-- illegal immigrants, person without any job, any assets and any income. The
repayment from these borrowers was hardly expected. The share of subprime mortgages
to total originations increased from 5 percent ($35 billion) in 1994 to 20 percent ($600
billion) in 2006.10 Again, the difference between the prime loan and sub-prime loan
declined from 2.8 percent in 2001 to 1.3 percent in 2007. This resulted in the increase in
demand for sub-prime loans.11
Another example of high risk loans is the Adjustable Rate Mortgages (ARM).
Under ARMs borrowers had to pay the only the interest (not principal) during the initial
period. An estimated one-third of ARMs originated between 2004 and 2006 had teaser
rates below 4 percent.12

D. Securitization:

Securitization is a structured finance process in which assets, receivables or

financial instruments are acquired, pooled together as collateral for the third party
investments (Investment banks). Due to securitization, Mortgage Backed Securities

9
CRS Report R40417, Macroprudential Oversight: Monitoring the Financial System, by Darryl E. Getter
10
US Financial Crisis: The Global Dimension with Implications for US Policy, CRS Report for Congress,
November 18, 2008
11
Supra note 8.
12
Id.

7
(MBS) is created and distributed by the investment firms/banks. Initially, Freddie Mae
and Fannie Mac (quasi-government agency) used to issue MBS but later private agencies
also started issuing MBS on subprime loans.13 During 2003 to 2006, the agencies share
of MBS fell from 76 percent to 43 percent while Wall Streets share climbed up from 24
percent to 57 percent during the same period. The securitized share of subprime
mortgages (MBs on subprime) increased from 54 percent in 2001 to 75 percent in 2006.14

E. Inaccurate credit rating:

Under new system of securitization, investment firms/banks repackaged

mortgages securities (MBS) into innovative financial products called CDOs (Collateral
Debt Obligation), that promised to boost the return for investors. These CDOs were
further divided into small financial units called tranches. These tranches were rated on
the basis of risk involved.15 The safest portion of the tranches received the highest rating
of AAA, while riskier tranches received the medium quality BBB rating, just above the
junk bonds. It has been observed that MBS and CDOs originated from subprime
mortgages were distributed by the investment firms. Credit rating agencies are were
considered responsible for giving investment-grade rating to securitization transactions
based on subprime loans.16

F. US Government Policies:

To provide houses at affordable price to all the people was the priority of both the
Clinton and Bush administration. In 1974, President Carter passed the Community
Reinvestment Act. This Act made mandatory for all the banks and saving institution to
provide home loans to the lower income people in broad outlying areas where they had
branch.

13
Claeesen, Stijn, Giovanni DellArricia, Deniz Igan and Luc Laeven, 2010, Lessons and Policy
Implications from the Global Financial Crisis IMF Working Paper, 10/44
14
Id.
15
Supra note 10.
16
Gourinchas, Pierre-Olivier, 2010, U.S. Monetary Policy, Imbalances and the Financial Crisis,
Remarks prepared for the Financial Crisis Inquiry Commission Forum, Washington DC, February 26-27,
2010

8
 The U.S. Department of Housing and Urban Developments Mortgage policies
fueled the trend towards issuing risky loans. Housing and Urban Development directed
Freddie and Fannie to provide at least 42 percent of their mortgage financing to
borrowers with income below the median in their area. This target was increased to 52
percent in 2005. The only way to achieve income loan target while dramatically
increasing lending was to erode underwriting lending standards. Fannie Mae aggressively
bought Alt-A loans, where these loans may require little or no documentation of a
borrowers finances. Till November 2007 Fannie Mae held a total of $55.9 billion of
subprime securities and $324.7 billion of Alt-A securities in their portfolios.17

G. US Central bank policies:

The Federal Reserves primarily concern was to manage the monetary policy. It
was less bothered about the housing bubble and dot-com bubble. Once the bubble burst,
the Central Bank tried to control the spread of the crisis on other sectors. A contributing
factor to the rise in home prices was the lowering of the interest rate earlier in the decade
by the Federal Reserve lowered by the funds rate target from 6.5 percent to 1 per cent.
Further, A. Greenspan has been criticized for flourishing subprime loans.18

17
International Monetary Fund, 2010a, Central Banking Lessons from the Crisis (Washington:
International Monetary Fund)
18
Id.

9
 III. OVERVIEW OF CONSEQUENCES AND GLOBAL
RESPONSES TO THE CRISIS

In response to the shocks caused by the crisis, world economies have been adopting
reforms to their economic policies and have implemented several fiscal and monetary
stimulus initiatives to recover from the crisis.19 Some of these initiatives include tax
rebates and tax cuts at both the corporate level to spur investment, and at the personal
level to increase consumption and to bail out households with diminished wealth and
income20.
Other initiatives provide incentives to invest in infrastructure and public works
projects. Though difficult to measure accurately, Saha and Weizsacker estimate the size
of the stimulus package for the European Union for 2009 at 0.9% of the GDP, while the
corresponding figures for the United States and China are 2% and 7.1%, respectively.8
Nanto estimates the size of the stimulus package in Japan at about 5% of its GDP in
2009.21 In addition to the fiscal stimulus initiatives, many countries adopted a more
accommodative monetary policy to ease the liquidity tightening in the credit markets.22
While most of the economic indicators portended a bleak outlook for the world
economy and for individual markets, the severity of the crisis in the affected countries
and their responses to tackle the problems were not uniform. While the advanced
economies either contracted or had no growth during the crisis, the emerging market
economies continued to grow, although at a lower rate.23
The impacts of the crisis on the financial and real sectors of the economy were
also not uniform across the countries. While some economies that were structurally
strong were able to better withstand the crisis, others had to be bailed out with extensive
and multiple stimulus packages to overcome the adverse effects on the domestic
economies. The consensus opinion is that countries that curtailed the use of risky assets
19
US Financial Crisis: The Global Dimension with Implications for US Policy, CRS Report for Congress,
November 18, 2008
20
Supra note 14
21
Dixon, Hugo "Global Response to A global Crisis" The New York Times, March 20 2009.
22
The Economist, "The IMF: Mission Impossible" April 8th 2009.
23
Id.

10
and encouraged domestic investment and savings were less affected by the crisis. The
countries that did not adequately penalize risky behavior and those that had high rates of
consumption were more severely affected.24
One of the EMEs that performed relatively well during the financial crisis and
recovered quickly from its effects was India. The strength of the economy, the structure
of regulation in the financial markets, and the timely and appropriate responses to the
financial crisis by the monetary authorities in India allowed the country to contain the
adverse effects of the crisis and continue on the expansionary path it was on prior to the
crisis. In the following chapter, the impact of the financial crisis on the Indian economy
and some of the strategies adopted by it to manage the crisis are detailed.25

24
Warnock, Francis E. and Veronica Cacdac Warnock, 2009, International capital flows and U.S. Interest
Rates, Journal of International Money and Finance, 28, 903-919
25
Id.

11
 IV. IMPACT OF THE CRISIS ON INDIA

India could not insulate itself from the adverse developments in the international
financial markets, despite having a banking and financial system that had little to do with
investments in structured financial instruments carved out of subprime mortgages, whose
failure had set off the chain of events culminating in a global crisis. 26 The effect of the
crisis on the Indian economy was not significant in the beginning. The initial effect of the
subprime crisis was, in fact, positive, as the country received accelerated Foreign
Institutional Investment (FII) flows during September 2007 to January 2008. 27 There was
a general belief at this time that the emerging economies could remain largely insulated
from the crisis and provide an alternative engine of growth to the world economy. The
argument soon proved unfounded as the global crisis intensified and spread to the
emerging economies through capital and current account of the balance of payments.28

1. Information Technology:
With the global financial system getting trapped in the quicksand, there was
uncertainty across the Indian Software industry. The U.S. banks had huge running
relations with Indian Software Companies. A rough estimate suggests that at least a
minimum of 30,000 Indian jobs were impacted immediately in the wake of happenings in
the U.S. financial system.29 Approximately 61 per cent of the Indian IT Sector revenues
were from U.S financial corporations like Goldman Sachs, Washington Mutual,
Citigroup, Bank of America, Morgan Stanley and Lehman Brothers. The top five Indian
players accounted for 46 per cent of the IT industry revenues. The revenue contribution
from U.S clients was approximately 58 per cent. About 30 per cent of the industry
revenues were estimated to be from financial services. The software companies faced
hardships during the crisis.30
26
The Global Financial Turmoil and Challenges for the Indian Economy (Speech by Dr. D. Subbarao,
Governor, Reserve Bank of India at the Bankers' Club, Kolkata on December 10, 2008
27
S.L. Rao, Different way to go, The Telegraph, March 10, 2009
28
Supra note 25.
29
Niranjan Rajadhyaksha, Meltdown deconstructed, The Hindustan Times, October 14, 2008
30
Id.

12
2. Exchange Rate:
Exchange rate volatility in India increased in the year 2008-09 compared to
previous years. Massive selling by Foreign Institutional Investors and conversion of their
holdings from rupees to dollars for repatriation resulted in the rupee depreciating sharply
against the dollar. Between January 1 and October 16, 2008, the Reserve Bank of India
(RBI) reference rate for the rupee fell by nearly 25 per cent, from Rs.39.20 per dollar to
Rs.48.86.31 This depreciation may have been good for Indias exports that are adversely
affected by the slowdown in global markets but it was not so good for those who have
accumulated foreign exchange payment commitments.32

3. Foreign Exchange Outflow:

After the macro-economic reforms in 1991, the Indian economy has been
increasingly integrated with the global economy. The financial institutions in India are
exposed to the world financial market. Foreign institutional investment (FII) is largely
open to Indias equity, debt markets and market for mutual funds. The most immediate
effect of the crisis had been an outflow of foreign institutional investment from the equity
market. There was a serious concern about the likely impact on the economy because of
the heavy foreign exchange outflows in the wake of sustained selling by Foreign
Institutional Investors in the stock markets and withdrawal of funds by others. The crisis
resulted in net outflow of $ 10.1billion from the equity and debt markets in India till 22nd
Oct, 2008.33

4. Investment:
The tumbling economy in the U.S dampened the investment flow. The capital
inflows into the country dried up. Investments in mega projects, which were under
implementation and in the pipeline, were delayed before injecting funds into

31
Reserve Bank of India (2008) Handbook of Statistics on the Indian Economy, Mumbai
32
Id.
33
Reserve Bank of India (2009) Macroeconomic and Monetary Developments First Quarter Review
2009- 10, Mumbai, July 27, 2009.

13
infrastructure and other ventures. The buoyancy in the economy was dampened in all the
sectors. Investment in tourism, hospitality and healthcare slowed down.34

5. Real Estate:
One of the casualties of the crisis was the real estate. The crisis hit the Indian real
estate sector hard. The realty sector witnessed a sudden slump in demand because of the
global economic slowdown. The recession forced the real estate players to curtail their
expansion plans. Many on-going real estate projects suffered due to lack of capital, both
from buyers and bankers. Some realtors defaulted on delivery dates and commitments.
The steel producers decided to resort to production cuts following a decline in demand
for the commodity.35

6. Stock Market:
The financial turmoil affected the stock markets even in India. The combination
of a rapid sell off by financial institutions and the prospect of economic slowdown pulled
down the stocks and commodities market. Foreign institutional investors pulled out close
to $11 billion from India, dragging the capital market down with it. Stock prices fell by
60 per cent. Indias stock market indexSensex had touched above 21,000 mark in the
month of January, 2008 and plunged below 10,000 during October 2008. 36 The movement
of Sensex showed a positive and significant relation with Foreign Institutional Investment
flows into the market.37 This also had an effect on the Primary Market. In 2007-08, the
net Foreign Institutional Investment inflows into India amounted to $20.3 billion. As
compared to this, they pulled out $11.1 billion during the first nine-and-a-half months of
the calendar year 2008, of which $8.3 billion occurred over the first six-and-a-half
months of the financial year 2008-09 (April 1 to October 16).38

34
Supra note 28
35
Id.
36
Id.
37
Id.
38
Id.

14
7. Exports:
The crisis sharply contracted the demand for exports. It had an impact on
merchandise exports and service exports. The decline in export growth sharply affected
some segments of the Indian Economy that were export oriented. The slowdown in the
world economy affected the garment industry. The orders for factories which were
dependent on exports, mainly to the U.S came down following deferred buying by big
apparel brands. Rising unemployment and reduced spending by the Americans forced
some of the leading brands in the U.S to close down their outlets, which in turn affected
the apparel industry in India.39

8. Banks:
The crisis had an adverse impact on some of the Indian banks. Some of the Indian
banks had invested in derivatives which had exposure to investment bankers in U.S.A.
However, Indian banks in general, had very little exposure to the asset markets of the
developed world. Effectively speaking, the Indian banks and financial institutions did not
experience the kind of losses and write-downs that banks and financial institutions in the
Western world faced. Indian banks had very few branches abroad. Our Indian banks were
slightly better protected from the financial meltdown, largely because of the greater role
of the nationalized banks and other controls on domestic finance. Strict regulation and
conservative policies adopted by the Reserve Bank of India ensured that banks in India
were relatively insulated from the travails of their western counterparts.40

39
Supra note 25.
40
Id.

15
 V. INDIA'S POLICY RESPONSE TO THE CRISIS

Subbarao, Misra and Thorat present the various monetary and fiscal policy initiatives
implemented by the Indian government and its agencies in response to the global
financial crisis and its effects on the domestic economy.26 In its role as the principal
regulator of the financial markets in India, the primary responsibility of the Reserve Bank
of India (RBI) is to ensure the orderly functioning of the credit and foreign exchange
markets in India. The monetary policy response of the RBI was aimed at containing the
contagion effects of the financial crisis from the advanced economies by ensuring
sufficient liquidity in the credit markets. On the fiscal side, the government's policy
responses were aimed at protecting businesses and groups that were directly affected by
the crisis. This was accomplished through relaxation of some onerous restrictions, tax
subsidies and strengthening of social safety-nets.41

Monetary Policy Responses

The goals of the monetary policy initiatives were three-fold: to provide sufficient
liquidity in the domestic market, to provide dollar liquidity for businesses financing in the
external markets, and to ensure flow of credit to those industry sectors that were
productive.
Following the rapid expansion in the first half of the decade, the monetary policy
was tightened in the second half. This policy had been in place till August 2008 when the
initial effects of the crisis started impacting India in the form of reduced credit
availability. Banks became cautious and started cutting back on their new loan offerings.
To provide more liquidity to the credit markets, the RBI gradually reduced the repo rate
from 9% (in August 2008) to 4.75%, and the reverse repo rate from 6% to 3.25%.42
To moderate the expansion, monetary tightening was put into effect between
2005-06 and August of 2008, when the rates increased. In 2009-10, the call rate was
reduced sharply to 3.22%, reflecting the RBI's injection of liquidity into the market. In

41
Arjun K. Sengupta, The financial crisis and the Indian response, The Hindu, October 24, 2008
42
Id.

16
effect, this expanded the money supply in India by providing incentives to banks to
increase their loan portfolios. The cash reserve ratio (or reserve requirement), which had
been at 7.5% in 2007-08, was also reduced to 5%, allowing the multiplier effect to
expand the money supply43. Along with this, the Statutory Liquidity Rate, a liquidity
requirement for commercial banks, was also relaxed to allow them to provide more
credit.44
To facilitate availability of sufficient dollar liquidity, the RBI intervened in the
foreign exchange markets to support the Indian Rupee. Further, it initiated currency
swaps with businesses that were exposed to United States dollar payables, and extended
export credit finance to them.45 With the limited availability of United States dollar
funding in external markets and increased risk aversion on the part of lenders, ceilings on
rates at which businesses could borrow in external markets were relaxed. Finally, the
rates on Eurodollar deposits in India were raised to attract more funds from foreign
individual investors.46

Fiscal Policy Responses

The focus of the fiscal policy responses of the Indian government to the financial crisis
was to stimulate demand for the country's output and to bailout those industries and
groups that were most vulnerable to the crisis. Starting in December 2008, the
government introduced three stimulus packages in the span of four months that lowered
tax rates and increased tax subsidies, increased capital expenditures and government
spending, and provided incentives that encouraged growth in consumption and demand. 47
Specifically, the government announced plans for additional public spending in capital
expenditure projects, provided government guarantees for infrastructure spending, and
expanded credit for SMEs and exporters.48
43
Prime Minister of Indias statement at the Summit of Heads of State or Governments of the G-20
countries on Financial Markets and the World Economy held at Washington on November 15, 2008
44
Id.
45
Ajit Balakrishnan, Brave new world of derivatives, Business Standard, November 11, 2008
46
Id.
47
Report on Effect of Economic Slowdown on Employment in India (October December 2008),
Government of India, Ministry of Labour and Employment, Labour Bureau, Chandigarh, January 2009
48
Arjun K. Sengupta, The financial crisis and the Indian response, The Hindu, October 24, 2008

17
 The agriculture industry, which supports a majority of the population, was
particularly affected due to rising oil and fertilizer prices, and due to failed monsoons.
The loans that were in default in the farming sector were waived by the government. The
stimulus packages also included tax rebates and subsidies for some of the affected sectors
of the market. Finally, a revised pay structure for all government employees implemented
salary increases that raised the disposable income for a significant part of the labor force.
Subbarao estimates the size of the fiscal stimulus amounted to about 3% of the GDP.49

49
Supra note 44.

18
 CONCLUSION

The global recession was the outcome of the financial crisis that originated in the United
States mortgages market and extended to the rest of the world. The financial crisis
forced the insolvency of many banks and financial institutions in the U.S. and the
world. Governments adopted different policies such as financial saving plans,
spending stimulus packages, and aggressive monetary policies to contain the crisis.
However, the negative spread effect of the crisis extended to other sectors and
industries.
The financial credit crisis moved the US and the global economy into deep
recession. Bankruptcies and foreclosure of banks and firms caused huge layoffs.
Increased unemployment coupled with decline of wealth and income of consumers
around the world lowered demand for consumer and industrial products.
To summarize, lack of supervision of regulatory agencies over the financial
market, expansion of financial derivatives beyond acceptable norms, imbalance in the
world trade, and greed of Wall Street led to this exceptional global financial and
economic crisis.
India was by-and-large spared of global financial contagion due to the sub-prime
turmoil for a variety of reasons. Indias growth process had been largely domestic
demand driven. The credit derivatives market was in nascent stage; the innovations of the
financial sector in India was not comparable to the ones prevailing in advanced markets;
there were restrictions on investments by residents in such products issued abroad; and
regulatory guidelines on securitization did not permit rabid profit making. Financial
stability in India had been achieved through perseverance of prudential policies which
prevented institutions from excessive risk taking, and financial markets from becoming
extremely volatile and turbulent.

19
 BIBLIOGRAPHY

1. Kristin Forbes et al., The Global Financial Crisis: Project Synopsis, available at:
http://pdfstori.com/pdf/12593_the-global-financial-crisis-mit-massachusetts-
institute-of
2. Mauro F. Guilln, , Sandra L. Surez, (2010), The global crisis of 20072009:
Markets, politics, and organizations, in Michael Lounsbury, Paul M. Hirsch (ed.)
Markets on Trial: The Economic Sociology of the U.S. Financial Crisis: Part A
(Research in the Sociology of Organizations, Volume 30 Part A) Emerald Group
Publishing Limited
3. Barrel, R, EP Davis, D Karim and I Liadze, 2010, Was the Subprime Crisis
Unique? An analysis of the factors that help predict banking crises in OECD
countries, National Institute of Economic and Social Research Discussion Paper
No. 363
4. Dokko, Jane, Brian Doyle, Michael T. Kiley, Jinil Kim, Shane Sherlund, Jae Sim
and Skander Van den Heuvel, Monetary Policy and the Housing Bubble,
Finance and Economics Discussion Series 2009-49, Federal Reserve Board,
Washington, D.C.
5. CRS Report R40417, Macroprudential Oversight: Monitoring the Financial
System, by Darryl E. Getter
6. US Financial Crisis: The Global Dimension with Implications for US Policy, CRS
Report for Congress, November 18, 2008
7. Claeesen, Stijn, Giovanni DellArricia, Deniz Igan and Luc Laeven, 2010,
Lessons and Policy Implications from the Global Financial Crisis IMF Working
Paper, 10/44
8. Gourinchas, Pierre-Olivier, 2010, U.S. Monetary Policy, Imbalances and the
Financial Crisis, Remarks prepared for the Financial Crisis Inquiry Commission
Forum, Washington DC, February 26-27, 2010
9. International Monetary Fund, 2010a, Central Banking Lessons from the Crisis
(Washington: International Monetary Fund)

20
 10. Dixon, Hugo "Global Response to A global Crisis" The New York Times, March
20 2009.
11. The Economist, "The IMF: Mission Impossible" April 8th 2009.
12. Warnock, Francis E. and Veronica Cacdac Warnock, 2009, International capital
flows and U.S. Interest Rates, Journal of International Money and Finance, 28
13. Reserve Bank of India (2008) Handbook of Statistics on the Indian Economy,
Mumbai
14. Reserve Bank of India (2009) Macroeconomic and Monetary Developments
First Quarter Review 2009- 10, Mumbai, July 27, 2009.
15. Arjun K. Sengupta, The financial crisis and the Indian response, The Hindu,
October 24, 2008
16. Ajit Balakrishnan, Brave new world of derivatives, Business Standard,
November 11, 2008
17. S.L. Rao, Different way to go, The Telegraph, March 10, 2009
18. Claudio Borio, The Financial Turmoil of 2007: A Preliminary Assessment and
Some Policy Considerations, BIS working paper 251, 2008.

Internet sites visited

1. www.economist.com
2. www.londonsummit.gov.uk
3. www.rbi.org.in
4. www.telegraph.co.uk
5. www.usa.gov
6. www.whitehouse.gov
7. www.worldbank.org.in
8. www.imf.org

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