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ÕIn economics, the term V


ôescribes the reô ction of a
co ntry's gross ôomestic proô ct
(GDP) for at least two q arters.
arters.

The s al ôictionary ôefinition is "a

perioô of reô ceô economic activity"
Ú The Uniteô States
States--baseô National
B rea of Economic Research (NBER)
ôefines economic recession as: "a
significant ôecline in economic activity
spreaô across the co ntry, lasting more
than a few months, normally visible in
real GDP growth, real personal income,
employment, inô strial proô ction, anô
wholesale--retail sales.
wholesale
Ú That private organization ôefines a
recession more ambig o sly as "a
significant ôecline in economic activity
spreaô across the economy, lasting more
than a few months.³
Ú In macroeconomics
macroeconomics,, a recession is a
ôecline in a co ntry's gross ôomestic
proô ct (GDP), or negative real economic
growth, for two or more s ccessive
q arters of a year
 mV V


Ú½ J ly 1980 - November 1982

1982::
2 years total
Ú ½ J ly 1990-
1990-March 1991
1991::
8 months
Ú ½ March 2001-
2001-November 2001
2001::
8 months
Ú ½ December 2007-
2007-c rrent
rrent::
15 months as of March 2009
 
 

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Ú 
 

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V, which is also calleô a  

è

VV 

V,
 
V, occ rs when the val e of a
  
V,
c rrency changes q ickly, nôermining its ability to
serve as a meôi m of exchange or a store of
val e.
e. It is a type of financial crisis anô is often
associateô with a real economic crisis

Ú 
   
èn  V
V is any great bottleneck (or price
rise)) in the s pply of energy reso rces to an
rise
economy.. It s ally refers to the shortage of oil
economy
anô aôôitionally to electricity or other nat ral
reso rces.
rces. èn energy crisis may be referreô to as
an  
V
 
V,,  V

V,


V,  VV ,

V
V or
V

V
Ú 


 

In
 V

 , recessions anô
stagnation arise ô e to inaôeq ate cons mer
ôemanô relative to the amo nt proô ceô
Ú 
 

In economics
economics,,  VV

 refers to
excess of s pply over ôemanô of proô cts
being offereô to the market
market.. This leaôs to
lower prices anô / or nsolô gooôs
Ú 

   
The term 
 
V is applieô broaôly to
a variety of sit ations in which some financial
instit tions or assets s ôôenly lose a large
part of their val e
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r S b-
b-prime Iss e:
Ú S b Prime lenôing is lenôing to people who have very poor
creôit history.
Ú In US, a lot of loans, partic larly mortgages, were extenôeô to a
wiôe target gro p incl ôing people who haô very low repayment
capacities anô paiô very low margin.
Ú These loans then were b nôleô into packages by Investment
Bankers anô were solô to investors like pension f nôs,
ins rance companies, heôge f nôs etc. Toôay these loans
constit te the largest component of the US Debt Market.
{ ere are mainly two reasons w y t is market became so large:
Ú S staineô Lower interest rates in the US saw most asset prices
going p for long time. This enco rageô prospective home
b yers to take loans anô b y ho ses.
‡ èro nô the same time, a lot of financial innovations took place,
main being sec ritization of assets. In this, mortgage companies
seô to extenô loans to home b yers anô sell these loans
onwarôs to investors.
‡ Since mortgage companies were not holôing these mortgages,
basic ô e ôiligence of creôitworthiness of home loans
ôeteriorateô. On the other hanô, ô e to lower interest rates,
there was a lot of ôemanô for mortgage bonôs as they were
yielôing attractive yielôs.
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Ú Increasing press re of inflation leaô to higher interest rate.

(Interest Rate cycle t rneô aro nô miôôle of 2007)
Ú ès res lt cycle of taking loans anô cons mer spenôing
practically stoppeô.
Ú Demanô for homes ôroppeô ô e to rise in interest rates. People
with low creôit profile (to whom s b prime loans were given)
came nôer press re anô starteô ôefa lting.
Ú Ho sing prices came ôown (the basic calc lation of mortgage
players of increase in property prices went wrong) anô mortgage
players faileô to proviôe cover for the mortgage loans when s b
prime borrowers starteô ôefa lting.
 mmm &

Ú Easy liq iôity graô ally starteô vanishing from the system.
Ú Foreclos res increaseô which f rther p t press re on ho sing
prices.
Ú Ever increasing ôefa lts by borrowers anô sl mp in ho sing
prices forceô mortgage players to write off these loans of large
amo nt.
Ú US Feô has alreaôy spent $900 bn in taking over failing
companies ô e to s b prime crisis anô has anno nceô bail o t
package of $700 bn.
Ú Major players in the US has alreaôy anno nceô h ge write offs
in excess of $500 bn ô e to s b prime.
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ès we can see, ho sing prices ôo bleô between 2002 to Q1 of 2006

 
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Ú Solvency fears have h rt liq iôity flows
{ ere ave been more t an 500 billion dollars of NPAs in t e
US. But w at as added fuel to t e fire is t at Banks ave
become very cautious in lending and t ey are ardly lending to
any borrowers for t e fear of t ese borrowers being bankrupt.
Hence t is as impacted t e Credit flow.
Ú Selling press re beca se of Capital èôeq acy
Req irements.
m en t e bank provides for NPAs«t ey take a it on t eir
capital.
EXèMPLE:- If the capital of the Bank is 100 anô the NPè
EXèMPLE:-
is 5 the capital becomes 95. D e to this they have to
inf se new capital (raising capital in c rrent times is also
ôiffic lt)against their hit to meet the Capital èôeq acy
Req irement.

77*,

Ú Over Leveraging (Greeô)

Ú Baô Reg lations (Ease)
Ú Over Sophistication anô Complication
Ú Fear anô Distr st (èffecting Liq iôity Flows)