iv 03a real economy and great recession of 2008-10

7/31/2019 IV 03a Real Economy and Great Recession of 2008-10

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Real Economy vs. Financial Economy

Understanding ofGreat Recession - 2008-10


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GrowingMarket Economy

Declining Market Economy

TWO STAGES OF MARKET ECONOMY


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Growing Economy


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Declining Economy


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What is currentInternational Business

Environment ?


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Programme, ICAI, Bangalore by CA V.V.S.Rao


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The current Wall Street collapse has its roots in the Dotcom Bubble ofthe late 1990s

By mid-90s prices of the stocks ofInternet startups skyrocketed

By 2001 they collapsed, resulting in the loss of $7 trillion worth ofassets leading to recession of 2001-02

To try to counter a long recession, US FED cut the prime rate to a 45-year-low of1 per cent in June 2003

Continue to keep it there for over a year.

This had the effect of encouraging another bubblethe real estatebubble.


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US Dollar Long term Interest rates since 1987 to 2011


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In just six days the NASDAQ had lost nearly nine percent, falling from roughly 5,050 on

March 10, 2000 to 4,580 on March 15, 2000.

America's 371 publicly traded Internet companies have grown to the pointthat they are collectively valued at $1.3 trillion, which amounts to about 8%of the entire U.S. stock market.

The Stock Market Crash of 2000-2002 caused the loss of$5 trillion inthe market value of companies from March 2000 to October 2002.

The 9/11 terrorist destruction of the World Trade Center's Twin Towers,killing almost 700 employees of Cantor-Fitzgerald, accelerated the stockmarket drop;

50% of the dot-com companies survived through 2004 which indicatesthat assets lost from the Stock Market do not directly link to the closing of dot-com cos.

But technology experts, such as computer programmers, found a glutted job

market..

Impact of Dot Com Bubble


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The technology-heavy NASDAQ Composite index peaked at 5,048 inMarch 2000, reflectin the hi h point of the dot-com bubble.


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C t b bbl H did it f ?


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Current bubble - How did it form?Current bubble - How did it form?(.contd)(.contd)

C b bbl H did i f ?C t b bbl H did it f ?


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C t b bbl H did it f ?C t b bbl H did it f ?


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NINJA Loans

S iti ti ti


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Securitization practices


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IndiaContribution to National Income

2008-09

Agriculture 20%

Government including PSUs 20%

Private Corporates 15%

Partnership / Proprietorship 45%

In USA Corporates plus Government is 85%

G t R i


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THE WORLD ECONOMY LOSTAROUNDUS$ 6 TRILLION

DURING 2008 RECESSION

WHOARE THE GAINERS?

Great Recession


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Alas !It is not !?#######

Imaginary money has been createdby brain power of professionals

andthat is put to use as real power by

Businessmen

Is it Real

money ???

That is the crisis today

Wh th L f G t


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Author Richard Duncan points out in his 2009 book

The Corruption of Capitalism

Outstandings in the global derivatives market at its peak in

June 2008 was $760 trillion

This was equal to

everything produced on earth

during the previous 20 years.

Where are the Losses of GreatRecession ?

Probably no more than 10-20% of activity in thederivative markets

is related to hedging

Recession Remedies


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Government is the art of

looking fortrouble finding it misdiagnosing it and then applying the wrong remedies

- Groucho MarxComedian / Actor

In 1920-30s

Legislators and regulators globally are likely to

discover the truth of the above proposition in their

attempts to regulate the derivative market

Recession Remedies

Greed makes us deaf, dumb and blind?


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On December 17, 2005 InternationalFinancing Review (IFR) announced its 2005Annual Awards

Lehman Brothers not only maintained itsoverall market presence, but also led thecharge into the preferred space by ...developing new products and tailoringtransactions to fit borrowers' needs

Lehman Brothers is the most innovative inthe preferred space, just doing things youwon't see elsewhere."

But Warren Buffett, who eliminatedderivatives from his investment fund longbefore the recent crisis says , in 2003:

Derivatives are financial weapons of massdestruction devised by madmen

The truth is that the top graduates of the USbusiness schools like Harvard and Stanfordbrought us this crisis.

Greed makes us deaf, dumb and blind?


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iv 03a real economy and great recession of 2008-10

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