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A presentation by Flying Kiwis
Agenda
 What is Recession?
 History of Global Recession
 Causes of the 2008 Meltdown-
 Mainly affected countries
 Consequences of Recession
 Impact on India
 Recovery measures
What is Recession?
 Prolonged period of time when a nation's economy
is slowing down, or contracting
 When global growth is less than 3% (As per the
International Monetary Fund)
 Significant decline in economic activity
 Decline in Gross Domestic Product (GDP)
Trends signalling recession
Consumers spend less
 Decrease in demand and factory
production
Growing unemployment and lay offs
Slump in personal income
An unhealthy stock market
Bankruptcies
Conventionally, slow-down has to
continue for at least six months to be
considered a recession
Dynamics of a recession
History of Global Recession
 Since 1854, the US has encountered 32 instances of
recession (As per National Bureau of Economic
Research)
Latest being Early 2000s- collapse of the
speculative dot-com bubble & September 11 attack
 UK early 1990s- due to savings and loan crisis in US
 Japan 1990s- collapse in land and stock prices, which
caused Japanese firms to become insolvent
Symptoms of recession in USA
 Unemployment was rising in USA since November
2007 (find stats)
 Rising incidence of bankruptcy among many
industries
 Falling of the prices in real estate
 Debts of individuals, corporations and the US
Government reached historic height
The 2008 Meltdown
 Called as the “Great Recession”
 Duration for a period of 18 months
 December 2007 to July 2009
 Affected the entire world economy
Source: National Bureau of Economic Research
The 2008 Meltdown – Causes
 The broad factors for Meltdown –
Macro-Economic factors
Lack of regulation of Financial Sector
Other reasons
Macro-economic Factors
 Excessively accommodative monetary policy and soft
regulation
 No formal mandate to any institution to maintain
financial stability
 Illusion created due to new intermediaries and new
derivative instruments
 Unprecedented increase in Private debt levelsexcessive leverage
 Economies not ready for objective surveillance
Liberal Monetary Policy
 Excessively accommodative monetary policy and soft
regulation
Supply of money in economy was plentiful- US Federal
Reserve eased credit availability
Low interest rates
Resulted in excess liquidity – investment into
speculative activities causing asset bubbles
Soft regulation to attract financial service industry
Lack of norms for stability
 No formal mandate to any institution to maintain
financial stability
Focus exclusively on price stability
 Low emphasis in the public policy for financial
stability
Banks influenced the government policy
Complex Financial Instruments
 Illusion created due to new intermediaries and new
derivative instruments
Central Banks perceived excessive risks but
concluded that they were dispersed widely
Ignored economic imbalances and asset bubbles
Failed to act to moderate the boom bust cycle
Excessive Leverage
 Unprecedented increase in Private debt levels-
excessive leverage
Low interest rates facilitated the growth of debt at all
levels of the economy
Excessive demands leading to rise in prices
Debt default causing lender default- Domino effect
Ignorance to forecasts
 Economies not ready for objective surveillance
Multilateral institution like IMF gave warnings
macro economic imbalances
Dominating economies encouraged excessively
market-oriented ideology
about
Lack of Regulation of Financial
Sector
 Regulators did not have adequate skills to cope
with new financial products
 Ratings by Credit Rating Agencies unreliable
 Non-bank entities like Investment Banks, Hedge
Funds, Private Equity Funds remained unregulated
– Shadow banking system
 Overall the regulatory structures were inadequate
Lack of skills of Regulators
 Regulators did not have adequate skills to cope
with the new financial products
Rapid growth in variety and complexity of
market innovation
New financial products very complex
Unreliable Credit ratings
 Ratings by Credit Rating Agencies (CRAs)
unreliable
Regulators relied heavily on ratings of CRAs
Failed to adequately regulate the CRAs
CRAs failed to alert about the build-up of risks
Unregulated entities
 Non-bank entities like Investment Banks, Hedge
Funds, Private Equity Funds remained unregulated
Also referred as the “Shadow banking system”
Focus only on regulating Commercial Banks
Developments in the shadow system ignored
No formal regulatory structure developed
Other Reasons
 Over optimism
 Sharp increase in oil and food prices
 Investments in speculative asset bubbles
 Policy of mark-to-market rules for valuation as
per US GAAP
 Financial system dominated by few large
financial conglomerates
Major Countries Affected
 Major impact on the US Economy
 United Kingdom
 Japan
 New Zealand
 Singapore
 Countries within the European Economic Area
 India, China & South Africa - Economic slowdown
How it all collapsed
The two main causes of the crisis in USA that triggered
the global crisis are
Sub-Prime crisis
Derivatives crisis
Sub-prime Mortgages
 Trigger point that started the Global recession
 Concerted effort to make home loans more accessible to
those with lower credit- higher risk of default
 Mortgages backed by Housing Security
 The Housing Bubble burst
 Sub-prime lending by Fannie Mae and Freddie Mac, which
are government sponsored entities
Derivative crisis
 Banks lent money to borrowers to increase their
advances
 Banks then securitized this asset pool and issued
certificates to investors
 Credit rating for such instruments issued
carelessly
 Many of such certificates were collected by banks
for fixed income
 When loans proved irrecoverable, the asset pool
created by such instruments proved to be inflated
Impact in USA
 Between June 2007 and November 2008, Americans lost
25% of their net wealth
 Housing prices dropped by 20%
 Total losses of around USD 8.3 trillion to the economy
 Large scale lay-offs and unemployment
 Collapse of major investment banks like Lehmann
Brothers, Indy Mac Bank and AIG
Impact on India
 Although India not directly affected due to the crisis,
effects felt due to the integration of economy with
universal economies
 Exports to other countries declined
 Export of services took a hit
 Overall economy was dampened because of the slack in
exports
Impact on India
 Equity markets affected due to withdrawal of liquidity
by FIIs
 Bond markets affected as foreign investors replaced
overseas investment with domestic investments due to
uncertainties
 Many companies slashed their work force leading to
termination of employment
Absorption of impact in India
The following factors ensured that the global crisis did
not affect India tremendously:
 Domestic savings and investments in India
have broadly been in balance
 The domestic demand has been increasing
pointing towards growth
 Prudent regulations of the Reserve Bank of
India
Banks did not exhibit the
weaknesses that caused Global Crisis
Absorption of impact in India
 Financial markets have shown a lot of resilience due to
RBI’s commitment to mop up excess volatility
 Most of the corporates and households are not
excessively leveraged
 Strong domestic demand makes India a hard nut to be
cracked by such global crises
Global recovery measures
 Central banks in many countries reduced interest
rates and induced liquidity
 Fiscal stimulus has been provided by the Governments
in the form of subsidies and reduction in tax burden to
companies
 Prudential banking norms and regulatory practices
adopted
 Central banks and governments provided liquidity and
borrowings to financial intermediaries to avoid largescale insolvency
Recovery measures in India
 Monetary measures included reduction in policy rates
and reduction of reserves deposited by banks with RBI
 This ensured liquidity in the hands of the banking
institutions
 Special arrangement for NBFCs, where liquidity
support was provided by RBI, but solvency risk was
born by the Government
 Policies with regard to access to ECB were relaxed
Recovery measures in India
 The Fiscal Stimulus Package was launched in
December 2008
 The package included additional public spending by
the Government, guaranteed funds for infrastructure
and additional support to exporters
 Rates of excise duty were reduced to foster more
production and consequently, consumption
Conclusion
 The global crisis of 2008 affected the whole world
 India also affected because of its globally integrated
economical
 The impact of recession not felt as much in India
because of parallel stream of unaccounted money,
stimulating demand
 Financial institutions did not crumble due to the
stringent regulations of RBI