the most important topic this year would be " recession"
try to find out the cause and current problems faced globally and effect of it in major ecnomies ..:smile:
be cool :)
**********Recession - Cause and Current Problems*********Just a Starter!! :xmas:
Recession: IMO Recession in one sentence is slowing down in economic activities which is attributed to reduced willingness of people in taking part in various transactions.
Cause of Recession: Subprime Crisis and its cascading effect on the globalised economy
What is Subprime Crisis and how it started?Business model of Subprime: Subprime Lending deals (rather dealt) with lending to less credit worthy people (that's why the word "subprime") at higher interest rates. So, it's high risk high return business model.
pros: huge market place for subprime as Americans are credit maniacs (I read one article in NY Times that now a days financially broke people go for shopping expensive items on credits just to distress themselves, that's PAGALPAN in Indian standards, isn't it?)
cons: probability of sucessful loan closure goes down dramatically
How it all started? (taking a bit of contrarian stand here, which might spur few counter arguments) US was experiencing Real Estate boom for a decade (till the crisis started) and the reason for this boom was excess liquidity in the market. This excess liquidity was due to the lowered interest rates by Fed.
So what led Fed to continually lower interest rates during boom time (unlike in India; in India RBI continuously kept on increasing interest rates to control liquidity)??
The reason could be the unprecedented Funding for Iraq War!! Iraq war started in 2003 and it overshot the initial budget (initial budget was $60 billion, but it shot to $500 billion. Some even say that it was A Trillion Dollar War). So, huge liquidity was one of the best ways available with US govt to get the funding for war (infact there were lot of Short Term borrowings in terms of T-Bills during that period).
So my line of thinking while discussing the cause for the Crisis is,
(Iraq War + Credit crazy Americans) --> need for funds by US govt --> attempt to keep liquidity high --> Subprime business model boom --> Global and local I-Banks jump into the tempting business of securitisation of subprime loans --> Liquidity Crunch --> No more money to pay the so called "EMIs" --> Increase in defaults --> property prices decline due to supply-demand mismatch --> Direct economic impact to I-Banks who securitised these loans
Current Problems!!As the business of securitisation went deep into many tiers of Global Banking network, it caused tremendous cascading effect on the economic world.
Few of the many problems that Economies of various countries are facing now are:
1> Ironically the high liquidity that at one time triggered Global Economic Meltdown is now immediate answer to the issue in hand. Almost all economies are agrressively lowering interest rates to inject liquidity.
2> Huge decrease in demand in almost all sectors as now consumers are very reluctant to spend/invest money insanely.
3> Lowered international trades.
4> Increase in Risk Aversion. Thus, less people to burn their fingers in something new/risky.
5> And direct impact on people is Loss of Jobs.
Comments Welcome!!