The Anatomy of a Recession

  • SumoMe

The media spotlight in the recent times has glared excessively on the happenings on the Wall Street and has heightened the concerns of the commoners who aren’t well versed with the lingo used in Wall Street.  This avalanche of media blitz has added another chapter of confusion which has now become a hallmark of that place. The front pages of the financial press are abounding with the commentaries findings and surveys done by estimable international institutions and economists and which are often at cross purposes with each other. This conflicting theories and viewpoints are the principal reason behind the pandemonium which pervades outside the vicinity of the place. The apparent attempts in the editorials to explicate the jargon have yielded no results whatsoever. Terms like credit crunch, sub prime mortgages and recession were alien concepts and were no where even near the fringes of the colloquial language. It is a stark contrast to the present times with every conversation now replete with words like these.

 

The provenance of the present financial morass lies in the autumn of 2007. The whole crisis began with the rise in the US fed interest from 1% to 5.36% which led to the decrease in falling prices of housing and the home loan owners defaulting on the loans leading to total collapse in the housing market. The loans on these mortgages were packed as complex derivatives and were sold throughout the world via the investment banks on the Wall Street. The crisis came to a head with the collapse of Bearn Stearns in March followed by the Bankruptcy of Lehman Brother- another investment bank.  The failure of the investment bank was only the beginning of the phenomenon which is now referred to as ‘Global Recession’ which is the sustained decline in economic activity in the economy. Sustained recession may lead to depression eventually. The immediate fallout of the banking crisis was the complete freeze of lending on the WALL STREET.  Companies couldn’t find money to finance their day to day operations or couldn’t reef up enough funds for further expansion. As a result the whole consumer spending took a severe hit and the country entered the first phase of slowdown. The crisis mirrored itself in the form of volatile stock markets throughout the major economies of the world  and matched only by the equally volatile global currency markets .The ripples of the crisis were felt throughout the world making it clear that US was the undisputed engine of growth for the rest of the countries. Some major economies of the world were fed by the colossal US consumption demand which is often the subject of censure by the economist worldwide. The fear of recession in the US, wrought the out ward flow of money from the countries in the form of sell offs by the foreign investors who are ploughing the money back to their head offices in US causing imbalances in the economies and contraction of demand in general. It also made clear the point that the Globalization has arrived and the argument of decoupling- the separation of Asian and Euro economies from US holds no water.

 

No amount of crystal grazing can predict the course of global economy. It will be a matter of time when the countries pick up the threads and begin anew. Although economist throughout the world are sanguine about the global prospects, and view it as an opportunity to correct the failings of the past. It is a chance to realign the global imbalances both political and economic. The era of single country dominance is over and the recession will see the emergence of new countries that will change the way businesses in the countries work. It is not a matter of “If” but only a matter of “when”.

 

Geetu Batra

 

 

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