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Business Cycle
The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. Business cycles are widely known to be irregular - varying in frequency, magnitude and duration.
Trough: At this stage, output and employment are at their lowest. This is also referred to as the stage of depression Recovery: The recovery stage is the rise in output, employment and trade after the depression stages. The employment levels increase till maximum employment is reached.
Economic Recession
The technical definition of an economic recession is when GDP growth is negative for two quarters or more. A recession is usually preceded by several quarters of slowing but positive growth. During recession economic growth slows, businesses stop expanding, employment falls, unemployment rises, and housing prices decline.
Since it was a good time and property prices were soaring, the only aim of most lending institutions and mortgage firms was to give loans to as many potential customers as possible. As a result, many people with low income & bad credit history were given housing loans. These types of loans were known as subprime loans as those were are not part of prime loan market (as the repaying capacity of the borrowers was doubtful).
The investment in these loans were great because,the interest we 2%higher than that of prime loans and the other reason was that if the borrower defaulted the lender could sell the house and recover the amount. With the stock market booming, many big fund investors like hedge funds and mutual funds bought these sub-prime loans from the original lenders ,including European Investment banks,due to this the sub prime loans diversified into the global market.
However, as the saying goes, No boom lasts forever, the housing bubble was to burst eventually. Overbuilding of houses during the boom period finally led to a surplus inventory of homes, causing home prices to decline beginning from the summer of 2006. Due to this house prices started to decline. As a result,interest rates rose and borowwers started to default on loans
But when the house prices declined,these loans became risky and unprofitable,as many more loans defaulted. And as the prices decreased the lenders could not sell the houses and recover the loan amount. Eventually, there remained no option but to write off losses on these loans. The effects of these losses were huge. Global banks and brokerages have had to write off an estimated $512 billion in subprime losses so far.
The Citigroup ($55.1 billion) and Merrill Lynch ($52.2 billion). A little over half of these losses, or $260 billion, have been suffered by US-based firms, $227 billion by European firms and $24 billion by Asian ones. The crisis led to The Lehman Brothers file for bankrupcy. Merrill Lynch has been bought out by Bank of America. Since many banks had invested,the global economy suffered huge losses and went into global economic recession.
Unemployment Financial Markets:IT industries,real estate industries,car industry investment banking and other industries suffered huge losses due to the fall in global economy. Decline in dollar Value:Due to decreased investment in the US markets. Slowed export and import.
Governments policy actions to arrest the situation included bail out of financial institutions, reduction of bank rate and expansionary fiscal policy aimed at stimulating economic growth. The various policy actions have helped to restore some confidence especially in the worst hit some confidence especially in the worst hit developed economies. However the global economic environment remains highly uncertain and recovery is projected in 2010 depending on the effectiveness of the various policy actions.