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Economic Analysis- Financial Crisis
- 1. The Great Depression 1932 The Suez Crisis The International Debt Crisis The OPEC Oil Price Shock The Global Economic Recession
- 4. The Great Depression Time Period: 1929-1933 Duration(Months): 43 Global GDP Decline: - 26.7% Peak Global Unemployment: 24.9% Source: Wikipidia
- 5. The Great Depression •On October 25, 1929 the New York Stock Exchange saw 13 million shares being sold in panic selling. •During the 1920s, America experienced such a run-up of stock prices which attracted millions of Americans into financial speculation. •There was no rational explanation for the collapse of the American markets in October 1929. Source: Wikipidia
- 6. The Great Depression •Nearly US $ 30 billion were lost in a day, wiping out thousands of investors. •In the aftermath of the US stock market crash, a series of bank panics emanated from Europe in 1931 spreading financial contagion to United States, United Kingdom, France and eventually the whole world spiraled downward into the Great Depression. Source: Facts.net
- 7. The Great Depression •Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. •Around 11,000 banks failed during the Great Depression, leaving many with no savings. •In 1929, unemployment was around 3%. In 1933, it was 25%, with 1 out of every 4 people out of work. Source: http://nationalarchives.nic.in/
- 8. The Great Depression •The average family income dropped by 40% during the Great Depression. •In the period 1930-32, money supply in the United States fell by 26 percent, Germany by 27 percent, in United Kingdom and France by 18 percent. Source: Wikipidia
- 9. The Great Depression How did it end? •The “New Deal” of President Franklin Roosevelt brought in a sweeping reformation of the US economy. •The “New Deal” was the first step in the United States muscular emergence from the Great Depression, and the beginning of the country’s rise to become the undisputed “leader of the free world.” Source: http://nationalarchives.nic.in/
- 11. THE INTERNATIONAL DEBT CRISIS •The international debt crisis began on August 20, 1982 • Mexico could not repay the loan that was due and engulfed 20 countries. This was the commencement of a decade long international debt crisis. •The monetary contraction in the United States in the 1970-80 period resulted in a sustained appreciation of the US dollar. It made repayments in dollar terms impossibly difficult for most countries of Eastern Europe and Latin America. The commercial debt crisis erupted in 1982 and lasted till 1989. Source: http://nationalarchives.nic.in/
- 12. THE INTERNATIONAL DEBT CRISIS •In the 1970s, developing countries borrowed freely. •Several developing countries had reached borrowings 12 percent of their national income. •Highly profitable activity for commercial bank. Source: http://nationalarchives.nic.in/
- 13. THE INTERNATIONAL DEBT CRISIS •.The International Debt Crisis lasted from 1981 to 1989. It covered nearly 20 countries around the world. • East European countries affected were Poland, Romania and Hungary •Major Latin American countries affected were Chile, Brazil & Ecuador. Source: http://nationalarchives.nic.in/
- 14. THE INTERNATIONAL DEBT CRISIS •The systemic crisis gradually subsided by 1983, although debt servicing difficulties remained. The period 1985-87 was a period of sustained growth and developing countries could reduce the burden of servicing debt. •By 1989, there was a marked improvement in external economic environment facing many of the indebted countries which brought an end to the international debt crisis. Source: http://nationalarchives.nic.in/
- 15. 1973 Oil Crisis
- 16. 1973 Oil Crisis •The OPEC oil embargo was a decision to stop exporting oil to the United States. In 1973, the 12 OPEC members agreed to the embargo. •The embargo sent gas prices through the roof. Between 1973-1974, prices more than quadrupled.
- 17. 1973 Oil Crisis •The embargo was targeted at nations perceived as supporting Israel during the Yom Kippur War. •By the end of the embargo in March 1974,[ the price of oil had risen nearly 400%, from US$3 per barrel to nearly $12 globally
- 18. 1973 Oil Crisis •The oil embargo aggravated inflation by raising oil prices. •It came at a vulnerable time for the U.S. economy with domestic oil producers were running at full tilt. •It also worsened the recession. First, higher gas prices meant consumers had less money to spend on other goods and services. This lowered demand. It also weakened consumer confidence. People were forced to change habits, making it feel like a crisis that the government tried unsuccessfully to resolve. This lack of confidence made people spend less.
- 19. 1973 Oil Crisis •In March 1974, restrictions were lifted after negotiations at Washington Oil Summit. •The reason being the dependence of middle east countries on Oil Income. •Along with that, research & discovery of alternatives.
- 20. Dot-com Bubble
- 21. Dot-com Bubble Background on Financial Bubbles •A boom in the stock prices of a certain industry followed by a sudden drop. •Investor's put high bids on stock driving the stock’s prices above the fair value of its actual worth. •Bubble bursts and stock prices fall to their true values causing a drop in the total value of the market. Source: http://nationalarchives.nic.in/
- 22. Dot-com Bubble Start in the boom •Rise in the number of internet users lead to increase in “dot-coms”. •Start of a new economy •Between 1995 and its peak in March 2000, the Nasdaq Composite stock market index rose 400% only to fall 78% from its peak by October 2002, giving up all its gains during the bubble. Source: http://www.thebubblebubble.com/
- 23. Dot-com Bubble Start in the boom •Lack of clear business plan & no earning. •New millionaire every 60 seconds in silicon valley. Source: https://www.slideshare.net/
- 24. Dot-com Bubble Dot-com Bubble Popped •Reality started to sink in. •Investors soon realized that the dot-com dream had devolved into a classic speculative bubble. •Fell 78% from its peak by October 2002, giving up all its gains during the bubble. •NASDAQ stock index crashed from 5,000 to 2,000 •Panic selling ensued as the stock market’s value plunged by trillions of dollars Source: https://www.slideshare.net/
- 26. The Great Recession •In 2008 severe recession unfolded in the United States and Europe which was the deepest slump in the world economy since 1930 and first annual contraction since the postwar period. The financial crisis which erupted in 2007 with the US sub-prime crisis deepened and entered a tumultuous phase by 2008. Source: http://nationalarchives.nic.in/
- 27. The Great Recession •The United States GDP fell by nearly 4 percent in the 4th quarter of 2008 with the broadest of US market indices, the S&P500 down by 45 percent from its 2007 high. •World GDP growth slowed down from 5 percent in 2007 to 3 ¾ percent in 2008 and 2 percent in 2009. The IMF estimated the loan losses for global financial institutions at US $ 1.5 trillion. The Lehman Brothers collapsed in September 2008. Source: http://nationalarchives.nic.in/
- 28. The Great Recession Source: http://nationalarchives.nic.in/ Causes •Housing Bubble Burst in 2005-06 •Subprime mortgage crisis.
- 29. The Great Recession Source: http://nationalarchives.nic.in/ Consequences •Global recession As the financial downturn in the US continues irresistibly, the recession now starts to spread globally. The world economy is nowadays linked together so close and interactions between companies, investors and banks increased heavily the last decades. In late 2008 the world stock market reacts to the crisis with a tremendous fall. In Europe several subsidiaries and offices of the banking companies had to close and banks in Germany for example had to be rescued by the government as they also invested heavily in American real estate securities. Consumers around the world consume less and spend less because they either lost money or feared to lose their jobs in an insecure development.
- 30. The Great Recession Source: http://nationalarchives.nic.in/ Consequences •Exports especially in the US collapsed •Highly dependent from the US market, Chinese manufacturers faced problems as their major markets stopped to invest and reduced demand. •In China more than 10 million migrant workers lost their jobs. Unemployment’s rates in the US also “shot up to 7.2% in December from its recent low of 4.4% in March 2007. •The recession had reached almost every sector of the world economy.
- 31. The Great Recession Source: http://nationalarchives.nic.in/ Recovery •Policymakers around the world faced the daunting challenge of stabilizing financial conditions while simultaneously nursing their economies through a period of slower growth and containing inflation. • The policy actions included programs to purchase distressed assets, use of public funds to recapitalize banks and provide comprehensive guarantees, and a coordinated reduction in policy rates by major central banks.
- 32. The Great Recession Source: http://nationalarchives.nic.in/ Recovery •By October 2009, economic growth turned positive as wide ranging policy intervention supported demand and lowered the uncertainty of systemic risks to the financial system. •Return of consumer confidence with firmer confidence in housing markets.
- 33. The Great Recession Source: http://nationalarchives.nic.in/ Countries that avoided recession • India, Uzbekistan, China, and Iran experienced slowing growth, they did not enter recessions. •The financial crisis did not affect developing countries to a great extent. Experts see several reasons: Africa was not affected because it is not fully integrated in the world market. Latin America and Asia seemed better prepared, since they have experienced crises before.
- 35. COVID-19 (Corona Virus) Crisis •Brought the global economy to a standstill and plunged the world into a recession. •Almost all countries and territories have reported cases of COVID-19, the disease caused by the coronavirus. •The worldwide cases have crossed 1.7 million mark leading to deaths of more than 100000 people.
- 36. COVID-19 (Corona Virus) Crisis •impossible for economists to predict the endgame of this crisis •IMF sees coronavirus- induced global downturn 'way worse' than financial crisis •Emerging markets and developing economies have been hard hit by the crisis
- 37. COVID-19 (Corona Virus) Crisis •Nearly $90 billion in investments had already flowed out of emerging markets, Impact could cause equivalent of 195 million job losses •COVID-19 likely to shrink global GDP by almost one per cent in 2020. •Indian GDP can see a downfall of almost 2%. Source: un.org
- 38. COVID-19 (Corona Virus) Crisis •The pandemic is disproportionately hurting millions of lower-wage workers in service sectors •Absent adequate income support, many will fall into poverty, even in most developed economies, worsening already high levels of income inequality •The effect of school closures could make the educational divide more pronounced, with possible long-term consequences. • Source: un.org
- 39. Thank You! Presented By: Ananya Sharma Nitesh Agnihotri Rati Sharma Shreiyansh Kasliwal
Editor's Notes
- The Great Depression 1932 The Suez Crisis The International Debt Crisis The OPEC Oil Price Shock The Global Economic Recession Economic histories of Nations contain several success stories of economic reforms undertaken by them, but what are remembered most are the years of hardship suffered by millions of populations at times of Financial crisis.
- Financial crises have been an unfortunate part of the industry since its beginnings. Bankers and financiers readily admit that in a business so large, so global and so complex, it is naive to think such events can ever be avoided. Greetings for the day! Today we will talk about Financial Crises, Financial crises are, unfortunately, quite common in history and often cause economic tsunamis in affected economies. In this presentation you will find a brief description of six of the most-devastating financial crises of modern times.
- The first one is, The Great Depresssion
- On October 25, 1929 the New York Stock Exchange saw 13 million shares being sold in panic selling. During the 1920s the American economy grew at 42 percent and stock market values had increased by 218 percent from 1922 to 1929 at a rate of 20 percent a year for 7 years. No country had ever experienced such a run-up of stock prices which attracted millions of Americans into financial speculation. Nobody had seen the stock market crash coming and Americans believed in permanent prosperity till it happened. There was no rational explanation for the collapse of the American markets in October 1929.
- Nearly US $ 30 billion were lost in a day, wiping out thousands of investors. In the aftermath of the US stock market crash, a series of bank panics emanated from Europe in 1931 spreading financial contagion to United States, United Kingdom, France and eventually the whole world spiraled downward into the Great Depression.
- By 1930s, when the Great Depression came to its epitome, nearly 13 to 15 million Americans were unemployed and a large portion of the national banks were on the verge of shutting down. Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. Around 11,000 banks failed during the Great Depression, leaving many with no savings. In 1929, unemployment was around 3%. In 1933, it was 25%, with 1 out of every 4 people out of work.
- The average family income dropped by 40% during the Great Depression. In the period 1930-32, money supply in the United States fell by 26 percent, Germany by 27 percent, in United Kingdom and France by 18 percent.
- The “New Deal” of President Franklin Roosevelt brought in a sweeping reformation of the US economy, laying the foundations of the American welfare state – federal aid to the unemployed, stiffer regulation of industry, legal protections for workers, and the Social Security program. The “New Deal” was the first step in the United States muscular emergence from the Great Depression, and the beginning of the country’s rise to become the undisputed “leader of the free world.”
- The next is, THE INTERNATIONAL DEBT CRISIS
- On 12 August 1982, the Mexican government announced that it could not meet its forthcoming debt repayments on its $80 billion of outstanding debt to international banks. This was the first sign of the international debt crisis. Soon after the Mexican announcement a number of other less-developed countries (LDCs) announced that they too were facing severe difficulties in meeting forthcoming repayments. The monetary contraction in the United States in the 1970-80 period resulted in a sustained appreciation of the US dollar. It made repayments in dollar terms impossibly difficult for most countries of Eastern Europe and Latin America. The commercial debt crisis erupted in 1982 and lasted till 1989.
- In the 1970s, developing countries borrowed freely in the rapidly growing international credit markets at low interest rates. Banks had grown cash rich with large deposits from oil-exporting countries and there was increased lending to oil-importing countries. The loans were used on investment projects or to boost current consumption. Several developing countries had reached borrowings 12 percent of their national income, resulting in major debt-servicing difficulties. Commercial banks believed that sovereign lending to developing countries was a highly profitable activity.
- Mexico and Poland were the first manifestations of the impending crisis. Soon after Mexico, several countries in Latin America – Argentina, Brazil, Chile, Ecuador, Peru and Uruguay encountered debt-servicing problems. The International Debt Crisis lasted from 1981 to 1989. It covered nearly 20 countries around the world encompassing 30 different episodes.
- The systemic crisis gradually subsided by 1983, although debtservicing difficulties remained. The period 1985-87 was a period of sustained growth and developing countries could reduce the burden of servicing debt. By 1989, there was a marked improvement in external economic environment facing many of the indebted countries which brought an end to the international debt crisis.
- In the early 1970s, the oil consumption demand rose in US and this demand could not have been met by oil which was generated locally. The decline in in-house production, soaring demand and dependence on oil import led to spike in overall oil costs. However, the situation was not alarming yet as policymakers in Washington trusted Arab oil exporters and believed that Arab countries couldn't bear the loss of income from the U.S. market. These presumptions were destroyed in 1973,when an oil ban forced by individuals from the Organization of Arab Petroleum Exporting Countries (OAPEC) prompted fuel deficiencies and extremely high prices for oil and gas in the following years.
- The embargo was targeted at nations perceived as supporting Israel during the Yom Kippur War. The initial nations targeted were Canada, Japan, the Netherlands, the United Kingdom and the United States with the embargo also later extended to Portugal, Rhodesia and South Africa On October 19, 1973, President Nixon requested $2.2 billion from Congress in emergency military aid for Israel. The Arab members of OPEC responded by halting oil exports to the United States and other Israeli allies. By the end of the embargo in March 1974,[ the price of oil had risen nearly 400%, from US$3 per barrel to nearly $12 globally US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy
- The oil embargo aggravated inflation by raising oil prices. It came at a vulnerable time for the U.S. economy. Domestic oil producers were running at full tilt. They were unable to produce more oil to make up the slack It also worsened the recession. First, higher gas prices meant consumers had less money to spend on other goods and services. This lowered demand. It also weakened consumer confidence. People were forced to change habits, making it feel like a crisis that the government tried unsuccessfully to resolve. This lack of confidence made people spend less. For example, drivers were forced to wait in lines that often snaked around the block. They woke up before dawn or waited until dusk to avoid the lines. Gas stations posted color-coded signs: green when gas was available, yellow when it was rationed, and red when it was gone. States introduced odd-even rationing: drivers with license plates ending with odd numbers could get gas on odd-numbered days.
- In March 1974, restrictions were lifted after negotiations at Washington Oil Summit. The reason being the dependence of middle east countries on Oil Income. Along with that, research & discovery of alternatives. Over the long term, the oil embargo changed the nature of policy in the West towards increased exploration, alternative energy research, energy conservation and more restrictive monetary policy to better fight inflation
- The dot-com bubble (also known as the dot-com boom,[1] the tech bubble,[2] and the Internet bubble)
- First, we will understand what is a Financial Bubble. A boom in the stock prices of a certain industry followed by a sudden drop. Investor's put high bids on stock driving the stock’s prices above the fair value of its actual worth. Bubble bursts and stock prices fall to their true values causing a drop in the total value of the market.
- Rise in the number of internet users lead to increase in the number of internet companies called “dot-coms”. Speculators suggested this was the start of a new economy based on e-commerce The booming economy and stock market of the late 1990s inspired some economists to speculate that we were in a “New Economy” in which inflation was virtually nonexistent and where recessions were a relic of the past. According to this logic, the “Old Economy” represented traditional brick-and-morter businesses, which included sectors such as natural resources and retail stores. Some analysts even believed that corporate earnings and other financial data were not relevent for analyzing and investing in technology and internet-related stocks. In 1999 there was 457 IPOs in the US Stock market, most of which was internet related. Between 1995 and its peak in March 2000, the Nasdaq Composite stock market index rose 400% only to fall 78% from its peak by October 2002, giving up all its gains during the bubble.
- From 1996 to 2000, the NASDAQ stock index exploded from 600 to 5,000 points. “Dot-com” companies run by people who were barely out of college were going public and raising hundreds of millions of dollars of capital. Many of these companies lacked clear business plans and even more had no earnings whatsoever to speak of. At the peak of the dot-com bubble in 1999, it was said that a new millionaire was created every 60 seconds in Silicon Valley.
- By early 2000, reality started to sink in. Investors soon realized that the dot-com dream had devolved into a classic speculative bubble. Within months, the NASDAQ stock index crashed from 5,000 to 2,000. Hundreds of stocks such as Pet.com, which once had multi-billion dollar market capitalizations, were off the map as quickly as they appeared. Panic selling ensued as the stock market’s value plunged by trillions of dollars. The NASDAQ further plunged to 800 by 2002.
- The fifth one is The Great Recession
- In 2008 severe recession unfolded in the United States and Europe which was the deepest slump in the world economy since 1930 and first annual contraction since the postwar period. The financial crisis which erupted in 2007 with the US sub-prime crisis deepened and entered a tumultuous phase by 2008. The impact was felt across the global financial system including in emerging markets. The 2008 deterioration of global economic performance followed years of sustained expansion built on the increasing integration of emerging and developing economies into the global economy. Lax regulatory and macroeconomic policies contributed to a buildup in imbalances across financial, housing and commodity markets. The international financial system was devastated.
- The United States GDP fell by nearly 4 percent in the 4th quarter of 2008 with the broadest of US market indices, the S&P500 down by 45 percent from its 2007 high. World GDP growth slowed down from 5 percent in 2007 to 3 ¾ percent in 2008 and 2 percent in 2009. The IMF estimated the loan losses for global financial institutions at US $ 1.5 trillion. The Lehman Brothers collapsed in September 2008.
- The causes of the Great Recession include a combination of vulnerabilities that developed in the financial system, along with a series of triggering events that began with the bursting of the United States housing bubble in 2005–2006. When housing prices fell and homeowners began to walk away from their mortgages, the value of mortgage-backed securities held by investment banks declined in 2007–2008, causing several to collapse or be bailed out in September 2008. This 2007–2008 phase was called the Subprime mortgage crisis. The combination of banks unable to provide funds to businesses, and homeowners paying down debt rather than borrowing and spending, resulted in the Great Recession that began in the U.S. officially in December 2007 and lasted until June 2009, thus extending over 19 months.[5][6] As with most of other recessions, it appears that no known formal theoretical or empirical model was able to accurately predict the advance of this recession, except for minor signals in the sudden rise of forecasted probabilities, which were still well under 50%.[7] The recession was not felt equally around the world; whereas most of the world's developed economies, particularly in North America, South America and Europe, fell into a severe, sustained recession, many more recently developed economies suffered far less impact, particularly China, India and Poland, whose economies grew substantially during this period – similarly, the highly developed country of Australia was unaffected, having experienced uninterrupted growth since the early 1990s.
- As the financial downturn in the US continues irresistibly, the recession now starts to spread globally. The world economy is nowadays linked together so close and interactions between companies, investors and banks increased heavily the last decades. In late 2008 the world stock market reacts to the crisis with a tremendous fall. In Europe several subsidiaries and offices of the banking companies had to close and banks in Germany for example had to be rescued by the government as they also invested heavily in American real estate securities. Consumers around the world consume less and spend less because they either lost money or feared to lose their jobs in an insecure development.
- As a consequence of that, exports especially in the US collapsed, which affected suppliers from China and Japan. Highly dependent from the US market, Chinese manufacturers faced problems as their major markets stopped to invest and reduced demand. Only in China more than 10 million migrant workers lost their jobs.16 In the meantime, unemployment’s rates in the US also “shot up to 7.2% in December from its recent low of 4.4% in March 2007, and it was almost certain to continue rising into 2009.”17 Later at the end of the crisis unemployment rates both in the US and Europe should be risen to 10%, the highest value since the 70’s. The recession had reached almost every sector of the world economy. Even world leading firms like G.M and Chrysler who employ together more than 280.000 people were facing bankruptcy and also had to be rescued by government funds.
- Policymakers around the world faced the daunting challenge of stabilizing financial conditions while simultaneously nursing their economies through a period of slower growth and containing inflation. • The policy actions included programs to purchase distressed assets, use of public funds to recapitalize banks and provide comprehensive guarantees, and a coordinated reduction in policy rates by major central banks.
- By October 2009, economic growth turned positive as wide ranging policy intervention supported demand and lowered the uncertainty of systemic risks to the financial system. Although the pace of recovery was slow, there was a rebound in commodity prices, pickup in manufacturing and a return of consumer confidence with firmer confidence in housing markets.
- India, Uzbekistan, China, and Iran experienced slowing growth, they did not enter recessions. The financial crisis did not affect developing countries to a great extent. Experts see several reasons: Africa was not affected because it is not fully integrated in the world market. Latin America and Asia seemed better prepared, since they have experienced crises before. We live in a more and more unequal society and US economy becomes less crucial. Inequality of wealth is now higher in the US than in any other country of the world. High paying jobs are easy to find and the financial sector grows tremendously. Besides Lehman Brothers, all other big banks effected by the crisis have now more influence than ever before. Only in the financial sector more than 3000 lobbyists are employed to influence politics and they have already plans to deregulate again some areas of financial products.
- We might have recovered from all these financial crisis but we can see next one standing right beside us. That is COVID – 19.
- The coronavirus outbreak is first and foremost a human tragedy, affecting hundreds of thousands of people. It is also having a growing impact on the global economy. It brought the global economy to a standstill and plunged the world into a recesThe pandemic continues to expand Almost all countries and territories have reported cases of COVID-19, the disease caused by the coronavirus.sion.
- With each passing day, the 2008 global financial crisis increasingly looks like a mere dry run for today’s economic catastrophe. The short-term collapse in global output now underway already seems likely to rival or exceed that of any recession in the last 150 years. Until we know how quickly and thoroughly the public-health challenge will be met, it is virtually impossible for economists to predict the endgame of this crisis. IMF sees coronavirus-induced global downturn 'way worse' than financial crisis It is "HUMANITY'S DARKEST HOUR“ Emerging markets and developing economies have been hard hit by the crisis
- nearly $90 billion in investments had already flowed out of emerging markets, impact could cause equivalent of 195 million job losses COVID-19 likely to shrink global GDP by almost one per cent in 2020. Indian GDP can see a downfall of almost 2%.
- The pandemic is disproportionately hurting millions of lower-wage workers in service sectors Absent adequate income support, many will fall into poverty, even in most developed economies, worsening already high levels of income inequality. The effect of school closures could make the educational divide more pronounced, with possible long-term consequences. The report finds that as the COVID-19 pandemic worsens, deep-seated economic anxiety—fuelled by slower growth and higher inequality—is increasing. Even in many high-income countries, a significant proportion of the population do not have enough financial wealth to live beyond the national poverty line for three months. It is yet to be seen how much this will affect the world economy. In a world that is more and more globalized, country’s will have to find concepts and solutions to prevent another financial crisis.