WHEN US SNEEZES THE WORLD CATCHES COLD – THE FINANCIAL CRISIS OF 2008
BRIEF INTRO OF RECESSION .
The great recession refers to the economic downturn between 2008 and 2013. The recession began after the 2007/08 global credit crunch and led to a prolonged period of low/negative growth and rising unemployment .Economists called the financial crisis of the 2007 – 2009 as the “Great Recession”, since it is a critical factor and vital cause for the failure of many businesses and significant influencer that has worsened many economies. A recession is a decline in country s domestic growth for two or more consecutive quarters of the year, it is preceded by various quarters of slowing down , is the reduction of the demand of products in the global market.
NATIONAL BUREAU ECONOMIC RESEARCH (NBER) is the official agency in charge of declaring that economy is in the state of recession.
Introduction
The global Financial Crisis of 2008 is the most severe financial crisis that the world has ever faced since the Great Depression of the 1930s. The ‘Financial Crisis of 2008’
, also called the US Meltdown, has its origin in the United States housing sector .
The financial crisis is characterized by the failure of mortgage companies, investment banks, and government institutions which had heavily invested in subprime loans. Though the crisis started in 2005-06, but has become more visible during 2007-08, when many of the renowned Wall Street firms collapsed.
Subprime mortgage is the practice of providing loans to borrowers who do not qualify at the market rate of interest owing to various risk factors such as low income level, size of down payments made, credit history, employment status etc. The subprime loans (also called Ninja or Liar loans) are provided to those who do not qualify at the market rate of interest. The value of U.S. subprime mortgages was estimated at $1.3 trillion till March 2007.
Causes of the crisis
It is difficult to pin down the exact cause of the financial crisis, but majority of the experts and economists are of the view that subprime loans in the housing sector was one of the most important cause of the financial crisis of 2008. The different causes of the crisis are specified below:
Boom and bust in the housing market: The crisis actually started with the bursting of houses, 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.
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. . A 85 percent of the houses purchased were for investment purposes.
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. 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.
Impacts of the US Financial Crisis on India
Though in the beginning Indian official denied the impact of US meltdown affecting the Indian economy but later the government had to acknowledge the fact that US financial crisis will have some impact on the Indian economy. The US meltdown which shook the world had little impact on India, because of India’s strong fundamental and less exposure of Indian financial sector with the global financial market. Perhaps this has saved Indian economy from being swayed over instantly. Unlike in US where capitalism rules, in India, market is closely regulated by the government.
1. Impact on stock market
The immediate impact of the US financial crisis has been felt when India’s stock market started falling. On 10 October, Rs. 250,000 crores was wiped out on a single day bourses of the India’s share market. This huge withdrawal from the India’s stock market was mainly by Foreign Institutional Investors (FIIs), and participatory-notes.
2. Impact on India’s trade and foreign exchange
The trade deficit is reaching at alarming proportions. Because of worker’s remittances, NRI deposits, FII investment and so on, the current deficit is at around $10 billion. But if the remittances dry up and FII takes flight, then we may head for another 1991 crisis like situation, if our foreign exchange reserves depletes and trade deficit keeps increasing at the present rate. Further, the foreign exchange reserves of the country has depleted by around $57 billion to $253 billion for the week ended October 31. With the outflow of FIIs, India’s rupee depreciated approximately by 20 per cent against US dollar and stood at Rs. 49 per dollar at some point, creating panic among the importers.
3. Impact on India’s export
With the US and several European countries slipping under the full blown recession, Indian exports have run into difficult times, since October. Manufacturing sectors like leather, textile, gems and jewellery have been hit hard because of the slump in the demand in the US and Europe..
4. Impact on India’s handloom sector, jewelry export and tourism
Again reduction in demand in the OECD countries affected the Indian gems and jewellery industry, handloom and tourism sectors. Around 50,000 artisans employed in jewellery industry have lost their jobs as a result of the global economic meltdown. With the global economy still experiencing the meltdown, Indian tourism sector is badly affected as the number of tourist flowing from Europe and USA has decreased sharply.
THUS WHENEVER US SNEEZES THE REST OF THE WORLD GETS COLD ……
NOTE :
ALL THE STATISTICAL INFORMATION HAS BEEN TAKEN EXACTLY FROM THE WIKIPEDIA AND INVESTOPEDIA.