RECESSION IN UNITED

STATES OF AMERICA

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 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 Recession is a contraction phase of the business cycle.

• National Bureau of Economic Research (NBER) is the

official agency in charge of declaring that the economy is in
a state of recession.
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 They define recession as :
“significant decline in economic activity lasting more than a
few months, which is normally visible in real GDP, real
income, employment, industrial production, and wholesale-
retail sales”.

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 HOW TO KNOW RECESSION?

Indicators to say a nation is in recession;

- People buying less stuff

- Decrease in factory production
- Growing unemployment
- Slump in personal income
- An unhealthy stock market
 What
Causes
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 fall

and thus stock markets fall on negative sentiment.
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 U.S ECONOMIC RECESSION HISTORY

The United States has encountered 32 cycles of expansions and contractions, with
an average of 17 months of contraction and 38 months of expansion. Let’s see a
detail history of economic recession in the United States -:

• Late 2000's Recession

• Early 2000's Recession •The Great Depression
• 1990's Recession •Recession 1926
• 1980's Recession •Post World War I Recession
• 1970's Oil Crisis
•
•Panic of 1907
Late 1960's Recession
• Early 1960's Recession •1870's Recession
• Late 1950's Recession •1890's Recession
• Early 1950's Recession •Panic of 1857
• Late 1940's Recession •Panic of 1837
• Recession of 1945
•Depression of 1807
•Panic of 1819
•Panic of 1797

• The Great Depression

• U.S.A – Consumption based Economy.
• 2/3rd Economic activity i.e. GDP –
comes from consumers.
• Credit - free flowing for U.S consumers

(SUBPRIME CRISES)

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 WHAT IS A SUB-PRIME LOAN?
• In the US, borrowers are rated either as ‘prime’ - indicating that they have a
good credit rating based on their track record - or as ‘sub-prime’, meaning
their track record in repaying loans has been below par.

 Loans given to sub-prime borrowers, something banks would normally be

reluctant to do, are categorized as sub-prime loans. Typically, it is the poor
and the young who form the bulk of sub-prime borrowers

What Was The Interest Rate On Sub-prime Loans?

 Since the risk of default on such loans was higher, the interest rate charged on
sub-prime loans was typically about two percentage points higher than the
interest on prime loans. This, of course, only added to the risk of sub-prime
borrowers defaulting.

 The repayment capacity of sub-prime borrowers was in any case doubtful.

The higher interest rate additionally meant substantially higher EMIs than for
prime borrowers, further raising the risk of default.
 
For internal use only
 WHY LOANS WERE GIVEN?

 In roughly five years leading up to 2007, many banks started giving loans
to sub-prime borrowers, typically through subsidiaries.

 They did so because they believed that the real estate boom, which had
more than doubled home prices in the US since 1997, would allow even
people with dodgy credit backgrounds to repay on the loans they were
taking to buy or build homes.

 Government also encouraged lenders to lend to sub-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
fund investors like hedge funds and mutual funds saw sub-prime loan
portfolios as attractive investment opportunities. Hence, they bought such
portfolios from the original lenders. This in turn meant the lenders had
fresh funds to lend. The subprime loan market thus became a fast growing
segment.

For internal use only

 HOW DID THIS TURN INTO A
CRISIS?
 The housing boom in the US started petering out in 2007. One major reason
was that the boom had led to a massive increase in the supply of housing.
Thus house prices started falling. This increased the default rate among
subprime borrowers, many of whom were no longer able or willing to pay
through their nose to buy a house that was declining in value.

 Since in home loans in the US, the collateral is typically the home being
bought, this increased the supply of houses for sale while lowering the
demand, thereby lowering prices even further and setting off a vicious cycle.

 That this coincided with a slowdown in the US economy only made matters
worse. Estimates are that US housing prices have dropped 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 hence
have to book losses.

For internal use only

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

Result
Overconsumption/
Extravagant
spending
by the consumer

Thus
For years prices of
homes in US kept
rising

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• 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 card 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 up in the street to withdraw their money.

On July 11,Indy Mac - the largest mortgage lender in the US -

was seized by federal regulators.

• During the weekend of September 14-15, Lehman

Brothers declared bankruptcy after failing to find buyers.

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HOW DID THE CRISIS BUILD UP?

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

others and invest. It started with the subprime 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.
 
 Suppose mortgage was earning 6%, these bonds are sold at 4%. The
difference is the spread which the investment bank earns. By selling
these structured 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 virus spreads across markets.

For internal use only

• Bank of America agreed to purchase Merrill
Lynch, & consortium of 10 banks created an
emergency fund 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
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 LIST OF BANKRUPT 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

IMPACT OF US RECESSION ON
INDIAN
ECONOMY

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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 substantially over the years. The India economy is
likely to lose between 1 to 2 percentage points in GDP growth in the next
fiscal year. Indian companies with big tickets deals in the US would see their
profit margins shrinking.
• The worries for exporters will grow as rupee strengthens further 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 record highs reached is taken, the DJIA was down 30 per
cent in December 2002 from the highs it hit in January 2000. In contrast, the
Sensex 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 decouple itself (or be independent) from the
rest of the world, say experts.
SHARE
MARKET

• Most people have sold the shares.

• Foreign investors have pulled out from stock
market.
• Stock broking houses are laying-off people.
• People have started saving money.

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 INDUSTRIAL
SECTOR

• Government and other private companies are reluctant in

starting new ventures and starting new projects.

• Car, bike & truck sales down.

• Steel plants also started cutting production.

• Hospitality and airlines are hit by poor demand. 22

• Companies in the private sector and government sector are
hesitant to take up new projects. And they are working on
existing projects only.

• Projections indicate that up to one crore persons could lose

their jobs in the correct fiscal ending March.{as given by
Federation 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, according to the FIEO survey

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 BANKING
SECTOR
•Indian banks are facing through a tough time of liquidity
crunch. 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 bankruptcy.

• Falling down of Lehman had a great impact on the leading

international 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%. 24
AGRICULTUR
E
(NO EFFECT)

• No major on impact on Indian agriculture

• Negligible foreign investment

• Normal and distributed rainfall in 2008

• Production increased from 231-234 million

tonnes (07-08)
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 How to come out of recession?

Government has 2 plans

Fiscal Policies Monetary Policies

(By Govt.) (By RBI)

How it spends Supply of money

and collects money in the country
MONETARY POLICY
• Fed will maintain historic low target for key interest rate before raising
it toward 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 “green 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-thirds 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 “BEGINNING OF THE END” 28
THANK YOU..

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