The United States has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. Below you will find a detail history of economic recession in the United States
RECESSION IN UNITED STATES OF AMERICA By- Siddhu.S
In economics, the term recession describes the reduction of a country's gross domestic product (GDP) for at least two quarters .
A Recession is a contraction phase of the business cycle.
National Bureau of Economic Research (NBER) is the official agency in charge of declaring that the economy is in a state of recession.
They define recession as : “ significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales ”.
U.S ECONOMIC RECESSION HISTORY The United States has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. Let’s see a detail history of economic recession in the United States -:
In the US, borrowers are rated either as ‘prime’ - indicating that they have a good credit rating based on their track record - or as ‘sub-prime’, meaning their track record in repaying loans has been below par.
Loans given to sub-prime borrowers, something banks would normally be reluctant to do, are categorized as sub-prime loans. Typically, it is the poor and the young who form the bulk of sub-prime borrowers
What Was The Interest Rate On Sub-prime Loans?
Since the risk of default on such loans was higher, the interest rate charged on sub-prime loans was typically about two percentage points higher than the interest on prime loans. This, of course, only added to the risk of sub-prime borrowers defaulting.
The repayment capacity of sub-prime borrowers was in any case doubtful. The higher interest rate additionally meant substantially higher EMIs than for prime borrowers, further raising the risk of default.
In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries.
They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes.
Government also encouraged lenders to lend to sub-prime borrowers, arguing that this would help even the poor and young to buy houses.
With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime 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.
The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value.
Since in home loans in the US, the collateral is typically the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle.
That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.
For internal use only
for years the prices of homes in the U.S. kept rising. for years the prices of homes in the U.S. kept rising. for years the prices of homes in the U.S. kept rising. for years the prices of homes in the U.S. kept rising. for years the prices of homes in the U.S. kept rising. Thus Result Overconsumption/ Extravagant spending by the consumer For years prices of homes in US kept rising
In early July, depositors at Los Angeles offices of Indy Mac Bank lined up in the street to withdraw their money. On July 11,Indy Mac - the largest mortgage lender in the US - was seized by federal regulators.
During the weekend of September 14-15, Lehman Brothers declared bankruptcy after failing to find buyers.
An investment bank uses its proprietary book (own money) to lend others and invest. It started with the subprime crisis. Banks like Lehman, buy mortgage loans from other banks, and then package them to sell bonds against the loan pool. Often they add cash to make the loan pool more attractive, so that the bonds can be sold at a higher price.
Suppose mortgage was earning 6%, these bonds are sold at 4%. The difference is the spread which the investment bank earns. By selling these structured bonds, it raises money and frees capital. But when homebuyers started defaulting, these bonds lost their value. It all began like this, and then the virus spreads across markets .
A slowdown in the US economy is bad news for India.
Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking.
The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring down oil prices to $70.
Between January 2001 and December 2002, the Dow Jones Industrial Average went down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000. In contrast, the Sensex was down 45 per cent.
The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to totally decouple itself (or be independent) from the rest of the world, say experts.