Recession 2008 : Comparison with The Great DepressionPresentation Transcript
Recession 2008 : Comparison with The Great Depression Presented By:
What is Recession ?
In economics, a recession is a business cycle contraction, a general slowdown in economic activity.
During recessions, many macroeconomic indicators vary in a similar way.
Production, employment, investment spending, capacity utilization, household incomes and business profits all fall.
Bankruptcies and the unemployment rate rise.
Types of Recession V-shaped recession U-shaped recession The Recession of 1973–75 in the United States could be considered a U-shaped recession. The Recession of 1953 in the United States is a classic V-shape.
L-shaped recession W-shaped recession The early 1980s recessionn the United States is an example of a W-shaped recession. L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble in 1990.
The Housing Bubble Burst The Subprime Mortgage Fiasco RECESSION 2008 : Causes RECESSION 2008 : Causes Sky-High Price of Crude Oil and Refined Product Dollar Devaluation
The Housing Bubble Burst
In US, a boom in the housing sector was driving the economy to a new level.
Home Loans became cheap and demand increased.
Lending institutions and mortgage firms wanted to give loans to as many potential customers as possible.
People even under the NINJA category were given housing loans.
Overbuilding of houses led to decline in prices and refinancing became difficult.
As prices declined, more homeowners were at risk of default and foreclosure.
The Subprime Mortgage Fiasco.
Continuous Monetary Inflation suckered individuals into low-down-payment/low-interest adjustable mortgages.
Incentive is to sell the property quickly
Various institutions that hold the poorly performing debt obligations were forced to 'write down' the value of these assets.
Record supply availability, falling prices, higher insurance costs and restricted credit were prevalent.
Sky-High Price of Crude Oil and Refined Product.
World-wide speculative Middle East war fears .
Increase in demand (especially from China).
Increasing energy prices.
High Costs of Production.
Caused by Iraq blunder and the Federal Reserve–generated oversupply of dollars.
The bulk of crude oil purchases takes place in dollars.
Investments such as US Treasury bills and bonds become less attractive.
Prevents the Federal Reserve from pushing US interest rates much lower.
EFFECT ON THE WORLD
Worse hit are the poorest countries.
The 15-country Euro zone were defined as a shrinking economy for two consecutive quarters.
Decreased demand for exports and remittances slowed down the Asia-Pacific economy.
Fall in house prices and increase in unemployment in the UK economy .
India recovered early as there was very little exposure to foreign assets and their derivative products.
The Great Depression The American economy went from unprecedented prosperity in the 1920s to unprecedented misery in the 1930s .
What is Depression?
A depression is a sustained, long-term downturn in economic activity in one or more economies.
Considered, by some economists, a rare and extreme form of recession
Characterized by abnormally large increases in unemployment, falls in the availability of credit and large number of bankruptcies
Price deflation, financial crises and bank failures are also common elements
Stock Market Crash 1929
THE GREAT DEPRESSION : CAUSES
Reduction in Purchasing Across the Board
American Economic Policy with Europe
Stock Market Crash 1929
Black Tuesday, October 29, 1929.
Dow Jones industrial average dropped over 12%.
Result of mass panic selling of stocks, causing prices to plummet .
Flood of sell orders provided stock prices to traders.
Stockholders lost more than $40 billion dollars.
By the end of 1930, America truly entered what is called the Great Depression.
Throughout the 1930s over 9,000 banks failed.
People who had their life savings in the banks – lost their money.
Individuals from all classes stopped purchasing items.
Reduction in Purchasing
Reduced Production leading to reduction in Workforce.
Unemployed were unable to pay installments on their items, which were ultimately repossessed.
Unemployment rate rose above 25%.
American Economic Policy
Government created the Smoot-Hawley Tariff in 1930.
Charged a high tax for imports thereby leading to less trade between America and foreign countries.
Drought occurred in the Mississippi Valley in 1930.
People could not even pay their taxes or other debts .
Forced to sell their farms for no profit to themselves.
The area was nicknamed "The Dust Bowl."
KEYNESIAN APPROACH (1933-1942)
Expansionary fiscal policies forced by the war had brought output back to potential by 1941.
The U.S. entry into World War II led to much sharper increases in government purchases.
It ended the Great Depression.
By 1942, increasing aggregate demand had pushed real GDP beyond potential output.
Comparison between Recession 2008 & The Great Depression 1929