Recession in America

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RECESSION IN UNITED STATES

OF AMERICA

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WHAT IS RECESSION ?WHAT IS RECESSION ?

In economics, the term recession describes the reduction

of a country's gross domestic product (GDP) for at least two

quarters.

A R ecession is a contraction phase of the business cycle.

National Bureau of Economic R esearch (NBER) is the

official agency in charge of declaring that the economy is in

a state of recession.2



They define recession as :

³significant decline in economic activity lasting more than a

few months, which is normally visible in real GDP, realincome, employment, industrial production, and wholesale-

retail sales´.

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Indicators to say a nation is in recession;

- People buying less stuff - Decrease in f actory production

- Growing unemployment

- Slump in personal income - An unhealthy stock market

HOW TO KNOW RECESSION?



WhatWhat

CausesCausesRecession ?Recession ?

WhatWhat

CausesCausesRecession ?Recession ?

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An economy typically expands for 6-10 years and tends to

go into a recession for about six months to 2 years.

A recession normally takes place when consumers loose

confidence in the growth of the economy and spend less.

This leads to a decreased demand for goods and services,

which in turn leads to a decrease in production, lay-offs and

a sharp rise in unemployment.

Investors spend less as they fear stocks values will f all

and thus stock markets fall on negative sentiment.6



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U.S ECONOMIC RECESSION HISTORY

TheUnited States has encountered32 cycles of expansions and contractions, with

an average of 17 months of contraction and 38 months of expansion. Let¶s see adetail history of economic recession in theUnited States -:

Late 2000's Recession

Early 2000's Recession

1990's Recession

1980's Recession

1970's Oil Crisis






Recession of 1945

The Great Depression

Recession 1926

Post World War I Recession

Panic of 1907

1870's Recession

1890's Recession

Panic of 1857

Panic of 1837Depression of 1807

Panic of 1819

Panic of 1797



U.S.A ± Consumption based Economy.

2/3r d Economic activity i.e. GDP ±

comes from consumers. Credit - free flowing for U.S consumers

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Credit car d loans for personalconsumption

Auto loans for purchase of cars

Home loans for purchase of houses

(SUBPRIME CRISES)



For inter nal use only

WHAT IS A SUB-PRIME LOAN? In the US, borrowers are rated either as µprime¶ - indicating that they have a

good credit rating based on their track recor d - or as µsu b-prime¶, meaning

their track recor d

in repaying loans has been below par.

Loans given to su b-prime borrowers, something banks would normally bereluctant to do, are categorized as su b-prime loans. Typically, it is the poor and

the young who form the bulk of su b-prime borrowers

WhatWas The Interest Rate On Sub-prime Loans?

Since the risk of default on such loans was higher, the interest rate charged onsu b-prime loans was typically about two percentage points higher than theinterest on prime loans. This, of course, only added to the risk of su b-prime

borrowers defaulting.

The repayment capacity of su b-prime borrowers was in any case dou btf ul. Thehigher interest rate additionally meant su bstantially higher EMIs than for prime borrowers, f urther raising the risk of default.




WHYLOANSWERE GIVEN?

In roughly five years leading u p to 2007, many banks started givingloans to su b-prime borrowers, typically through su bsidiaries.

They did so because they believed that the real estate boom, whichhad more than dou bled home prices in the US since 1997, would

allow even people withdo

dgy cre

dit backgro

un

ds to repay on theloans they were taking to buy o r build homes.

Government also encouraged lenders to lend to su b-prime borrowers,arguing that this would help even the poor and young to buy houses.

With stock markets booming and the system flush with liquidity, many big f und investors like hedge f unds and mutual f unds saw su b-primeloan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meantthe lenders had fresh f unds to lend. The su bprime loan market thus

became a fast growing segment.




HOWDID THIS TURN INTO A CRISIS?

The housing boom in the

US starte

d petering o

ut in 2007. One major reasonwas that the boom had led to a massive increase in the su pply of housing.

Thus house prices started falling. This increased the default rate amongsu bprime borrowers, many of whom were no longer able or willing to paythrough their nose to buy a h ouse that was declining in value.

Since in home loans in the US, the collateral is typically the home being bought, this increased the su pply of houses for sale while lowering thedemand, thereby lowering prices even f urther and setting off a vicious cycle.

That this coincided with a slowdown in the US economy only made matters

worse. Estimates are thatU

S housing prices have

droppe

d by almost 50%from their peak in 2006 in some cases. The declining value of the collateral

means that lenders are left with less than the value of their loans and hencehave to book losses.



Result

Overconsumption/

Extravagant

spending

by the consumer

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for years the prices of homes in the U.S. kept rising.for years the prices of homes in the U.S. kept rising.

For years prices of homes in US kept

rising

for years the prices of homes in the U.S. kept rising.for years the prices of homes in the U.S. kept rising.for years the prices of homes in the U.S. kept rising.

Thus



Felt a need to Preserve capital. Therefore Started tightening credit , Started

restricting lending to the U.S consumer and businesses.

Since then Loans became difficult to come by banks, Bank cut Credit car d limits.

U.S. consumer significantly reduce spending.

Dollar value Declined Stock market crashed

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In early July, depositors at Los Angeles offices of Indy Mac Bank

lined u p in the street to withdraw their money.

On July 11,Indy Mac - the largest mortgage lender in theUS - wasseized by federal regulators.

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During the weekend of September 14-15, Lehman

Brothers declared bankr u ptcy after failing to find buyers.




HOWDID THE CRISIS BUILD UP?

An investment bank uses its proprietary book (own money) to lend

others and invest. It started with the su bprime crisis. Banks like

Lehman, buy mortgage loans from other banks, and then package

them to sell bonds against the loan pool. Often they add cash to make

the loan pool more attractive, so that the bonds can be sold at a higher price.

Su ppose mortgage was earning 6%, these bonds are sold at 4%. The

difference is the spread which the investment bank earns. By selling

these str uctured bonds, it raises money and frees capital. But when

homebuyers started defaulting, these bonds lost their value. It all began like this, and then the vir us spreads across markets.



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Bank of America agreed to purchase Merrill Lynch,

& consortium of 10 banks create

dan emergency f

un

d of at least $70 billion to deal with the effects of

Lehman's closure.

Another bank failure occurred on September 25 when

JP Morgan Chase agreed to purchase the banking assets

of Washington Mutual



LIST OFBANKR UPT AIRLINES

Dec 26, 2007 - Maxjet Airways files

March 31, 2008 - Aloha Airlines files and discontinues passenger

transporting operations

April 03, 2008 - ATA Airlines files and discontinues operations

April 05, 2008 - Sky bus Airlines files and discontinues operations

April 10, 2008 - Frontier Airlines files

April 26, 2008 - Eos Airlines files and discontinues operations



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IMPACT OF US RECESSION ON

INDIAN ECONOMY



A slowdown in the US economy is bad news for India.

Indian companies have major outsourcing deals from the US. India's exports

to the US have also grown su bstantially over the years. The India economy is

likely to lose between 1 to 2 percentage points in GDP growth in the nextfiscal year. Indian companies with big tickets deals in the US would see their

profit margins shrinking.

The worries for exporters will grow as r u pee strengthens f urther against the

dollar. But experts note that the long-term prospects for India are stable. A

weak dollar could bring more foreign money to Indian markets. Oil may get

cheaper brining down inflation. A recession could bring down oil prices to

$70.

Between January 2001 and December 2002, the Dow Jones Industrial

Average went down by 22.7 per cent, while the Sensex fell by 14.6 per cent.

If the fall from the recor d highs reached is taken, the DJIA was down 30 per

cent in December 2002 from the highs it hit in January 2000. In contrast, theSensex was down 45 per cent.

The whole of Asia would be hit by a recession as it depends on the US

economy. Asia is yet to totally decou ple itself (or be independent) from the

rest of the world, say experts.



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Most people have sold the shares. Foreign investors have pulled out from stock

market.

Stock broking hou

ses are laying-off people. People have started saving money.

SHAREMARKET



Government and other private companies are reluctant in

starting new ventures and starting new projects.

Car, bike & tr uck sales down.

Steel plants also started cutting production.

Hospitality and airlines are hit by poor demand. 22

INDUSTRIALSECTOR



Companies in the private sector and government sector are

hesitant to take u p new projects. And they are working on

existing projects only.

Projections indicate that u p to one crore persons could lose

their jobs in the correct fiscal ending March.{as given byFederation of Indian Export Organisations (FIEO)}

The textile, garment and handicraft industry are worse

effected. Together, they are going to lose four million jobs

by April 2009, accor ding to the FIEO survey

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BANKING

SECTOR

Indian banks are facing through a tough time of liquidity

cr unch. Lehman Brothers had invested a great amount in the

stocks of Indian banks that have invested in derivatives.

A sudden fall in the economy directly affected Lehman and

Merill, eventually forcing them to file a bankr u ptcy.

Falling down of Lehman had a great impact on the leadinginternational bank, ICICI Bank, a bank that had invested in

Lehman¶s bonds.

The interest rates have drastically increased from 11.5% to

nearly about 16%.



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AGRICULTURE

(NO EFFECT)

No major on impact on Indian agriculture

Negligible foreign investment

Normal and

d

istribu

ted

rainfall in 2008

Production increased from 231-234 million

tonnes (07-08)



Government has 2 plans

Fiscal Policies

(By Govt.)

Monetary Policies

(By RBI)

How it spends

and collects money

Su pply of money

in the country

How to come out of recession?



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MONETAR Y POLICY

Fed will maintain historic low target for key interest rate before raising

it towar d the end of 2009.

Inflation will be relatively low over the year, and core inflation will

slow.

Central bank is widely expected to pursue financial lending and

monetary stimulus initiatives.

Federal Reserve's most-recent decision on March 11, 2008 to increase

liquidity via the launch of its new, $200 billion Term Securities Lending

Facility for 28-day loans for primary dealers

Mr Obama has emphasised the need for a ³green recovery´ ± one based

on sustainable technologies, not merely on consumption spending.



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IS RECESSION OVER IN US ECONOMY ?

Unemployment stood at 9.8 per cent in September 2009, the

highest rate in 28 years, and is widely expected to reach 10 per

cent in 2010.

Consumer spending, which accounts for about two-thir ds of the US economy, jumped 3.4 per cent.

US stocks jumped more than 0.5 per cent in opening trading

on Wall Street.

President Barack Obama said, the 19-month US recession

had reached the ³BEGINNING OF THE END´



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Recession in America

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