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Recession Is A Contraction Phase of The Business Cycle, or "A Period of Reduced
Recession Is A Contraction Phase of The Business Cycle, or "A Period of Reduced
activity spread across the economy, lasting more than a few months, normally
Some business & investment glossaries add to the general definition a rule of
thumb that recessions are often indicated by two consecutive quarters of negative
growth (or contraction) of Gross Domestic Product (GDP).A recession has many
attributes that can occur simultaneously and can include declines in coincident
corporate profits. Recessions are the result of falling demand and may be
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Causes of Recession:
• Currency Crisis
• Inflation
• National Debt
• Speculation
• Wars
• Sub-Prime Loans
Effects of Recession:
• Bankruptcies
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• Banks lend less money
• Deflation
• Reduced Sales
• Unemployment
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When Harshad Mehta and Ketan Parekh used money from the
debt markets to play up stocks , they took the markets and few
players down with them .When large investment banks use money
from the wholesale debt markets for nearly a decade ,and go belly
up when their favorite bet crash , they can bring whole nation to
INVESTMENT BANKS
After the crisis of 1930s, the Glass Steagall Act was promulgated ,
UNHEALTHY COMPETITION
In 1999 ,the Glass Steagall Act was discarded . Deposit taking banks
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investment banks .Competition cut into the margins of investment
banks .As a result their trading desk become bigger, and their
structures and selling them off to clients. The size of their trading
ENGINEERING
to borrow money to buy assets , was that return from trading assets
was higher than the borrowing rate .In early 2000s fund procuring
was no problem since federal reserve rates was at lower levels. But
the assets still carried risk. So investment banks bought only those
assets that were liquid and easy to sell off in the market .Where
the asset was not liquid, it was made liquid through financial
engineering.
LAYERING
For example, a 15-year home loan made by a bank ,is not liquid .
But the cash flows due from the loan can be repackaged and sold
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off to another entity like mortgaged backed securities. Investment
off to others. They can also repack their risk into newer
instruments like credit default swaps . The risk on the original home
LEVERAGING
Since the interest rates were low, and housing prices were going
than they needed, banks lend more than they could, investment
banks held and traded too much of the structured products and
record. They only needed to use the money to buy the house,
BUBBLE BUILDING
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As everyone books blew out of proportion, the bubble burst. When
housing prices crashed, the domino effect came into play. Across
the balance sheet that the loans were spread into, all values
dropped. And panicky investment banks try to sell off what they
held, and found that market had become illiquid. When they wanted
to borrow to keep the assets ,the rates had moved up and money
was not available. They began to sell in panic what they had, and
Investment banks now faced a situation where the assets they held
were worth less than the amount they had borrowed. So ,they went
around asking for capital .At the peak of the boom, many of them
had $40 of borrowings for every dollar of capital. Now when the
value of assets fell off to say $20 or less,there was no money to repay
the borrowing ,unless they got equity capital .Equity capital was not
forthcoming because the value of the assets was dropping day by day.
AFTER EFFECTS
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Since fear of failure grip the markets credit has dried out .As
value of assets held by large players has shrunk, the market itself
has shrunk. Money is difficult to get. Loan is new bad word and
no one wants to lend money to fund risky assets. Safe heavens like
money market funds have began to lose value, and investors are
holding back funds worsening the liquidity crunch. And the result ,
U.S financial System , Lehman Brothers and Merrill Lynch have filed
other two Goldman Sachs and Morgan Stanley have given up their
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ANOTHER DEPRESSION IN THE MAKING-
356% versus 260% during the of the 1930’s. This massive buildup
this time. This proves that most people in this country have not
this is using the fake CPI numbers put out by the government.
Using inflation rates in the real world would make the situation
more dire for the average household. The only way people have
improvement in lifestyle. The country has been living a lie for the
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The top 20% of households showed real increases in income. The
bottom 50% lost income during the Bush years, with the bottom
so much anger in the country regarding this bailout for the top 1%.
Fifty million households make less today than they made 8 years
ago. The criminal CEOs on Wall Street collected $30 million annual
salaries while their companies have lost $500 billion in the last
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TODAY’S ENVIRONMENT V/S CONDITIONS THAT
Federal Reserve
THEN
belatedly tightened in 1929, it was far too late and, in the Austrian
efforts to prop up the economy after the crash of 1929 only made
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NOW
on Wall Street with their CDOs, MBSs, and other magic potions
that made bad loans appear good. The Bush administration’s decision
are worse than they were prior to the Great Depression based on
the speculation that has occurred in the last eight years in stocks
THEN
margin requirement was only 10%, so you could buy $10,000 worth
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of stock for $1,000 and borrow the rest. With artificially low
good times and invested in huge expansions. During the 1920s there
American industry.
NOW
Today, the richest 1% own 21% of the nation’s wealth. The bottom
last eight years. During the dot.com boom of 1998 – 2000, small
should have been learned that would last a lifetime. Instead, Alan
speculation is now only half finished. Home prices did not fall on
a national level during the Great Depression. In the last ten years,
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industry. This is why our financial institutions have become too big
THEN
1931. This caused the value of the dollar to plummet. The Federal
Reserve raised rates and reduced the money supply by 30% to try
from banks, and banks began to fail. By the end of 1932, 9,000
banks failed. People hid their cash under their mattresses. Bank
deposits were uninsured, so when banks failed, people lost their life
savings and businesses failed. Panic and fear gripped the nation.
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and enterprising people will pick up the wreck from less competent
people.”
supply was a huge mistake. The United States had the flexibility to
stimulate the economy. At that point in history the U.S . was the
Hoover increased the top tax rate from 25% to 63% in 1932 . The
.NOW
In this current financial crisis no one can accuse the Federal Reserve or the
reducing interest rates sufficiently. The discount rate has been reduced from 4.75%
to 2% in the past year. The Federal Reserve has increased their balance sheet by
over $1 trillion in the last 9 months. The government has committed in excess of
$1.3 trillion of taxpayer money to keep the financial system from imploding. The
question that has yet to be answered is whether these actions are just pushing on a
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string. Are the current conditions so extreme that we are destined for a severe
recession or possible Depression? The country has a national debt of $9.6 trillion,
annual deficits of $600 billion, unfunded future liabilities of $53 trillion, a trade
deficit of $600 billion, inflation of 6%, two wars costing $12 billion per month,
and a weak currency. Therefore, we have not entered this extremely dangerous
period with strong economic fundamentals.. The next administration could easily
BANK BAILOUT
equity capital in the bank. Banks that are facing losses on some part
their activities properly. This will ensure that there is also some
Banking system.
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IMPACT OF US RECESSION ON INDIAN ECONOMY
r eces s ion of U.S . economy. R eas ons being the decline of foreig n
in v es tment, S haken trus t of F oreign Ins titut ional Inves tors (F II’s ) ,
Financial Express stated that , “in the next ten days or so about 25
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This further became the reason of fall in the growth of the
country. The Finance Minister projected the growth for the financial
at 6.9%
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CONCLUSION
world catches cold”, it bought entire world with it with world stock
markets plunging faster than one could even blink his eyes
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Stringent actions have been taken to save the economy from the
decrease in REPO rate by 1.5 % and this lead to fall in market rate
minister has announced many times via media that people should
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BIBLIOGRAPHY
The following journals and sites have been cited for reference and
www.TheHindu.com
www.Wikipedia.org
www.imf.org )
www.google.com
www.yahoo.com
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