WORLD ECONIMIC CRISIS &

EFFECTS
[Document subtitle]

IBS GURGAON
SANCHIT NARAYAN SHARMA
19BSP3720
Submitted To: - Dr. Rakhi Singh
 World Economic Crises
Economic/ financial crisis nothing but the outcomes of financial frauds and wrong doing. Either
it is the great depression of 1930s or Great recession / subprime moorage in 2008.
A financial crisis is any of a broad variety of situations in which some financial assets suddenly
lose a large part of their nominal value. In the 19th and early 20th centuries, many financial
crises were associated with banking panics, and many recessions coincided with these panics.
Other situations that are often called financial crises include stock market crashes and
the bursting of other financial bubbles, currency crises, and sovereign defaults. 
Financial crises directly result in a loss of paper wealth but do not necessarily result in
significant changes in the real economy .where ever this thing happens there will be some
political or financial Wong doing or some high-level frauds.
Economical slow down and country specific crises are more often seen in the likes of
1970s OIL AND POWER CRISES, 1991 INDIA ECONOMIC CRISES, EARLY 2000s recession, DOT
COM bubble (2002)
But the or subprime mortgage crises hit the world at their economic heart / center America.

THE GREAT DEPRESSION

The Great Depression was the worst economic downturn in US history. It began in 1929 and did not
abate until the end of the 1930s. The value of the US stock market nearly doubled in a frenzy of
speculative buying in the eighteen months before the crash began on “Black Thursday,” October 24,
1929. On that day, and on “Black Tuesday,” October 29, panic set in as millions of shares of stock traded
at ever-falling prices.

The October 1929 downturn was only the beginning of the market collapse. By mid-November the stock
market had lost a third of its September value, and by 1932-when the market hit bottom-stocks had lost
ninety percent of their value. A share of US Steel which had sold for $262 before the crash sold in 1932
for $22.

The stock market crash signaled the beginning of the Great Depression, but it was only one factor
among many root causes of the Depression. A weak banking system, further collapse in already-low
farm prices, and industrial overproduction each contributed to the economic downturn. The disastrous
international trading partners to retaliate by raising rates on US-made goods. The result was shrinking
international trade and a further decline in global economies.

As the effects of the Depression cascaded across the US economy, millions of people lost their jobs. By
1930 there were 4.3 million unemployed; by 1931, 8 million; and in 1932 the number had risen to 12
million. By early 1933, almost 13 million were out of work and the unemployment rate stood at an
astonishing 25 percent. Those who managed to retain their jobs often took pay cuts of a third or more.

More than a third of the nation’s banks failed in the three years following 1929. Long lines of desperate
and despairing people outside banks hoping to retrieve their savings were common. Many ordinary
citizens lost their life savings when banks failed.

Farmers were hit particularly hard by the crisis. On top of falling prices for crops, a devastating drought
in Oklahoma, Texas, and Kansas brought on a series of dust storms known as the Dust Bowl. In the
South, sharecroppers-both white and black-endured crushing poverty and almost unimaginable
degradation. African Americans suffered significantly higher levels of unemployment than whites due to
pervasive racism.
The financial crisis was not limited to the United States. Countries in Europe and around the world
experienced the depression. Hitler’s rise to power in Germany was fueled in part by the economic
slowdown, and throughout the 1930s international tensions increased as the global economy declined.

President Hoover initially met the economic downturn from the perspective of his long-
held voluntarist principles—that is, his belief in minimal government interference in the economy, as
well as a conviction that direct public relief to individuals would weaken individual character, turn
people away from the work-ethic, and lead them to develop a dependency on government handouts. By
1931 Hoover reversed his earlier approach and embraced government intervention in the economy. The
1932 Reconstruction Finance Corporation (RFC) authorized the lending of $2 billion to banks, railroads,
and other privately held companies, and in July 1932 the federal government appropriated $300 million
for the nation’s first relief and public works projects.

For many, however, these actions were too little, too late. Shantytowns of makeshift hovels-
disparagingly labeled “Hooverville’s” in disgust with the president’s inaction in the face of crisis-grew up
across the country in public parks and in vacant lots, as the out-of-work, unable to pay mortgages or
rent, were evicted from their homes. Trouser pockets pulled out to signal the lack of money within them
were “Hoover flags.” Newspapers used for warmth by the homeless were “Hoover blankets.

THE GREAT RECESSION / 2008 WORLD ECONOMIC CRISES

IN 1977 Lewis S. Ranieri sold his first mortgage-backed securities (MBS) pass through he started the
clock towards the 2008 crisis.

A mortgage bond is a bond backed by a pool of mortgages on a real estate asset such as a house. More
generally, bonds which are secured by the pledge of specific assets are called mortgage bonds.
Mortgage bonds can pay interest in either monthly, quarterly or semiannual periods.

A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured
by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of
individuals (a government agency or investment bank) that securitizes, or packages, the loans together
into a security that investors can buy. Bonds securitizing mortgages are usually treated as a separate
class, termed residential; another class is commercial, depending on whether the underlying asset is
mortgages owned by borrowers or assets for commercial purposes ranging from office space to multi-
dwelling buildings.

But story change with private label MBS comes in to play. Banking become America no 1 industry and
after nearly 30 year after it all come crashing down in 2007.
Lewis Ranieri’s MBS came out to be profitable to the big banks. they made billion of billions of dollars
out of it. but when they run out of mortgages to put in the MBS, because only some amount of people is
having good enough job to pay,

Big banks start putting Subprime mortgages in the MBS having AAA rating and selling them.

AAA rated bond which was supposed to be filled with 65% of AAA bonds where filled with subprime, and
with them help of contact and money, they force the ratting agencies to rate them adequately as per
there need.

So big banks could sell this subprime filled bond for 2% fee, so keep the profit wheel running.

On the other hand, the housing markets are pumped up bay this bad loan, people with low payback
capability where given loans. Categorically they rate this bond in following AAA, AA, A, BBB, BB, B, AAA
are the best and B is the lowest that can get.

Some where down the line bankers came up with something call “C.D.O” (COLLITRIALIZED DEBT
OBLIGATIONS) when they unable to sell those BB B rated bond, they put left over in to CDO, and sell
them which collapse in crises.

This thing happening and U.S government just don’t get notice of it, even simply sleeping on it.

They make CDO on CDO synthetic once sold them.

Housing market was getting up and up from years, people think they still go up, but during mid of 2000s
people keep losing job slowly, but pricing of house just keep getting up. Housing market keep showing
good results but, on the ground, situation is all negative, houses gain got twice or thrice of pricing in
market but really it was the loan people getting is raising the price.

Value of these houses are still in same, they just get over rated this is the housing bubble that crash the
world Economy, this not just the case with America across the globe this house bubble is active in lower
manner.

But some people Shaw this coming they bought CDS (credit default swamps) with the banks, that case of
housing market default they will get 10 to 1 what invest that what happen in 2007.

Default rate reach 12% and it all is crashing down.

 EFFECTS
 USA National unemployment rate rose from 5 % in December 2007 to 10% in October 2009
 GDP declined by 4.3% from 2007-2009
 Mass layoffs (occurring when 50 or more claims for unemployment insurance are filled) Involved
326,392 workers in February of 2009.
 3 million households were foreclosed on from 2005- 2009
 In 2007 the dow jones industrial average declined by 50 %
 The DJI plummeted more in the following years to a low of under 10K for the first time ever.
 The S&P 500 declined by 57.8%

WHEN THE DUST SETTLED FROM THE COLLAPSE,

5 trillion dollars in pension money, real estate vale ,401k, saving and bonds had disappeared.

8 million people lost their jobs, 6 million lost their homes

And the was just in USA.

In 2015, several large banks began selling billions in something called a “bespoke tranche opportunity”,
which acc to Bloomberg news, is just another name of a CDO.

Effects on India
The global recession started in December 2007. The initial impact on India was muted: GDP growth
slowed from 9% in 2007-08 to 7.8% in April-September 2008, still a very high rate. But after Wall Street
collapsed in September, India's growth plummeted to 5.8%, 5.8% and 6.1% in the next three quarters.
This was a comedown. Yet, it far exceeded the World Bank's forecast of 4% growth in 2009. It exceeded
my expectations too.

n 1997, India's foreign exchange reserves were strained, interest rates went sky-high, companies
defaulted on loans and dragged down banks. But in 2008, India's high foreign exchange reserves
prevented any panic, even after foreign institutional investors withdrew $12 billion from the stock
market and foreign credit suddenly vanished.
Indian corporates were much less over-borrowed in 2008 than in 1997, and Indian banks were far better
capitalized, so they withstood the financial crisis.

Venezuela crises
From the richest country in Latin America to the poorest. Venezuelan economy has suffered with bad
political decision, democratic dictatorship and the most significant issue of its economy “hyperinflation”.

Venezuelan economy has suffering with inflation from years, but in past couple of years
this problem has become currency eating monster for common people. Inflation in Venezuela in year
2017-18 was 80,000 % and predicted to be more in coming year.
People can’t buy food, because the cost continuous to rise 50% each month, because of hyperinflation.
paper currency (Venezuelan bolivar) is essentially worthless, there is a huge contradiction between
government exchange rate and actual rate in black-market.

Exchange rate for Government and people close to Nicolas maduro (president of Venezuela) Is 10
bolivars: 1 USD and common people forced to buy their dollars through black market at rate of 12,163:1.

This disastrous situation of Venezuelan economy forms richest to poorest is a result of years of
mismanagement of government policy’s and miss use of resources.

In mid-1990 a revolution takes place against the Government of that time. leaded by Hugo Chavez.
Chavez was a leaded of hard-core socialist ideology. during his governance tenure 1999-2013 he took
great hit on poverty and able to reduce it form 60% to below 30% , through different policy’s

But at the same time damaging country economy, budget balance was fall to -22% and there was a
constant growth in inflation and a deep in GDP of the country.

But still condition was not worsen because of hike in crude oil price, Venezuela is world’s biggest oil
reserve. but in 2014 when oil price fall below 100 $ per barrel and change in power in government after
the death of Hugo Chavez thing change for Venezuela.

On one hand they loss their beloved leader and on the other there main revenue started to fall rapidly
because of oil price fall.
Nicolas Maduro next president and successor of Hugo Chavez. He counties hugo socialist ideology , but
after the fall in crude oil prises it is a constant deep in GDP and hike in inflation .

In end of 2017 when USA start shell oiling and put restrictions on Venezuela thing get hugely worst
,which result in hyperinflation in country . in which basic needs like food and electricity prises hike every
record .after this uncontrollable situation Nicolas Maduro try to control inflation with the introduction of
new currency .

Sovereign bolivar to Venezuelan bolivar in which he reduce 5 zero rom currency, high note in new
bolivar is of 500 which value 5 million old bolivar = just 8 $ in current inflation.

Petro an cryptocurrency also introduces by government. according to government 3600 new bolivar = 1
Petro= 60 $, but many economists say it just a fazed doing math it can cause 95% to 96% currency
devaluation.

Beside this there is a lot of miss use of army and court by Nicolas Maduro’s government and fourad
voting allegations. people are hungering and out on street crime rate is all time up and people leaving
country.

Which is result of “hyperinflation”.

 Conclusion
If we closely observe all the crises, we could able to see that, each crisis is something to do with
government Neglections, finical wrong doing and bad management across the finical sector.

This could easily be prevented but due to one and another mistakes this thing happens again and again.

Similarly, in India we are experiencing some slow down, it is due to NPA hike and down fall in housing
market, but it is due to bad loan primarily

During the eve of 2008 rescission Indian government low the interest rate to overcome those current
situations, due to which our banking system which was h conservative on passing loan become a bit
neutral and start giving loan more easily than previously.

But due to this some unstructured loan slipped through the crack, which is now shadowing their effect
as NPAs now.

Other factor also works as catalyst in this like demonetization and GST but those NPAs that force
government to harden their law and restrict loan sanctioning.

More or less situation is temporary, and government is taking step like lower the interest and making
reforms to stabilize out economy.