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A REPORT ON THE CAUSES AND AFTER EFFECTSOF RECESSION 2008

INTRODUCTION

In 2008, an economic recession throughout the industrialized world was suggested by several important indicators of economicdownturn. [1] Contributors to this downturnincluded high oil prices , high food prices ,

and a substantial credit crisis leading to thedrastic bankruptcy of large and well established investment banks as well ascommercial banks in many nations around the world. This crisis has led to increased unemployment , and other signs of contemporaneous economic downturns inmajor economies of the world .

In December 2008, the NBER declared that the United States had been in recessionsince December 2007, and several economists expressed their concern that there is no end in sight for the downturn.

MAJOR CAUSES OF DOWNFALL IN MARKETS:

1. HIGH PRICES:

The decade of the 2000s saw a commodities boom, in which the prices of primary commodities rose again after the late-twentieth century commodities recession of 1980-2000. But in 2008, the prices of many commodities, notably oil and food, got sohigh to cause genuine economic damage,

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threatening stagflation and a reversal of globalization .

In January 2008, oil prices surpassed $100 a

barrel for the first time, the first of many price milestones to be passed in the courseof the year. In July, oil peaked at $147.30 abarrel and a gallon of gasoline was morethan $4 across most of the U.S.A. Thesehigh prices caused a dramatic drop indemand and prices fell below $35 a barrel at the end of 2008.

The food and fuel crises were bothdiscussed at the 34th G8 summit in July.

Sulfuric acid (an important chemical commodity used in processes such as steel

processing , copper production and bioethanol production ) increased in price

3.5-fold in less than 1 year whilst producersof sodium hydroxide have declared forcemajor due to flooding, precipitating similarly steep price increases.

In the second half of 2008, the prices of mo

Trade:

In middle -October 2008, the Baltic Dry Index , a measure of shipping volume, fell by 50% in one week, as the credit crunch madeit difficult for exporters to obtain letters of credit . [

Inflation:

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In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations. "Excess money supply around the globe, monetary easingby the Fed to tame financial crisis, growthsurge supported by easy monetary policy in

Asia, speculation in commodities,agricultural failure, rising cost of importsfrom China and rising demand of food and commodities in the fast growing emergingmarkets," have been named as possiblereasons for the inflation.

In mid-2008, IMF data indicated that inflation was highest in the oil-exportingcountries, largely due to the unsterilized growth of foreign exchange reserves , the

term “unsterilized” referring to a lack of monetary policy operations that could offset such a foreign exchange intervention inorder to maintain a country´s monetary

policy target. However, inflation was alsogrowing in countries classified by the IMF as"non-oil-exporting LDCs" ( Least Developed Countries ) and "Developing Asia", on

account of the rise in oil and food prices.Inflation was also increasing in thedeveloped countries , but remained lowcompared to the developing world.

Unemployment:

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The International Labour Organization predicted that at least 20 million jobs will have been lost by the end of 2009 due tothe crisis - mostly in "construction, real estate, financial services, and the autosector" - bringing world unemployment above 200 million for the first time

Return of volatility:

For a time, major economies of the 21st century were believed to have begun a

period of decreased volatility , which wassometimes dubbed The Great Moderation ,because many economic variables appeared to have achieved relative stability. Thereturn of commodity, stock market, and currency value volatility are regarded asindications that the concepts behind theGreat Moderation were guided by false

beliefs.

EARLY SUGGESSIONS OF RECESSION:

In the early months of 2008, many observersbelieved that a U.S. recession had begun. Asa direct result of the collapse of Bear Stearns , Global Insight increased the

probability of a worse-than-expected recession to 40% (from 25% before thecollapse). In addition, financial market turbulence signaled that the crisis will not be mild and brief.

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Alan Greenspan , ex- Chairman of the Federal Reserve , stated in March 2008 that the 2008financial crisis in the United States is likely to be judged as the harshest since the end of World War II . A chief economist at Standard & Poor's , said in March 2008 hehas a worst-case-scenario in which thecountry could endure a double-dip recessionin which the economy would briefly recover in the summer 2008.Under this scenario, theeconomy's total output, as measured by thegross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II

period.

The former head of the National Bureau of Economic Research said in March 2008 hebelieved the country was then in arecession, and it could be a severe one. Anumber of private economists generally

predicted a mild recession ending in thesummer of 2008 when the economicstimulus checks going to 130 millionhouseholds started being spent. A chief economist at Moody's predicted in March2008 that policymakers would act in aconcerted and aggressive way to stabilizethe financial markets, and that then theeconomy would suffer but not enter a

prolonged and severe recession. It takesmany months before the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end, makes itsown ruling.

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According to numbers published by Bureauof Economic Analysis in May 2008, the GDP

growth of the previous two quarters was positive. As one common definition of arecession is negative economic growth for at least two consecutive fiscal quarters, someanalysts suggest this indicates that the U.S.economy was not in a recession at the time.However this estimate has been disputed by some analysts who argue that if inflation is

taken into account, the GDP growth wasnegative for the past two quarters, makingit a technical recession. In a May 9, 2008,report, the chief North American economist for investment bank Merrill Lynch wrote that despite the GDP growth reported for thefirst quarter of 2008, "it is still reasonableto believe that the recession started some

time between September and January", onthe grounds that the National Bureau of Economic Research's four recessionindicators all peaked during that period.

New York's budget director concluded thestate of New York was officially in arecession. Governor David Paterson called

an emergency economic session of the statelegislature for August 19 to push a budget cut of $600 million on top of a hiring freezeand a 7 percent reduction in spending at state agencies already implemented by theGovernor. An August 1 report, issued by economists with Wachovia , said Florida wasofficially in a recession.

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White House budget director Jim Nussle said the U.S. avoided a recession followingrevised GDP numbers from the CommerceDepartment showing a 0.2 percent contraction in the fourth quarter of 2007down from a 0.6 percent increase and adownward revision to 0.9 percent from1 percent in the first quarter of 2008. TheGDP for the second quarter was placed at 1.9 percent below an expected 2 percent.Martin Feldstein , who headed the National Bureau of Economic Research until June and serves on the group's recession-dating

panel, said he believed the U.S. was in avery long recession and that there wasnothing the Federal Reserve could do tochange it.

In a CNBC interview at the end of July 2008 Alan Greenspan said he believed the U.S.was not yet in a recession, but that it could enter one due to a global economicslowdown.

A study released by Moody's found two-thirds of the 381 largest metropolitan areasin the United States were in a recession. Thestudy also said 28 states were in recession

with 16 at risk. The findings were based onunemployment figures and industrial

production data.

In March 2008, Warren Buffett stated in aCNBC interview that by a "common sensedefinition", the U.S. economy is already in arecession. Warren Buffett has also stated

that the definition of recession is flawed and

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that it should be 3 quarters of GDP growththat is less than population growth.However, the U.S. only experienced twoconsecutive quarters of GDP growth lessthan population growth.

RECESSION DECLARED BY ECONOMISTS:

On December 1, 2008, the National Bureauof Economic Research (NBER) declared that the United States entered a recession inDecember 2007, citing employment and

production figures as well as the third quarter decline in GDP. The Dow JonesIndustrial Average lost 679 points that sameday.

On January 4, 2009, Nobel prize winningeconomist Paul Krugman wrote that "Thislooks an awful lot like the beginning of a

second Great Depression." He continued,"Milton Friedman, in particular, persuaded many economists that the Federal Reservecould have stopped the Depression in itstracks simply by providing banks with moreliquidity, which would have prevented asharp fall in the money supply." and "Friedman’s claim that monetary policy

could have prevented the Great Depressionwas an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by thegovernment — is needed to fight massunemployment."

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RISE IN UNEMPLOYMENT:

On September 5, 2008, the United StatesDepartment of Labor issued a report that its

unemployment rate rose to 6.1%, thehighest in five years. The news report cited the Department of Labor reports and interviewed Jared Bernstein, an economist:

The unemployment rate jumped to 6.1 percent in August, its highest level in fiveyears, as the erosion of the job market accelerated over the summer. Employerscut 84,000 jobs last month, more thaneconomists had expected, and the Labor Department said that more jobs were lost in June and July than previously thought.So far, 605,000 jobs have disappeared since January. The unemployment rate,which rose from 5.7 percent in July, is nowat its highest level since September 2003.

Jared Bernstein, economist at theEconomics Policy Institute in Washington,said eight months of consecutive joblosses had historically signaled that theeconomy was in a recession. "If anyone isstill scratching their head over that one,they can stop," Mr. Bernstein said. Stocksfell after the release of the report, withthe Dow Jones industrials down about 100

points after about 40 minutes of trading.

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LIQUIDITY CRISIS:

Financial crisis of 2007–2008:

From late 2007 through September 2008,before the official October 3rd bailout, therewas a series of smaller bank rescues that occurred which totalled almost $800 billion.

In the summer of 2007, CountrywideFinancial drew down a $11 billion line of credit and then secured an additional $12

billion bailout in September. This may beconsidered the start of the crisis.

In mid-December 2007, Washington Mutual bank cut more than 3,000 jobs and closed itssubprime mortgage business.

In mid-March 2008, Bear Stearns was bailed out by a gift of $29 billion non-recoursetreasury bill debt assets.

In early July 2008, depositors at the Los Angeles offices of IndyMac Bank frantically lined up in the street to withdraw their money. On July 11, IndyMac, a spinoff of Countrywide, was seized by federal regulators - and called for a $32 billion

bailout. The mortgage lender succumbed tothe pressures of tighter credit, tumblinghome prices and rising foreclosures. That day the financial markets plunged asinvestors tried to gauge whether thegovernment would attempt to save mortgage lenders Fannie Mae and FreddieMac . The two were placed into

conservatorship on September 7, 2008.

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During the weekend of September 13–14,2008, Lehman Brothers declared bankruptcy after failing to find a buyer, Bank of America agreed to purchase Merrill Lynch , theinsurance company AIG sought a bridge loanfrom the Federal Reserve, and a consortiumof 10 banks created an emergency fund of at least $70 billion to deal with the effectsof Lehman's closure, similar to theconsortium put forth by J.P. Morgan duringthe stock market panic of 1907 and thecrash of 1929 . Stocks on " Wall Street "tumbled on September 15.

On September 16 2008, news emerged that the Federal Reserve may give AIG an$85 billion rescue package; on September 17, 2008, this was confirmed. The terms of the rescue package were that the Federal Reserve would receive an 80% public stakein the firm. The biggest bank failure inhistory occurred on September 25 when JPMorgan Chase agreed to purchase thebanking assets of Washington Mutual .

The year 2008, as of September 17, hasseen 81 public corporations file for bankruptcy in the United States, already

higher than the 78 in 2007. LehmanBrothers being the largest bankruptcy inU.S. history also makes 2008 a record year in terms of assets with Lehman's $691billion in assets all past annual totals. Theyear also saw the ninth biggest bankruptcy with the failure of IndyMac Bank.

The Wall Street Journal states that venturecapital funding has slowed down which in

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the past led to unemployment and slowed new job creation.

Financial markets:

January 2008 stock market volatility:

January 2008 was an especially volatilemonth in world stock markets, with a surgein implied volatility measurements of theUS-based S&P 500 index and a sharpdecrease in non-U.S. stock market prices onMonday, January 21, 2008 (continuing to alesser extent in some markets on January 22). Some headline writers and a general news columnist called January 21 " Black Monday " and referred to a "global sharescrash," though the effects were quitedifferent in different markets.

American stock markets were closed onMonday, January 21 for Martin Luther King,

Jr. Day . Seemingly in response to the fall innon-U.S. markets, the U.S. Federal Reserve announced a surprise rate cut of 0.75% onTuesday at 8 a.m. This rate cut is believed to have been influential in preventing large

declines in the American stock markets,with the Dow Jones Industrial Average downonly 1.1% for the day, never closing that week worse than a 1.6% decrease from the

previous Friday, and indeed closed up for the week. Later it was announced that Société Générale , one of the largest banksin Europe, accused its employee Jérôme

Kerviel of fraudulent trades costing it €4.9

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billion, and causing it to sell approximately €50 billion in European equity derivatives from January 21–23.

The effects of these events were also felt onthe Shanghai Composite Index in Chinawhich lost 5.14 percent, most of this onfinancial stocks such as Ping An Insurance and China Life which lost 10 and 8.76

percent respectively. Investors worried about the effect of a recession in the USeconomy would have on the Chineseeconomy. Citigroup estimates due to thenumber of exports from China to America aone percent drop in US economic growthwould lead to a 1.3 percent drop in China'sgrowth rate.

Market downturn Fall 2008:

As of October 2008, stocks in North America,Europe, and the Asia-Pacific region had all fallen by about 30% since the beginning of the year. The Dow Jones Industrial Averagehad fallen about 37% since January 2008.

There were several large Monday declines instock markets world wide during 2008,including one in January, one in August, onein September, and another in early October.

The simultaneous multiple crises affectingthe US financial system in mid-September 2008 caused large falls in markets both inthe US and elsewhere. Numerous indicatorsof risk and of investor fear (the TED spread ,Treasury yields , the dollar value of gold) set records.

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Russian markets, already falling due todeclining oil prices and political tensionswith the West, fell over 10% in one day,leading to a suspension of trading, whileother emerging markets also exhibited losses.

On September 18, UK regulators announced a temporary ban on short-selling of financial stocks. On September 19 the United States'SEC followed by placing a temporary ban of short-selling stocks of 799 specific financial institutions. In addition, the SEC made it easier for institutions to buy back shares of their institutions. The action is based on theview that short selling in a crisis market undermines confidence in financial institutions and erodes their stability.

On September 22, the Australian Securities

Exchange ( ASX ) delayed opening by an hour after a decision was made by the AustralianSecurities and Investments Commission( ASIC ) to ban all short selling on the ASX.This was revised slightly a few days later.[

As is often the case in times of financial turmoil and loss of confidence, investors

turned to assets which they perceive astangible or sustainable. The price of gold rose by 30% from middle of 2007 to end of 2008. A further shift in investors’ preferencetowards assets like precious metals or land is discussed in the media

IMPACT OF GLOBAL RECESSION ON INDIANMARKET

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The recession in the US market and theglobal meltdown termed as Global recessionhave engulfed complete world ecomony witha varying degree of recessional impact.World over the impact has diversified and its impact can be observed from the very fact of falling Stock market , recession in

jobs availiability and companies followingdownsizaing in the existing available staff and cutting down of the perks and salary corrections. Globally the financial sector sacking the existing base of employees inhigh numbers in US the major examplebeing CITI Group same still followed by others in hospitality industry Jet and Kingfisher Airlines too. The cut in salary for the pilots being 90 % can anyone imaginesuch a huge cut in salary.

In the globalized market scenario, theimpact of recession at one place/ indusrty/ sector perculate down to all the linked indusrty and this can be truly interpreated from the current market situation which isfaced by the world since approx 2 monthand still the situation is not in control inspite of various measures taken to fight back the recession in the market.The badly hit setor at present being the financial sector, and major issue being the"LIQUIDITY Crises" in the market.

In-spite of the various measures tosubsidise the impact of the recession and cut down the inflation present nothing really sound have been done.

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Various steps taken by RBI to curb the present recession in the economy and counter act the prevailing situation.The sudden drying-up of capital inflows fromthe FDI which were invested in Indian stock markets for greater returns vizualizing thePotential Higher Returns flying back iscontinuing to challenge liquidity management.At the heart of the current liquidity tightening is the balance of

payments deficit, and this NRI deposit moveshould help in some small way.

To curb the liquidity crises the RBI will continue to initiate liquidity measures aslong as the current unusually tight domesticliquidity environment prevails. The current step to curb these being lowering of interest rates and reduction of PLR. However, thebig-picture story remains unchanged – all countries in the world with current account deficits and strong credit cycles are findingit difficult to bring cost of capital down inthe current environment. India is nodifferent. New measures do not change our view on the growth outlook. Indeed, weremain concerned about the banking sector and financial sector. The BOP- Balance of Payment deficit – at a time when domesticcredit demand is very high – is resulting in avicious loop of reduced access to liquidity,slowing growth, and increased risk-aversionin the financial system .

In total the recession have turned down thegrowth process and have set the minds of

economists and others for finding out the

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real solution to sustain the economic growthand stability of the market which is desired for the smooth running of the economy.

Complete business/ industry is in dolledrumsituation and this situation persist for alonger duration will create the small business to vanish as they have lower stability and to run smoothly requirecontinious flow of liquidity which is drived from the market.

In present situation down fall in one sector one day leads to a negative impact on theother sector thus altogether everyone feel the impact of the Financial crises with theresult of the current recession which started in US and slowly and gradually due to linked global world have impacted everyone.

Solution for the problem still remain at thetop of the mind of every one, still everyonefacing the impact of recession but how longis the major question which is of great importance.

MEASURES TAKEN TO STABILISE MARKETS

Measures taken by India's central bank:

Following are measures taken by India'scentral bank on Saturday in its latest moveto shield the economy from the spill over effects of the global financial crisis and boost growth.

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* To reduce the repo rate or its main short-term lending rate by 50 basis points to 7.5

percent with effect from Nov. 3, 2008.

* To cut banks' cash reserve ratio, or theamount of funds banks have to hold with it on deposit, by 100 basis points to 5.5

percent in two steps. The measure will release 400 billion rupees ($8.1 billion) intothe banking system.

* To reduce banks' statutory liquidity ratio

or the percentage of deposits that bankshave to invest in federal debt by 1

percentage point to 24 percent.

* To provide refinance facilities to all scheduled commercial banks from theReserve Bank of India for an equivalent toup to 1.0 per cent of each bank's net

demand and time liabilities (NDTL) as onOctober 24, 2008 at the repo rate up to amaximum period of 90 days.

* Banks can borrow up to 1.5 percent of their deposits in cash from the central bank to onlend it to non-banking financecompanies to meet their fundingrequirements.

* The Reserve Bank of India would continueto sell dollars through agent banks toaugment supply in the domestic foreignexchange marekt or intervene directly tomeet any demand-supply gaps.

* All transactions by the Reserve Bank would

be at prevailing market rates and per

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market practice. Entities with bulk foreignexchange requirements can approach thecentral bank through their banks for this

purpose.

* In the context of forex outflows, it decided to conduct buy-back of Market StabilisationScheme (MSS) dated securities to provideanother avenue for injecting liquidity of amore durable nature into the system.

* This will be calibrated with the market

borrowing programme of the the federal government. The securities proposed to bebought back. the timing and modalities for these operations would be notified separately. ($1=49.50 rupees)

RBI steps in to stabilise forex market, stemoutflow

In a desperate move to arrest theunprecedented fall in the value of Indianrupee, the Reserve Bank of India (RBI) onThursday announced several measures torestore the confidence of exporters and foreign institutional investors (FIIs) and stem further outflow of foreign exchangefrom the country.

Announcing the measures, RBI Governor Bimal Jalan said pre-shipment export credit for six months and post-shipment credit for 90 days has been reduced by 550 basis

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points to 6.5 per cent for incremental exports over base year 1997-98. This facility will be available upto December 31, 1999.The Reserve Bank will refinance credit under the scheme at 4 per cent, which is equal tothe interest paid on CRR (cash reserve ratio)balances. Foreign currency export credit will be made available at 1.5 per cent over Libor (London Inter-Bank Offered Rate), a cut of 50-100 basis points for all exports and is not to be restricted to incremental volumesalone.

The RBI has allowed FIIs to cover their incremental equity investments from today.The central bank said that it will open awindow, enabling banks and authorised dealers of FIIs to buy dollars to this end. FIIshave also been allowed to invest in treasury bills henceforth. This is to induce FIIs toreinvest proceeds from equity sales intreasury bills.

Sticking to his weak rupee position, the RBIGovernor said in a statement here, ``RBIdoes not have a specific target for anexchange rate.'' The statement said the day-to-day exchange movements in the

exchange rates are ``market determined''the RBI is only committed to maintainorderly and reasonable conditions in themarket by providing additional supply of forex as considered necessary from time totime.

Financial institutions will be allowed to buy

back their debt paper or of other domesticcorporates in the international markets. The

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Reserve Bank's prior approval will have tobe taken in this regard. Seeking to calmapprehensions of an interest rate spiral,

Jalan said that he will ensure that there isno pressure on interest rates by stating that the RBI is ready to take on private

placement of government paper and releasethem to the market gradually.

The RBI announced its half-hearted initiativein the aftermath of the public outcry about rupee value which has depreciated by around 15 per cent after Bimal Jalan took charge as the Governor. When Jalan joined the RBI, the rupee was hovering at around 37.50 against the dollar. It has now comedown to 42.50 which implies a loss of nearly Rs 5 per dollar. This will have a cascadingeffect on the import bill and foreign debt obligations. While justifying the current exchange rate at 42.50, the central bank has said the present exchange rate of therupee should help boost the export effort.

However, the governor did not announceany measures to force the exporters tobring back the overdue export bills kept abroad. ``While the cost of export credit will

come down, exporters are encouraged tokeep their export earnings abroad as thecost of domestic borrowing has come downfurther,'' said a forex dealer. The RBI had earlier increased the interest on pre-shipment credit to force exporters to bringback their earnings, but removed later.

Another sop to the exporters is more accessto foreign currency loans from banks at a

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market. For the speculators Jalan has issued only a light piece of advice. ``Consideringthe present state of the international markets and the developments in India, theRBI will advise banks and other participantsto realistically assess various factors and avoid unwarranted speculative activity,'' hesaid.

Reeling out statistics about the Real Effective Exchange Rate (REER) and economic fundamentals, the RBI has said that it will not hesitate to use its reserves,as needed to meet the country's external obligations and its current account deficit, if at all necessary. This is exactly why the

policy of keeping high reserves has beenfollowed by the central bank.

PERSONAL VIEWS IN TACKLING RECESSION

Pay scales of the IT professions should bechanged

Bank loans and other loans for housing etcshould be reduced and made easily available.

NRI’S should be encouraged to invest inindia and give them high interest rates ondeposits to encourage foreign inflow.

Exports should be encouraged and rules for exports should be stabilised.

Petroleum product prices should beincreased to discourage use of vehicles

which will lead to decrease in imports of

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crude in india because crude is the highest imported good in india.

Consumer goods should be made cheaper

for higher consumption.

Banking sectors should change their rulesand regulations and make banking easier and friendly.

More of Indian banks should be opened inforeign countries for more of foreign

deposits.