Economic Crisis

Economic Crisis

Causes of Economic crisis
‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Actions taken to Control the Money Supply in the economy; Financial Crisis; Bad Investments by businesses; Stock Market crashes; Factors that stunt short term growth in the economy, such as a sharp increase in OIL PRICES; Wars Change in the nature of the business cycle due to Globalization

Impact of the Crisis
‡ Collapse of Financial Institutions in several ‡ parts of the world eg.Lehman Brothers; AIG, Freddie Mac and Fannie Mae etc. ‡ Central Banks in vulnerable countries such as Iceland become Bankrupt ‡ Investors across the globe lost huge amount of their investments ‡ Severe Credit squeeze and Liquidity crunch for the industry such as Housing; Automobiles; Retail ; Services etc

‡ Crisis of confidence leads consumer aversion to spending -Fall in housing and real estate prices -Fall in Demand for goods and services -Resorting to Trade Distorting Protectionism -Leads to drop in international trade in -commodities and services -Gets into a Vicious Cycle ‡ Job cuts and serious unemployment problem followed

How to come out of Crisis
‡ Governments in Market economies do not have direct control on Producers & the Consumers behavior; But, they can influence millions of Producers & Consumers with Government s policies. ‡ Policies are of two types a)Fiscal policies b)Monetary policis

‡ Fiscal policies(By Government)Governments influence the economy by changing how the Governments spend and collect money. ‡ Monetary policies(By central Banks) Central Banks manipulate the available supply of money in the country

Fiscal policies

Tax cuts for businesses or for individuals

More money available for spending

More Spending by Govt. to create jobs

Individuals get salary and spend money

Automatic fiscal policy; Unemployment Insurance

Some income to unemployed people to spend

As a result of which Demand pick up and market recover

Monetary policies

Reduce reserve ratio

More money available for bank to give loans

Lower the interest rates

Individuals take more loan

Use its own reserved money to buy Govt. bonds

It becomes an income to Govt. to inject money into the market

Global Response to the Crisis
Varied Response and Intervention to protect financial system and the tumbling economy ‡ Structural adjustment to correct the distortion in the financial system ‡ Long Term solution : Address the problem of ‡ misallocation of resources

Global Response: First phase of intervention
‡ First and Immediate intervention by the governments across the globe has been to prevent collapse of the financial system. ‡ Effort has been made --to stop the financial bleeding, -- to coordinate interest rate cuts, and pursue actions to restart and restore confidence in credit markets

‡ rescue of financial institutions -- Government take over of Banks and Financial Institutions on the verge of Collapse to prevent the financial system collapsing

‡ Government guarantees of bank deposits and money market funds, and government. ‡ Facilitation of mergers and acquisitions. ‡ Large Scale Government bailout packages for affected industries --US Bailout package for affected Industries; Banks and FIs exceeds 1 trillion US$

Second phase to Global Recovery
‡ Governments have turned to traditional monetary and fiscal policies to deal with recessionary economic conditions, declining tax revenues, and rising unemployment. ‡ Several countries have turned to funding from the IMF, World Bank, and capital surplus countries

Effort to ‡ Improve liquidity in the system by infusion of cash into the system; ‡ Restart credit flow by building confidence in the system ‡ Stimulate investment and demand for goods and services

Road Ahead: Third phase of Response
‡ Action is being coordinated to decide what changes may be needed in the financial system to prevent future crises. ‡ Some issues being addressed are -weakness in fundamental underwriting principles. - the build-up of massive risk concentrations in firms

‡ insufficient bank liquidity and capital buffers, ‡ overall regulatory structure for banks, brokerages, insurance, and futures

Fourth Phase of Global Response
‡ The fourth phase of the process will be dealing with political and social effects of the financial turmoil

Financial Crisis and Impact on India
‡ Subprime Lending is not a major issue in India ‡ Limited exposure of Indian banks to overseas mortgage and derivative products. ‡ Drying up of external demand for goods and services due to major problems in US and Europe: India s major trading partners. ‡ Lower domestic demand due to buyers hesitation to spend

‡ Exports down by about 20%. ‡ Major affected sectors are: Real Estate; Auto Industry, Textiles; Gem and Jewelry; Chemicals and Allied Products; Iron and Steel; Capital Goods etc.

‡ External dependant service sectors shows sign of stress. ‡ However, India is not likely to face recessionary trend. ‡ GDP Growth likely to remain above 6% in spite of recession and negative growth in the developed economies.

Significant slowdown in International Tourist arrivals
18 16 14 12 10 8 6 4 2 0 World Europe Asia and Pacific America Africa Middle east 2007 2008

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