Reasons for Global Recession: In plain simple English
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These days the most talked about news is the current financial crisis that has engulfed the world economy. Every day the main headline of all newspapers is about our falling share markets, decreasing industrial growth and the overall negative mood of the economy. For many people an economic depression has already arrived whereas for some it is just round the corner. In my opinion the depression has already arrived and it has started showing its effect on India.
So what has caused this major economic upheaval in the world? What is the cause of falling share markets the world over and bankruptcy of major banks? In this article, I shall try to explain the reasons for recent economic depression for all those who find it difficult to understand the complex economics lingo and are looking for a simple explanation.
It all started in US…
In order to understand what is now happening in the world economy, we need to go a little back in past and understand what was happening in the housing sector of America for past many years. In US, a boom in the housing sector was driving the economy to a new level. A combination of low interest rates and large inflows of foreign funds helped to create easy credit conditions where it became quite easy for people to take home loans. As more and more people took home loans, the demands for property increased and fueled the home prices further. As there was enough money to lend to potential borrowers, the loan agencies started to widen their loan disbursement reach and relaxed the loan conditions.
The loan agents were asked to find more potential home buyers in lieu of huge bonus and incentives. 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. Since almost everybody was driving by the greed factor during that housing boom period, the common sense practice of checking the customer’s repaying capacity was also ignored in many cases. As a result, many people with low income & bad credit history or those who come under the NINJA (No Income, No Job, No Assets) category were given housing loans in disregard to all principles of financial prudence. These types of loans were known as sub-prime loans as those were are not part of prime loan market (as the repaying capacity of the borrowers was doubtful).
Since the demands for homes were at an all time high, many homeowners used the increased property value to refinance their homes with lower interest rates and take out second mortgages against the added value (of home) to use the funds for consumer spending. The lending companies also lured the borrowers with attractive loan conditions where for an initial period the interest rates were low (known as adjustable rate mortgage (ARM). However, despite knowing that the interest rates would increase after an initial period, many sub-prime borrowers opted for them in the hope that as a result of soaring housing prices they would be able to quickly refinance at more favorable terms.
Bubble that burst…
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. Once housing prices started depreciating in many parts of the U.S., refinancing became more difficult. Home owners, who were expecting to get a refinance on the basis of increased home prices, found themselves unable to re-finance and began to default on loans as their loans reset to higher interest rates and payment amounts.
In the US, an estimated 8.8 million homeowners - nearly 10.8% of total homeowners - had zero or negative equity as of March 2008, meaning their homes are worth less than their mortgage. This provided an incentive to “walk away” from the home than to pay the mortgage.
Foreclosures ( i.e. the legal proceedings initiated by a creditor to repossess the property for loan that is in default ) accelerated in the United States in late 2006. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity. Increasing foreclosure rates and unwillingness of many homeowners to sell their homes at reduced market prices significantly increased the supply of housing inventory available. Sales volume (units) of new homes dropped by 26.4% in 2007 as compare to 2006. Further, a record nearly four million unsold existing homes were for sale including nearly 2.9 million that were vacant. This excess supply of home inventory placed significant downward pressure on prices. As prices declined, more homeowners were at risk of default and foreclosure.
Now you must be wondering how this housing boom and its subsequent decline is related to current economic depression? After all it appears to be a local problem of America.
What complicated the matter?…
Unfortunately, this problem was not as straightforward as it appears. Had it remained a matter between the lenders (who disbursed risky loans) and unreliable borrowers (who took loans and then got defaulted) then probably it would remain a local problem of America. However, this was not the case. Let us understand what complicated the problem.
For original lenders these subprime loans were very lucrative part of their investment portfolio as they were expected to yield a very high return in view of the increasing home prices. Since, the interest rate charged on subprime loans was about 2% higher than the interest on prime loans (owing to their risky nature); lenders were confidant that they would get a handsome return on their investment. In case a sub-prime borrower continued to pay his loans installment, the lender would get higher interest on the loans. And in case a sub-prime borrower could not pay his loan and defaulted, the lender would have the option to sell his home (on a high market price) and recovered his loan amount. In both the situations the Sub-prime loans were excellent investment options as long as the housing market was booming. Just at this point, the things started complicating.
With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw subprime 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. Major (American and European) investment banks and institutions heavily bought these loans (known as Mortgage Backed Securities, MBS) to diversify their investment portfolios. Most of these loans were brought as parts of CDOs (Collateralized Debt Obligations). CDOs are just like mutual funds with two significant differences. First unlike mutual funds, in CDOs all investors do not assume the risk equally and each participatory group has different risk profiles. Secondly, in contrast to mutual funds which normally buy shares and bonds, CDOs usually buy securities that are backed by loans (just like the MBS of subprime loans.)
Owing to heavy buying of Mortgage Backed Securities (MBS) of subprime loans by major American and European Banks, the problem, which was to remain within the confines of US propagated into the word’s financial markets. Ideally, the MBS were a very attractive option as long as home prices were soaring in US. However, when the home prices started declining, the attractive investments in Subprime loans become risky and unprofitable.
As the home prices started declining in the US, sub-prime borrowers found themselves in a messy situation. Their house prices were decreasing and the loan interest on these houses was soaring. As they could not manage a second mortgage on their home, it became very difficult for them to pay the higher interest rate. As a result many of them opted to default on their home loans and vacated the house. However, as the home prices were falling rapidly, the lending companies, which were hoping to sell them and recover the loan amount, found them in a situation where loan amount exceeded the total cost of the house. Eventually, there remained no option but to write off losses on these loans.
The problem got worsened as the Mortgage Backed Securities (MBS), which by that time had become parts of CDOs of giant investments banks of US & Europe, lost their value. Falling prices of CDOs dented banks’ investment portfolios and these losses destroyed banks’ capital. The complexity of these instruments and their wide spread to major International banks created a situation where no one was too sure either about how big these losses were or which banks had been hit the hardest.
Mayhem in the banks….
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, with the largest hits taken by 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 a relatively modest $24 billion by Asian ones.
Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world’s largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the US Federal Bank (The central Bank of America just like RBI in India)
The crisis has also seen Lehman Brothers - the fourth largest investment bank in the US and the one which had survived every major upheaval for the past 158 years - file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae, two giant mortgage companies of US, have effectively been nationalized to prevent them from going under. Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has so far taken over $82.9 billion so far to tide over the crisis.
From this point, a chain reaction of panic started. Since banks and other financial institutes are like backbone for other major industries and provide them with investment capital and loans, a loss in the net capital of banks meant a serious detriment in their capacity to disburse loans for various businesses and industries. This presented a serious cash crunch situation for companies who needed cash for performing their business activities. Now it became extremely difficult for them to raise money from banks.
What is worse is the fact that the losses suffered by banks in the subprime mess have directly affected their money market the world over.
Now what is a money market?
Money Market is actually an inter-bank market where banks borrow and lend money among themselves to meet short-term need for funds. Banks usually never hold the exact amount of cash that they need to disburse as credit. The ‘inter-bank’ market performs this critical role of bringing cash-surplus and cash-deficit banks together and lubricates the process of credit delivery to companies (for working capital and capacity creation) and consumers (for buying cars, white goods etc). As the housing loan crisis intensified, banks grew increasingly suspicious about each other’s solvency and ability to honour commitments. The inter-bank market shrank as a result and this began to hurt the flow of funds to the ‘real’ economy. Panic begets panic and as the loan market went into a tailspin, it sucked other markets into its centrifuge.
The liquidity crunch in the banks has resulted in a tight situation where it has become extremely difficult even for top companies to take loans for their needs. A sense of disbelief and extreme precaution is prevailing in the banking sectors. The global investment community has become extremely risk-averse. They are pulling out of assets that are even remotely considered risky and buying things traditionally considered safe-gold, government bonds and bank deposits (in banks that are still considered solvent).
As such this financial crisis is the culmination of the above mentioned problems in the global banking system. Inter-bank markets across the world have frozen over. The meltdown in stock markets across the world is a victim of this contagion.
Governments and central banks (like Fed in US) are trying every trick in the book to stabilize the markets. They have pumped hundreds of billions of dollars into their money markets to try and unfreeze their inter-bank and credit markets. Large financial entities have been nationalized. The US government has set aside $700 billion to buy the ‘toxic’ assets like CDOs that sparked off the crisis. Central banks have got together to co-ordinate cuts in interest rates. None of this has stabilized the global markets so far. However, it is hoped that proper monitoring and controlling of the money market will eventually control the situation.
How it has affected India?
In the age of globalization, no country can remains isolated from the fluctuations of world economy. Heavy losses suffered by major International Banks is going to affect all countries of the world as these financial institutes have their investment interest in almost all countries.
As of now India is facing heat on three grounds: (1) Our Share Markets are falling everyday, (2) Rupee is weakening against dollars and (3) Our banks are facing severe crash crunch resulting in shortage of liquidity in the market.
Actually all the above three problems are interconnected and have their roots in the above-mentioned global crisis.
For the last two years, our stock market was touching new heights thanks to heavy investments by Foreign Institutional Investors (FIIs). However, when the parent companies of these investors (based mainly in US and Europe) found themselves in a severe credit crunch as a result of sub-prime mess, the only option left with these investors was to withdraw their money from Indian Stock Markets to meet liabilities at home. FIIs were the main buyers of Indian Stocks and their exit from the market is certain to wreak havoc in the market. FIIs who were on a buying spree last year, are now in the mood of selling their stocks in India. As a result our Share Markets are touching new lows everyday.
Since, the money, which FIIs get after selling their stocks, needs to be converted into dollars before they can sent it home, the demands for dollars has suddenly increased. As more and more FIIs are buying dollars, the rupee is loosing its strength against dollar. As long as demands for dollars remain high, the rupee will keep loosing its strength against dollar.
The current financial crisis has also started directly affecting Indian Industries. For the past few years, the two most preferred method of raising money by the companies were Stock Markets and external borrowings on low interest rates. Stock Markets are bleeding everyday and it is not possible to raise money there. Regarding external borrowing from world markets, this option has also become difficult.
In the last fiscal year alone, India borrowed $29 billion from foreign lenders and got $34 billion of foreign direct investment. A global recession has hurt external demand. International lenders who have become extremely risk aversive can limit access to international capital. If that happens, both India’s financial markets and the real economy will be hurt in the process. Suddenly, the 9% growth target does not seem that ‘doable’ any more; we should be happy to clock 7% this fiscal year and the next.
However, one positive point in favor of India is the fact that Indian Banks are more or less secured from the ill-effects of sub-prime mess. A glance at Indian banks’ balance sheets would show that their exposure to complex instruments like CDOs is almost nil. In India, still the major banking operations are in the hands of Public Sector Banks who exercise extreme cautions in disbursing loans to needy people/companies. As a result, we are not likely to see a repeat of sub-prime crisis in India. Though there have been a presence of big US/European Banks in India and even some Indian banks (like ICICI) have some foreign subsidiary with stake in the sub-prime losses, there presence is miniscule as compare to the overall size of Indian banking industry. So at least on this major front we need not worry much.
However, a global depression is likely to result in a fall in demand of all types of consumer goods. In 2007-08, India sold 13.5% of its goods to foreign buyers. A fall in demand is likely to affect the growth rate this year. Our export may get affected badly.
A negative atmosphere, shortage of cash, fall in demands, reducing growth rate and uncertainties in the market are some of the most visible aspects of an economic depression. What started as a small matter of sub-prime loan defaulters has now become a subject of global discussion and has engulfed the global economy scenario.
Greed of some…woes of billions
If you think about this with a cool mind, you will find that the underlying cause of this depression is the greed of those who failed to anticipate the consequence of their actions. On a more ideological front, it is high time to have a rethink on the very idea of free markets and capitalism. I think the time has come to evolve a capitalism where everything works under a broad regulatory framework and we do not see a repeat of this condition where greed of some people can affect the lives of billions.
So here concludes my attempt to explain the current economic crisis which has started to affect the lives of all of us. The above explanation is very simple and by no means it presents an accurate picture (i.e the one that includes all the micro/macro factors) of the crisis. However, I hope that it must have given you a broad idea of the reasons behind current economic depression. Feel free to post your comments on this issue.
depression economy FIIs Housing bubble liquidity crunch. money market stock market crash Subprime crisisIf you wish to keep in touch, make sure you subscribe to my RSS feed!
Satish Lotlikar said,
Wrote on October 21, 2008 @ 6:46 am
You have detailed the issues very well.
Greed is a basic human trait and cannot be wished away. Such upheavals have taken place ( not necessarily in economics/finance} and humankind has found ways to overcome it.
21st Century mind is well equipped to take up the present challenge and overcome the setback. New systems and proceeses will be evolved to bring in order. Pressent state of information technology has made it easy for information to go around and ideas to overcome are pouring in from all corners of the globe.
Rest assured before long life would be as usual.
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blessie Reply:
November 3rd, 2008 at 8:22 am
thanks for your well detailed information
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kitty Reply:
December 2nd, 2008 at 11:23 am
thanks….it is really a good article..
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PhOeNiCs Reply:
December 8th, 2008 at 7:11 am
Thanx a lot for seving us a very short & perfect article…It’s very easy to understand…Nice job…!!!
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Ritvik said,
Wrote on October 22, 2008 @ 11:43 am
I found this explanation very simple and succinct. Very easy to understand. Good job!
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Avneet said,
Wrote on October 23, 2008 @ 9:30 am
Good article put up in a simple way to understand the reasons behind the Global recession and its effects on Indian Economy.
Rightly stated that Indian Banks mostly constituting PSU’s exposure is almost nil to the crises .The only major concern is the FII investments that had been made which is leading to our stock markets to fall and depreciation of our currency.
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Tarakanta said,
Wrote on October 25, 2008 @ 4:23 am
Thank you very much for a good explanation.
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Gitaanjali said,
Wrote on October 28, 2008 @ 8:36 pm
Amazing description of the current conditions. Best part about your article was that it was simple to understand.Good work!!
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Birendra David said,
Wrote on October 30, 2008 @ 1:25 am
Thank you for an enlightening article.
I agree with your inter-banking situation. The banks have become very myopic in their vision due to their losses in sub-prime crisis and are unable to lend hands to others to tide over the crisis.
It is incumbent on the government of the respective countries to intervene and set directives for their financial institutions.
I am confident that we will tide over this crisis in a year or so.
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Manisha Bisht said,
Wrote on November 1, 2008 @ 6:59 am
I found this article very enlightening and without any circumlocution. The interbanking situation mentioned is very rightly described.
Though i feel that the repercussions that world may have to face in the coming years because of this recession could have also been elborated upon.
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Eklavya Reply:
November 1st, 2008 at 7:57 am
Hello Manisha,
The article was an attempt to understand the causes of recession. The repercussion or ill effects will be described in a subsequent article if possible.
Regards
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sakshi said,
Wrote on November 1, 2008 @ 1:58 pm
too good, explained me all about the ongoing turmoil and i can discuss with anyone on this topic now
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Ram said,
Wrote on November 1, 2008 @ 4:09 pm
Very well explained. Felt like reading a text book. Keep it up.
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Muhammad Jawad Naseer said,
Wrote on November 4, 2008 @ 4:33 pm
mate,
you have described the reasons for the present crisis very well and detailed.
on the contrary i would like to add that asian markets are not going to be much affected with this especially pakistan and india because as u mentioned that
indian banks pledged loan very soundly and to those companies who provided good interest rates. while in US
everyone started purchasing things on credit which created a big liquidity crunch when the banks claimed their amount and thus created a hectic job for the US banks.
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Doug Reply:
November 16th, 2008 at 8:33 am
I would like you to know that all Americans did not purchase things on credit. We are a married couple in our early 40’s. Home, car, all things are paid, no debt. Our retirements saving accounts are funded via automatic payroll deduction at the maximum amount that our government allows. Most of the people we know are like us.
Approximately 1 in 10 families are the ones who took advantage of these loose lending practices. Actually, 1 in 10 families having poor financial discipline is nothing new. What was new was over the 5 years in the early part of the decade these people were given loans as described in the article.
We saw real estate values climb to crazy levels. Home prices have now returned to where they should have been. Some areas are still a bit too high, some have overcorrected and are a bit too low, but now the market is at levels consistent with long term history.
My reason for posting is so you don’t think all Americans are reckless sped free people. We are as upset with this situation as you are upset.
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Eklavya Reply:
November 16th, 2008 at 8:43 am
Sir,
Thanks for posting your valuable comments. I appreciate your concern about image of your countrymen abroad. This article is not intend to paint a negative picture of Americans. It is just an attempt to present the main reason of current global crisis in the simplest language possible. I also feel that nowhere in this article, I have tried to blame Americans for this mess. In fact I think even sub-prime lenders are also not responsible for this. The problem starts when big investments banks started buying CDOs without exercising any common sense on their part.
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ASMAVIL said,
Wrote on November 8, 2008 @ 5:15 am
Hats off!
Probably the best reasoning possible…
The crucial point of MBS and CDOs and mutual funds and their differences are well covered…
This is a very satisfied and complete article on reasons for global recession
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Nitin Arora said,
Wrote on November 9, 2008 @ 8:41 pm
This article has made me to understand the reasons for the global meltdown to a greater extent.
From this one can predicts what ills can happen to the global economy in future if cupidity of human is not capped.
Great Job.
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Sucharita Tyagi said,
Wrote on November 11, 2008 @ 5:45 am
thanks a ton….
you have no idea how much this article of yours has helped my case..
cheers!
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mayank yadav said,
Wrote on November 12, 2008 @ 5:56 am
a very comprehensive article on causes of global recession.
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Ankit said,
Wrote on November 12, 2008 @ 10:15 am
The best ever article on net, which I read about sub prime crisis and its causes. Thanks a lot.
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Akash said,
Wrote on November 13, 2008 @ 6:27 am
dont have any adjectives to praise. Simply the best
thank you
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sumant kumar behera said,
Wrote on November 18, 2008 @ 8:52 am
The article presented by you is apparently simple and interesting.
your endeavour to present the broad reasons behind the current economic recession has been successful. Your attempt to save it from using economic jargons and lingo is also acknowledged.
great job done and thanks ………..
sumant
ceo-htpl
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DEBABRATA ROY said,
Wrote on November 20, 2008 @ 3:05 am
matter has been well discussed by you but could you explain why other Europion Countries like Germeny,france ,Italy,uk have also faced this situation which they could not since 2nd worldwar and they are not the countries with substantial subprime deal like USA
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Eklavya Reply:
November 22nd, 2008 at 5:23 am
Hello Debabrata,
As I mentioned in the article, the prime reason for this global crisis is heavy buying of Mortgage Backed Securities (related to subprime loans) by major International Banks and Financial Institutions. Since these securities turned into heavy loss making properties, the credit facilities of these banks/institutions got severely affected. Owing to the presence of these major International Banks and Financial Institutions in all parts of Europe, a tight situation of liquidity crunch has emerged in the financial sectors of these countries.
As I already stated, in today’s globalized world no country can remain immune to the financial upheaval in other countries/major markets. As such what affects one, will affect another. That’s why seeing this phenomenon of financial turmoil even in those countries with negligible subprime deals.
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shobhit jain said,
Wrote on November 20, 2008 @ 6:40 am
Thanx for the useful information.
superb effort.
Can u plz throw some light that how will the IT industry of India will be effected by the crisis.
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mansi babyloni said,
Wrote on November 20, 2008 @ 12:26 pm
thank you so much for the over simpified view of the much talked about financial crisis. i had been looking for an understandable explaination for quite some time….and yipeeeeeeee the search ends here. thank u!
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Kanupriya Anand said,
Wrote on November 20, 2008 @ 3:48 pm
Thank you so much!! your article has been a life saver! it is so easy to understand and the explanation is very explicit and just what is needed.
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kishan salian said,
Wrote on November 22, 2008 @ 12:06 pm
Thanks for your article it explained most of the aspects in a simple language. Keep writing…
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Anju said,
Wrote on November 24, 2008 @ 1:40 am
Thankyou soo much for making all of understand soo well in verry simple langiage.
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Anoop Mathews said,
Wrote on November 24, 2008 @ 8:40 am
All I knew before reading this article was the current depression has its roots in the US housing loan fiasco. Now I see the big picture - the beginning, the spread and the Indian market.
Well explained.
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Deepti Verma said,
Wrote on November 24, 2008 @ 9:41 am
Thanks the above article amswred most of my question.
Keep writing.
Cheers…
Deepti Verma
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Piyu Mishra said,
Wrote on November 25, 2008 @ 2:26 am
The article is really good and very easy to understand.
Please keep writing about the present issues in such simple ways.
I could very clearly understand the zist of the global recession.However why did you wrote that last line
“The above explanation is very simple and by no means it presents an accurate picture of the crisis.”
Isn’t the article represents the accurate picture of crisis?
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Eklavya Reply:
November 26th, 2008 at 12:01 pm
Hello Piyu ! I admit that this line is a bit confusing. Yes this article represent the accurate picture of the crisis. From that line, I intended to say that the above explanation is simple and covers only the major background reason for the current economic crisis. However, it does not contain other micro/macro causes that might have contributed in the global recession.
I have made some modification in that line to make it clearer.
Regards,
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D Kumar said,
Wrote on November 29, 2008 @ 6:55 am
well explained and informative article.It has a big weight on the teaching side.I add here that its effect on India will b very big. The foreign reserve in india is more than 250 billion$ and if the $ keeps on exiting like this than very very doomms days are ahead.And also lot of our highly paid executives work for these foreign companies and if they can not pay for their EMIs than the situation can b like USA. Not only that lots of our people who have taken loans under the expectations that they will pay as their businesses improve, will b defaulters now.so it is just the start of the vicious circle.I think u can explore a bit deeper this lead.
D Kumar
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Hamayun Hassan said,
Wrote on December 1, 2008 @ 2:33 pm
thankzz a lot…. u have done really good work…. i m really happy to know the genuine cause of this recession… would u explain ur thoughts that how to solve the biggest problem “recession” b solved….
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Chuck K. said,
Wrote on December 1, 2008 @ 6:19 pm
Your article clearly defined how we got into this mess.
Question is: what are the possible solutions to correcting the problem? You have such a great grasp on the problem I hope that you can provide also some suggestions as to minimize the time for recovery.
CNN and other cable channels just add fuel to the fire with their fair and balanced opinions about the situation and who is at fault but no solutions are provided.
The consumer who has been the backbone of the economy is truly scared to death and are pulling back from making purchases that would positively stimulate the situation even if they can afford to do so.
I pray every day that Obama and his advisors will take the correct steps in the US and work globally to resolve these issues.
My retirement will occur in just a few years and I look forward to it being a happy time with few things to worry about - today I am really worried.
thanks
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Eklavya Reply:
December 3rd, 2008 at 12:07 pm
Sir,
Governments all over the world are already taking actions to tackle with the situation. Since the problem has wide spread ramification, it will take some time to become normal again. Just as the positive cycle of housing boom did not last, the negative cycle of depression will also not last forever.
Ups and downs are part of life. I don’t think you need to worry a lot. By the time your retirement comes, in all likelihood the economic condition will come back to normal.
If time permits, I shall try to write an article on the possible solutions for economic recession
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preeti arora said,
Wrote on December 3, 2008 @ 2:43 pm
sir this is really a good article to understand this mess.i request u to please write some more on it
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sharad & sonal said,
Wrote on December 5, 2008 @ 12:02 am
thank u sir
a very good description which helps us to have a clear picture of current scenario also a good description with simple language.
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Merin said,
Wrote on December 7, 2008 @ 12:50 am
Great Info…
Just a quick question: You did not mention anything about oil.
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balki said,
Wrote on December 9, 2008 @ 9:21 am
well that’s a good effort taken, describing the roots of the global recession….in the most simplest way.
well i could just come out with the most simple understanding is that, generally specially americans who are most assumpted to have dignified with the moral instincts of mankind were such reckless creed causing the worst.
the only thing is that, unless and until if humanbeing finds a solution to overcome this kind of greed or an excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth.. there is absolutely no solution for an even more disaster to overcome…
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Eklavya Reply:
December 14th, 2008 at 7:28 am
Well it is not appropriate to blame all Americans for this. The real culprit is an unbridled system of free markets where greed often prevails and make even the most judicious person a complete foolish.
Your conclusion is most appropriate. We all need to find a solution to overcome this kind of greed or an excessive desire to acquire or possess more than what one needs or deserves.
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Talha said,
Wrote on December 10, 2008 @ 3:56 pm
Hi,
You have made it as simple as it can be..I had been trying to understand the whole credit crunch mechanism and your article explains it all…
Thanks a lot for this work..
keep writing..
Cheers
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Sandeep said,
Wrote on December 14, 2008 @ 3:06 am
The article is very simple and excellent. Good work.
Thanks.
-Sandeep.N
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Reece said,
Wrote on December 14, 2008 @ 6:15 am
Great explanation of the crises (thanks!) but it doesn’t explain why governments haven’t forced banks into exposing their liabilities to the sub-prime CDOs etc, surely a forced transparency would have killed this question of potential risks at an early stage? Instead the governments have spent billions trying to increase liquidity?
Secondly there is the question of the inflated economy, the link to the FED bank (its control by the 12 privately owned banks) and the question about the ‘Federal banking system’ (After the 1913 act) verses a system linked to a ‘precious metal’ (like the gold standard) in light of recent events.
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Eklavya Reply:
December 14th, 2008 at 7:41 am
To be honest, I wanted to focus just on the main cause of this crisis. That’s why I did not cover the secondary causes of this crisis.
Feel free to elaborate on these causes if you like. It will be an additional knowledge boosters for all of us.
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Vishal said,
Wrote on December 14, 2008 @ 3:36 pm
Nice stuff to read and understand.
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Anoop K Joseph said,
Wrote on December 16, 2008 @ 12:58 am
My Nane is Anoop K Joseph and I Was an Underwriter For an Us Based Mortgage Called Phh. I Would Like to Mention Something about.
” Underwriting Credit , Income , Property and asset Related Documents For the Mortgage From India “Outsourced” Without Quality Is the Main Reason For this turmoil
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saras said,
Wrote on December 17, 2008 @ 1:56 am
the article is just too simple to understand and gave a very easy and fast understnading about the issue…
thank you
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Mukesh kumar Shukla (I.B.S)Ahmedabad said,
Wrote on December 19, 2008 @ 10:27 am
REally this article is worthwhile to read.
good one
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Soujanya said,
Wrote on December 22, 2008 @ 7:29 am
I was unaware of the causes of Recession and how it is related to IT field , being an IT employee myselves.
This article explained clearly abt the Reasons and the post effects.
Thanks a lot.
[Reply]
LATHA LK said,
Wrote on December 22, 2008 @ 9:48 am
WE INDIANS WISH AMERICAN ECONOMY SPEEDY RECOVERY. LET US ALL LEARN THE LESSON FROM THIS EPISODE AND HAVE FINANCIAL DISCIPLINE SO AS TO AVOID ECONOMIC INCONVENIENCES TO THE MILLIONS OF PEOPLE ACROSS THE WORLD
[Reply]
Rohit Nath said,
Wrote on December 22, 2008 @ 11:30 am
dont u think US war tendency is also the prime factor behing recession. u’vnt consider this factor.
need reply
[Reply]
Eklavya Reply:
December 22nd, 2008 at 1:37 pm
No US war tendency is not the prime reason for this global recession. A war requires enormous amount of money to sustain itself. A country at war requires all kinds of good to support its army. You require weapons to fight, fuel to fly jets & drive tanks, food for soldiers, spare parts for machinery and many more related products. As such a War turns out to be a huge stimulus for demands and boosts the economy. This is quite ironic but in fact a bitter truth.
Of late, owing to many domestic and International reasons, the capacity of US forces to fight long protracted wars in remote battle field has been affected. A decrease in war activity will actually harm the US economy as it will result into low demands for goods.
Hope you got the point as to why I did not consider this factor.
[Reply]
Amit Shukla said,
Wrote on December 27, 2008 @ 6:28 am
this is the most simplest and easy explanation available in the net for understanding subprime crisis and global recession. Thanks for your superb efforts to explain complicated things in the simplex way, even the people who are not aware of jargons of financial world. will find it easy…good work…keep it up.
regards
Amit
[Reply]
Eklavya Reply:
December 27th, 2008 at 11:23 am
Thanks Amit
[Reply]
Qazi Nadeem said,
Wrote on December 28, 2008 @ 7:58 am
The description of currnet finnacial crisis which is presented by you is surely a masterpiece , although everybody is having a little idea about this. But your article makes the whole picture crystal clear.
Today due to globalisation most of the econimies are interlinked and banks are the institutions which manage the life blood of economy ,ie: the money . This current fiscal crisis is the result of not anticipating the natural trend of eocnomic growth. And investment in risky portfolios to get higher returns in lesser time.
[Reply]
Ravi Kompella said,
Wrote on December 28, 2008 @ 9:31 am
The article is certainly the best and in the simplest form to understand the crisis.
If someone has to be optimistic, by when can the US federal bank take control of the situation and resolve it? Since you have also mentioned that the indian banks are not much effected (though a bit), am I right in saying that there is a lot of speculation in india about the global meltdown and as a result the consumer/SMBs are hesitating to spend their money on new initiatives?
If that is right, shouldnt there be someone (government or the banks or someone) make the public aware about it and ensure our enconomy grows by people spending their money? I think one should do it on priority.
I am in IT industry and the speculation of meltdown hitting indian markets is making the SMBs hesitate to spend on new projects in a ignorance that this might not be the right time to start those initiatives. This infact, is impacting other businesses which are dependant on the SMBs. People are talking about hiring freeze, travel freeze, expense freeze, etc..
I think something should be done about it. Does anyone agree to me?
Thanks
Ravi
[Reply]
Dheeraj said,
Wrote on January 1, 2009 @ 3:03 am
Hi,
Its a gr88 article.Really simple and excellent way to understand the current crisis we are in.
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kumar raj said,
Wrote on January 2, 2009 @ 1:28 pm
very useful
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