Download FINANCIAL MELTDOWN AND ITS RECOVERIES: A CASE STUDY

FINANCIAL MELTDOWN AND ITS RECOVERIES:
A CASE STUDY OF INDIA
Dr. Neeru Chadha (Associate Professor),
PG Department of Commerce and Business Management,
BBK DAV College for Women, Amritsar-143001 (PUNJAB).
Email: [email protected]
ABSTRACT
This study traces out the genesis of Global recession and evaluates its impact on Indian Economy.
The root cause of crisis is the building up of global imbalances. The origin of this crisis can be
attributed to large subprime lending in USA due to several factors like uncontrolled lending,
securitization and promotion of housing finance by government. Most of the countries witnessed
this crisis in the form of recession but India experienced least. Global crisis has led to stock
market crashes, panic in Indian banking system, currency collapse and decline in export market.
The slow pace of financial reforms taking place in India, careful approach towards foreign
investments in Indian business sectors, frequent technical obstacles and regulatory control have
turned out to be beneficial for India and helped it to escape from adverse affects. Numerous steps
have been taken by RBI to stabilize the economy, as a result of which the economy has started
gaining ground.
1
INTRODUCTION
In the era of Globalization, no country can be isolated from the fluctuations of world economy.
Heavy losses suffered by international banks were affected all countries of world. The collapse of
the Bear Stearns1 was a lead up to the meltdown in September 2008, and then followed by Global
financial crisis and recession. Bear Stearns pioneered the securitization and asset-backed
securities markets, especially the mortgage-backed assets that were pivotal to the subprime
mortgage crisis. The condition became more worsen with the failure of Lehman Brothers on 15
September 2008. Problems in mortgage and credit markets spilled over into interbank money
markets from mid-September to late October, there was collapse of the financial system and
guided many countries to face a severe meltdown in economy. This crisis led to drastic change in
the world economy, the global financial system and for the central banks.
GENESIS OF GLOBAL CRISIS
Global Recession is not a new phenomenon for whole world. The cause of the crisis was the
bursting of the United States housing bubble which highlighted in approximately 2005–2006.
There was collapse in housing market. There are three categories of mortgages: Prime mortgage,
Subprime mortgage, Alt-A mortgage. Prime mortgages are normal mortgages given to normal
borrowers who have strong income and decent creditworthiness. These borrowers also known as
Prime Borrowers and they provide full documentation of income, assets and liabilities. Subprime
mortgages are more risky than earlier one. Subprime lending is a kind of lending to borrowers
who might not qualify for a loan because of unstable incomes or low creditworthiness. These
borrowers are also known as Ninjas. Ninjas mean no income, no job and assets. Alt-A mortgages
fall between Prime and subprime mortgages. They are borrowers with good credit history, but
who provide lower documentation to support the loan or who make payment less than 20% of
down payment.2 The origin of this crisis can mostly be attributed to large subprime mortgage
lending. The banks were eager to earn more profits and moreover banks know that in case if
borrowers were not able to make payment, they could sell the houses at higher price due to
appreciation. Hence, they had increased the mortgaged interest rate and call it as a Subprime
mortgage. They also knew that they did not have to carry these bad loans in their books as to
1
Bear Stearns was one of the largest investment banks and in September 2008 takeover by JPMorgan
Chase, is one of the Big Four Banks of the United States with Bank of America, Citigroup and Wells
Fargo.
2
http://2008financialcrisis.umwblogs.org/analysis/the-subprime-mortgage-market/
2
offshore the balance sheet, they could transfer the default risk to financial institutions all over the
world. On the other hand, borrowers thought once they purchased the house, then in future, value
of house would went up and they could sell it, thus all debts could be easily paid off. Eventually
when the economic cycle got reversed and asset prices decreased, the value of mortgages also
went down. The interest rates on mortgaged loans were increased by banks to cover losses. But
borrowers failed to pay their monthly loan payment due to increased interest rate as there was
also situation of credit squeeze which led to more poor condition, as a result of this, borrowers
could not take fresh credit, so they might have to surrender their homes.3 Asset backed securities
did not worked in this situation because the underlying assets behind the securities were now
worthless. Liquidity dried up and led to credit crunch. So, banks stopped the subprime lending
and also interbank lending as they were afraid of losing money because they lend money to banks
which were also exposed to subprime loans.4
QUICK REVIEW OF TIMELINE
The current recession which affected the whole of world, is not a new phenomenon. World earlier
also faced this phenomenon. (See Appendix: Table 1)
THE GLOBAL CRISIS
An economic recession is primarily attributed to the actions taken to control the money supply in
economy. Usually, central bank of every country is responsible for maintaining the balance
between money supply, interest rates and inflation. So, to curb inflation, proper balance has to be
striked out to restrict bank rates, so that it will not lead to credit crunch. When delicate balance is
tipped, the economy is forced to correct itself. Some times, central bank smoothen the money
supply in money market. This helps to keep interest rates low, even if inflation rises. Inflation is
the rise in prices of goods and services over a period of time. Higher level of inflation leads to fall
in purchasing power of consumers. Hence, people are restricting themselves from spending
money on luxury items. In simple, people now want to save more and spend less. People and
business are looking forward to different ways to cut costs and spend less on expenditures.
Companies will start retrenching workers in order to cut down cost. Hence GDP begins to
decline. All these factors combine to drive economy into state of recession.5
3
http://financialindependent.blogspot.com/2008/01/simple-way-to-explain-subprime-crisis.html
http://www.highbeam.com/doc/1P3-1581306071.html
5
http://recession.org/definition
4
3
The causes of current Global Recession are:
Housing finance and securitization of mortgages: Federal Housing Administration (FHA),
Veterans Administration (VA), Fannie Mae, Freddie Mac were those entities created by US
Government for promotion of home ownership making mortgages available. Securitization
eliminates uncertainty and allows the risk to be price through higher interest rates. Firms who
were engaged with mortgage business know that they could reduce the overall risk because of
pooling system. So, this was the way how Fannie Mae, Freddie Mac expand the mortgage market.
By the end of 2008, the US mortgage market had $14.6 trillion outstanding of which $7.6 trillion
was mortgage-backed securities, including $5 trillion held or guaranteed by Fannie May and
Freddie Mac, and $2.6 trillion in held by private entities. An additional $5 trillion was held as
individual mortgages by commercial banks, thrifts and life insurance companies. The remainder
of the $14.6 trillion in mortgages was held by various government agencies and individuals as
individual mortgages6.
Subprime mortgage market: This market includes the business of subprime mortgages,
subprime auto loans and subprime credit cards, as well as various securitization products that use
subprime debt as collateral7.
The Shadow Banking System: A major player in the Collateralized Mortgage Obligation
(CMO) market was Shadow Banking System. It is a collection of financial institutions including
investment banks, hedge funds, money-market funds, and finance companies, as well as newly
invented entities called “asset-backed conduits” (ABCs) and “structured investment vehicles”
(SIVs). As shadow banks are not part of the formal commercial banking system, so they are not
entitled to same strict regulations as other banks. On April 28, 2004, the US Securities and
Exchange Commission waived the net capital rule for the largest investment banks: Bear Stearns,
Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley. Shadow banks were
estimated to provide as much as 60% of total lending while commercial banks only 40%. The
collateralized mortgage obligations sold by these shadow banks were similar to the mortgagebacked securities sold by Fannie Mae and Freddy Mac. The CMOs were sold in tranches (or
6
7
http://2008financialcrisis.umwblogs.org/analysis/housing-finance-the-securitization-of-mortgages/
http://www.investopedia.com/terms/s/subprime_market.asp
4
slices) to investors based on the investors’ risk preference. These CMOs were sliced into three
tranches: top, middle and bottom. The mortgage payments were accumulated each month would
go to top tranche. When enough money collected, the top tranche’s interest payments were paid.
The next mortgage payments were allocated to the middle tranche. When its interest payments
were paid, the remaining mortgage payments went to the bottom tranche. If any mortgage
holders failed to make their payments, the shortfall would apply to the bottom tranche. To
compensate for this possibility, investors in the bottom tranche were paid a higher interest rate.
The upper tranches were rated AAA by the bond rating agencies; thus, perceived to be safe
investments.8
The Collapse: The financial crisis was the result of the collapse of a bubble in the US housing
market which had formed in the early 2000s. There was the collapse of the housing bubble.
Investment growth in residential housing measured to near zero in late 2005. The first quarter of
2006 saw a 3.6% decline, and another 16.6% dropped in the second quarter. Residential
investment showed a 22.8% decline in the fourth quarter of 2008 and a 32.8% declined in the first
quarter of 2009.9
The Credit Crisis: When businesses found difficulty in raising loans from market because of
liquidity dried up, this led to credit crunch in market. A credit crunch is an economic condition in
which investment capital is difficult to obtain. According to many economics experts, one of the
reasons which lead to a credit crunch is a sustained period of careless and inappropriate lending
which results in losses for lending institutions as well as investors in debt.10 So, to make payment
of earlier loan borrowers could not take the fresh loans from the market. Even by this condition
interbank transactions were stopped because every bank had severe subprime loans.
IMPLICATIONS ON WORLD ECONOMY
This Financial crisis spread to whole of the economy in the form of recession. This recession was
noticeable in late 2008 but it started very earlier. The broadest indicator of economy is GDP 11.
The aggregate demand consistently exceeded domestic output which led to current account deficit
in US. Table 2 indicates current account balances of different countries. (See Appendix: Table 2).
8
http://2008financialcrisis.umwblogs.org/analysis/the-shadow-banking-system/
http://2008financialcrisis.umwblogs.org/analysis/the-collapse/
10
http://www.buzzle.com/articles/what-is-a-credit-crunch.html
11
GDP=consumption expenditure (C) +investment expenditure (I) + government expenditure (G)
+expenditures on net exports (NX).
9
5
The large domestic demands of US were met by rest of the world especially China and other East
Asian economies. These countries provided cheaper goods and services to US and also helped to
maintain price stability in US (Taylor, John (2009)). Generally there was a misconception that US
tighten the monetary policy which led to recession. But this was not the cause. It was collapse of
housing bubble. The main implications of this recession are:
Rising in Unemployment: This decline in housing market spilled over into the labour market in
late 2007. The unemployment rate was at 4.4% in October 2006 and began rise in December
2007. Over the next three months, the labour force dropped out. By May 2009, the unemployment
rate had reached 9.4%, the highest it had been since 1983.
Personal Consumption Expenditures: Total Personal Consumption Expenditures began falling
in the third quarter of 2008 with a -3.8% change which worsened to a -4.3% change in the fourth
quarter. The majority of decline was occurred in the market of Durable goods which turned
negative in first quarter of 2008 and snowballed to -22.1% in the fourth quarter of 2008. Nondurable Consumption had also declined beginning in the third quarter of 2008 with a -7.1%
change and continuing into the fourth quarter at -9.4%. Non-durable consumption is largely a
function of income. Services showed negative in the third quarter of 2008 at -0.1% turned
positive again in the fourth quarter of 2008, clocking in at 1.5%. In the first quarter 2009, total
consumer spending increased showed 9.6% growth in consumer durable spending.
Export and Import: During the period from the fourth quarter of 2005 to the second quarter of
2008, export growth averaged nearly 10% at an annualized rate. As recession became a global
phenomenon, the world demand for American exports declined. In the third quarter of 2008,
export growth slowed and dropped to 23.6% in the fourth quarter. This jump down accelerated in
the first quarter of 2008 with 28.7% decrease. US import growth peaked in late 2005, turning
negative in the fourth quarter of 2007, spreading the decrease in demand globally. Imports saw
decline in the fourth quarter of 2008 at -17.5%. This decline had accelerated to nearly 40% in
early 2009.
US Government spending: US government spending had not played a large role in the current
recession. Substantial decline in federal defense spending in the first quarter of 2009 caused a
noticeable 3.5% decline in total government spending.12
12
http://2008financialcrisis.umwblogs.org/the-recession/
6
LINKAGE OF AMERICAN ECONOMY WITH INDIAN ECONOMY:
The current collapse of USA can be witnessed all over the world. It has been an extraordinary
collapse of American economy. The effects of American crisis can be seen on European and
Japanese economies. Indian economy is no exception to this rule but India is far more fortunate.
The slow pace of financial reforms taking place in India, careful approach towards foreign
investments in Indian business sectors, frequent technical obstacles and regulatory control have
turned out to be beneficial for India and helped it to escape from adverse affects. 13. Its impact on
Indian economy is as follows:
Impact on the Indian Banking System: There was no direct impact on account of direct
exposures of subprime market to Indian banking system. But few Indian banks had invested in
collateralized debt obligations (CDOs) which had few underlying entities with subprime
exposures (Rakesh Mohan (2008)).Even interbank lending had been slowed globally, because
banks were lending at higher interest rates which led to expensive credit.
Impact on the Real Estate Market: This sector was already under pressure as RBI increased the
interest rates to restrain inflation. Further RBI restricted the real estate to raise money through
FCEB route. The investment banks had given huge amounts of money to real estate companies
for development projects. With the large investment banks going bankrupt, the projects have to be
discontinued, leading to the slump in the real estate market as well.
Impact on Exports and Employment: The worldwide financial crisis had caused up to 70
percent fall in India's exports. Handicrafts exports fell by 70 percent. Other sectors like tea and
carpets were also down by 20 percent and 32 percent, respectively. Overall export growth went
down to just over 10 percent from 26.9 percent. Bulk cargo shipping rates had also come down by
nearly 50 percent. As inflation rate was on the peak at that time, business men started to retrench
employees in order to cut down the cost which led to increase in unemployment rate
Impact on Stock Market: The investment in Indian firms by Lehman Brothers and Merrill
Lynch & Co’s were major worry for Indian investors. Indian stock market had seen its worst time
with the global financial crises. Mostly all the industrial sectors experienced a consistent low in
their stock prices. The IT sector had been badly hit. The IT companies have these investment
13
http://www.mumbaispace.com/economics/impact-of-us-recession-in-india.htm
7
banks as their clients. Indian stock market crashed from the high of 20000 to a low of around
8000 points.
Rupee Value: Rupee value against the US dollar has weakened completely One reason might be
the foreign fund inflow into India. Financial institutional investors have deleveraged globally.
This net FII flow has been the single most important reason for the Rupee's fall. The US Dollar
has been the world's reserve currency for several decades now. The Rupee's fall against other
major currencies has been less pronounced, as seen in the Figure below
Source: Financial Crises: A Cascading Effect on India by Madhuri Malhotra
RECOVERY FROM SHOCK TO STABLE ERA:
Mr. Zoellick, president of the World Bank, expressed that the global crisis needs a global solution
and preventing an economic catastrophe in developing countries is important for global efforts to
overcome this crisis. India though act very stably but still cannot keep itself aside from such
shocking state but now economy has moved towards recovery stage. Following are the few
recovery measures adopted by government:
8
Growth in GDP: In a country where 70 per cent of the population live on less than Rs.20 a day,
raising purchasing power of the people should be the first thing in the New Deal. Otherwise the
economic turmoil could lead to widespread social turmoil and disturbances (Markandey Katju).
The growth in GDP has improved significantly in 2010-11 at much faster rate than expected but
problem of global recovery still persist. As a result RBI first revised upward its GDP growth in
2010-11 to 8% but again it has reduced its projection to 7.6% for 2012-13.
Policy measures: To resolve economy from such pressure both central government and RBI
join hands and introduce huge fiscal packages to stimulate domestic demand and to recapitalize
banks. But the problem does not end over here. Depriciating rupee value is adding to the problem
and only measure of recovery is to increase foreign inflows and tightens regulatory measures.14
Recovery in Indian banking system: RBI has taken bold steps to raise liquidity by reducing
CRR, SLR, Repo rate and Revese Repo rate by 0.5%, 1%, 5.25% and 2.75% respectively which
is a big move towards saving economy from such disastraous state (Deepak Mohanty (2010)).
RBI has even raised the limit of FIIs investment in corporate bonds from $3 billion to $6 billion
(Dr. V. Basil Hans (2009)).
Recovery in employment: No doubt companies have reduced its pay packages due to crisis
but still providing ample opportunities to job seekers and jobbers. The need of hour is to go for
the placement not for the pay so that unemployed can add to progress of the economy instead of
being burden on economy.
Recovery in real estate: Though real estate sector has got big hit due to bursting of housing
bubble. Now this sector is also showing an upward trend as real estate dealers are now attracting
cutomers by offering luratic schemes like increasing EMI on flats, offering free cars etc so as to
boost up real estate business.
14
http://articles.economictimes.indiatimes.com/2011-12-18/news/30531096_1_fiscal-deficit-currentaccount-deficit-budget-estimate
9
CONCLUSION
The Great Panic of 2008 is now seriously over-rated. If one manages to keep a balance and act
logically, then not only he can minimize his losses and lay the foundations of making big profits
in the future. But if he becomes part of catrace then he has to face loss and it will take years to get
back good returns from investments. There are three main parts of the crisis: the Credit Crunch,
the Economic Slowdown and the Stock Market Crash. Since Most of the economies are
dependent on United States Economy. US Subprime loans are the major causes of 2008 melt
down. Any economy is considered in a recession when there is 10% continuous fall in two
financial quarters. In this period, many banks have faced bankruptcy and rate of unemployment
increased. Downfall in international trade has been seen. RBI has reduced Repo rate (5.5%),
Reverse Repo (4%), CRR (5%), SLR (24%) too boost up the economy. Most of the banks in India
are trying to decrease rates on loans and increase rates on deposits to increase the circulation of
money in economy. Following measures should be incorporated in order to maintain strongest
position of economy:
 Economies must prepare themselves beforehand so that in time of crisis, they are well
groomed to face the adverse situations
 Financial Companies and institutions should be borne in mind, before lending their
money, the track record of the person.
 Risk management techniques should be improved.
 Government must take positive steps time to time to stabilize their economies
10
BIBLIOGRAPHY
 International Monetary Fund (2009c), World Economic Outlook Database, April
 Mohan, Rakesh (2007), “Global Financial Crisis and Key Risks: Impact on India and
Asia”, downloaded from www.rbidocs.rbi.org.in/rdocs/Speeches/PDFs/87784.pdf on
29th july,2009
 Taylor, John (2009), “The Financial Crisis and the Policy Responses: An Empirical
Analysis of What Went Wrong”, Working Paper 14631, January, National Bureau of
Economic Research
 Malhotra, Madhuri(2008), “Financial Crises: A Cascading Effect on India”, downloaded
from
www.advances.mse.ac.in/making/Financial%20Crises%20madhuri.pdf
on
28th
July,2009
 Katju, Markandey (2009), “Reflections on the global economic crisis”, The Hindu,
Monday, March 9, 2009, p. 8.
 Kumar, Rajiv (2009), “Global Financial and Economic Crisis: Impact on India and policy
response”, downloaded from www.data.undp.org.in/FinancialCrisis/FinalFCP.pdf.
 Mohanty, Deepak (2010), “Global Financial Crisis and the India Economy”,
downloaded from www.unstats.un.org/unsd/trade/s_geneva2011/refdocs/CDs/India%20
%20Impact%20of%20financial%20crisis%20(Nov%202010).pdf
 Hans, Basil (2009), “Global Meltdown and India- Issues, Concerns and Challanges”,
downloaded from www.papers.ssrn.com/sol3/papers.cfm?abstract_id=1375022
WEBSITES:
 http://2008financialcrisis.umwblogs.org/analysis/the-subprime-mortgage-market/
 http://financialindependent.blogspot.com/2008/01/simple-way-to-explain-subprimecrisis.html
 http://www.highbeam.com/doc/1P3-1581306071.html
11
 http://recession.org/definition
 http://2008financialcrisis.umwblogs.org/analysis/housing-finance-the-securitizationof-mortgages/
 http://www.investopedia.com/terms/s/subprime_market.asp
 http://2008financialcrisis.umwblogs.org/analysis/the-shadow-banking-system/
 http://2008financialcrisis.umwblogs.org/analysis/the-collapse/
 http://www.buzzle.com/articles/what-is-a-credit-crunch.html
 http://2008financialcrisis.umwblogs.org/the-recession/
 http://www.mumbaispace.com/economics/impact-of-us-recession-in-india.htm
 http://articles.economictimes.indiatimes.com/2011-12-18/news/30531096_1_fiscaldeficit-current-account-deficit-budget-estimate
 http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
12
APPENDIX
Table 1 - Recessions and other Economic Crises
Name
Dates
Duration
Time since
start
Causes
of
previous
entry
Panic of
1797
1797–1800
3 years
_
The effects of the deflation of the Bank of
England crossed the Atlantic Ocean to North
America and disrupted commercial and real
estate markets in the United States and the
Caribbean. Britain's economy was greatly
affected
by
developing
deflationary
repercussions because it was fighting France
in the French Revolutionary Wars at the time.
Depression
1807–1814
7 years
10 years
of 1807
The Embargo Act of 1807 was passed by the
United
States
Congress
under
President
Thomas Jefferson. It devastated shippingrelated industries. The Federalists fought the
embargo and allowed smuggling to take place
in New England.
Panic
of
1819–1824
5 years
12 years
1819
The first major financial crisis in the United
States featured widespread foreclosures, bank
failures, unemployment, and a slump in
agriculture and manufacturing. It also marked
the end of the economic expansion that
followed the War of 1812.
Panic
of
1837–1843
6 years
18 years
1837
A sharp downturn in the American economy
was caused by bank failures and lack of
confidence in the paper currency. Speculation
markets were greatly affected when American
banks stopped payment in specie (gold and
silver coinage).
Panic
of
1857–1860
3 years
20 years
1857
Failure of the Ohio Life Insurance and Trust
Company burst a European speculative bubble
in United States railroads and caused a loss of
13
confidence in American banks. Over 5,000
businesses failed within the first year of the
Panic, and unemployment was accompanied
by protest meetings in urban areas.
Panic
of
1873–1879
6 years
16 years
1873
Economic problems in Europe prompted the
failure of the Jay Cooke & Company, the
largest bank in the United States, which burst
the post-Civil War speculative bubble. The
Coinage Act of 1873 also contributed by
immediately depressing the price of silver,
which hurt North American mining interests.
Long
1873–1896
23 years
Depression
The collapse of the Vienna Stock Exchange
_
caused a depression that spread throughout the
world. It is important to note that during this
period, the global industrial production greatly
increased. In the United States, for example,
industrial output increased fourfold.
Panic
of
1893–1896
3 years
20 years
1893
Failure of the United States Reading Railroad
and withdrawal of European investment led to
a stock market and banking collapse. This
Panic was also precipitated in part by a run on
the gold supply.
Panic
of
1907–1908
1 year
14 years
1907
A run on Knickerbocker Trust Company
deposits on October 22, 1907, set events in
motion that would lead to a severe monetary
contraction.
Post-World
War
1918–1921
3 years
11 years
I
Severe hyperinflation in Europe took place
over production in North America. It was a
recession
brief but very sharp recession and was caused
by the end of wartime production, along with
an influx of labor from returning troops. This
in turn caused high unemployment.
Great
1929–1933
43 months
21 months
Depression
Stock markets crashed worldwide, and a
banking collapse took place in the United
States. Although sometimes dated as lasting
until the Second World War, the US economy
was growing again by 1933, and technically
14
the U.S. was not in recession from 1933 to
1937
Recession
1937–1938
13 months
50 months
of 1937
The Recession of 1937 is only considered
minor
when
compared
to
the
Great
Depression, but is otherwise among the worst
recessions of the 20th century.
Recession
Feb-Oct 1945
8 months
80 months
of 1945
The decline in government spending at the end
of World War II led to an enormous drop in
Gross
Domestic
Product
making
this
technically a recession. The Post War years
were unusual in a number of ways and this era
has little in common with other recessions
Recession
Nov
1948–
of 1948
Oct 1949
11 months
37 months
The 1948 recession was a relatively brief
cyclical economic downturn, the mildness of
which led to confidence in the notion that the
Post War-era would be a period of stronger
growth.
Recession
July
1953–
of 1953
May 1954
10 months
45 months
After a post-Korean War inflationary period,
more funds were transferred into national
security.
The
Federal
Reserve
changed
monetary policy to be more restrictive in 1952
due to fears of further inflation
Recession
Aug
1957–
of 1958
April 1958
8 months
39 months
Monetary policy was tightened during the two
years preceding 1957, followed by an easing
of policy at the end of 1957. The budget
balance resulted in a change in budget surplus
of 0.8% of GDP in 1957 to a budget deficit of
0.6% of GDP in 1958, and then to 2.6% of
GDP in 1959.
Recession
April
1960–
of 1960-61
Feb 1961
10 months
24 months
After President Kennedy's 30 January 1961
call for increased government spending to
improve the Gross National Product and to
reduce unemployment, the 1960-61 recession
ended in February.
Recession
Dec
1969–
of 1969-70
Nov 1970
11 months
106 months
The relatively mild 1969 recession is thought
to have been mostly caused by the Federal
Reserve raising interest rates to hold down
15
inflation.
1973 oil
crisis
Nov.
1973–
16 months
36 months
March 1975
with high government spending due to the
Vietnam War led to stagflation in the United
1973–1974
stock
market
crash
1980
A quadrupling of oil prices by OPEC coupled
States.
Jan-July 1980
6 months
58 months
recession
The NBER considers a short recession to have
occurred in 1980, followed by a short period
of growth and then a deep recession.
Unemployment remained relatively elevated
in between recessions. The early '80s are
sometimes referred to as a "double dip" or "wshaped" recession.
Early 1980s
recession
July
1981–
16 months
12 months
Nov 1982
The Iranian Revolution sharply increased the
price of oil around the world in 1979, causing
the 1979 energy crisis. This was caused by the
new regime in power in Iran, which exported
oil at inconsistent intervals and at a lower
volume, forcing prices to go up. Tight
monetary policy in the United States to control
inflation led to another recession. The changes
were made largely because of inflation that
was carried over from the previous decade due
to the 1973 oil crisis and the 1979 energy
crisis.
Early 1990s
recession
July
1990–
Early 2000s
recession
Mar-Nov
8 months
92 months
March 1991
Industrial production and manufacturing-trade
sales increased in early 1991.
8 months
120 months
2001
The collapse of the dot-com bubble, the
September 11th attacks, and accounting
scandals contributed to a relatively mild
contraction in the North American economy.
16
Economic
crisis of
2008
2007–present
Ongoing
73 months
The collapse of the housing market led to bank
collapses in the US and Europe, causing the
amount of available credit to be sharply
curtailed, resulting in huge liquidity and
solvency crises. In addition, record oil prices
and food prices, stock markets crashed
globally, and several high profile banking,
automotive,
and
manufacturing
collapsed in the United States
Source : http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
17
giants
Table 2: Current Account Balance (per cent to GDP)
Country
1990- 1995-99 20002005
2006 2007 2008
94
04
China
1.4
1.9
2.4
7.2
9.5
11.0
10.0
France
0.0
2.0
1.3
-0.6
-0.6
-1.0
-1.6
Germany
-0.4
-0.8
1.4
5.1
6.1
7.5
6.4
India
-1.3
-1.3
0.5
-1.3
-1.1
-1.0
-2.8
Japan
2.4
2.3
2.9
3.6
3.9
4.8
3.2
Korea
-1.0
1.9
2.1
1.8
0.6
0.6
-0.7
Malaysia
-5.2
1.8
9.8
15.0
16.7
15.4
17.4
Philippines
-4.0
-2.8
-0.7
2.0
4.5
4.9
2.5
Russia
0.9
3.5
11.2
11.0
9.5
5.9
6.1
Saudi Arabia
-11.7
-2.4
10.6
28.7
27.9
25.1
28.9
South Africa
1.2
-1.3
-0.7
-4.0
-6.3
-7.3
-7.4
Switzerland
5.7
8.8
10.8
13.6
14.5
10.1
9.1
Thailand
-6.4
1.0
4.2
-4.3
1.1
5.7
-0.1
Turkey
-0.9
-0.8
-1.6
-4.6
-6.0
-5.8
-5.7
United Arab Emirates
8.3
4.6
9.9
18.0
22.6
16.1
15.8
United Kingdom
-2.1
-1.0
-2.0
-2.6
-3.4
-2.9
-1.7
United States
-1.0
-2.1
-4.5
-5.9
-6.0
-5.3
-4.7
Memo:
Euro area
n.a.
0.9@
0.4
0.4
0.3
0.2
-0.7
Middle East
-5.1
1.0
8.4
19.7
21.0
18.2
18.8
Source: World Economic Outlook Database, April 2009, International Monetary Fund
(2009c).
Note: (-) indicates deficit.
@: 1997-99
18