Saturday, July 18, 2009

CAUSES OF GLOBAL FINANCIAL SLOWDOWN

THE WORST-EVER financial crisis faced by the United States is the great depression that ravaged the world economy in 1930 which started with the stock market crash at the end of 1929.
ARE COMPARISONS WITH THE GREAT DEPRESSION JUSTIFIED?
The real comparison now is with the financial crisis that preceded the Great Depression, centred on the stock market collapse of 1929. At that time inspite of a 36% fall in the share index, all the Wall Street merchant banks made it throughthe Great Depression.
This time, all five Wall Street behemoths have either -
1. Failed (Lehman Brothers),
2. Been taken over at bargain-basement prices (Bear Stearns, Merrill Lynch),
3. Have sought to change their status to that of commercial banks before they failed (Morgan Stanley and Goldman Sachs).
And the expected economic downturn has only begun. So the financial crisis is much worse than in 1929.
The global financial crisis of 2008–2009 began in July 2007 when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve, Bank of England and the European Central Bank.
With the financial meltdown continuing unabated, US has already seen the collapse of 16 banks in the last few months -- which is more than one-fourth the total number of failures in the last nine years. With ten bank collapses in February, a total of 68 banks have failed since 2000 in the US. Moreover, 16 bank failures this year is more than half of the total collapses in 2008. Last year, a whopping 25 banks went belly up, mainly after the financial crisis turned severe with the bankruptcy

WHAT CAUSED THE CRISIS?
The immediate cause was the collapse in American house prices, which had doubled between January 2000 and August 2006, and have since fallen by 20%. More than 1% of American households have defaulted on their mortgages.
Up to a quarter of mortgages were "subprime” and financed by the issuing of "residential mortgage-backed securities" rather than by traditional bank loans. The bonds were then sold to investors, pension funds and councils all over the world.
As the banks of US provided loans to the individuals without undergoing much investigation they were forced to undergo such a problem. Large number of people defaulted their mortgages and when the banks wanted to sell out these mortgages they didn’t find such potential buyers as a result they not only lost their anticipated interest but also much of their principal. Subsequently this thing increased and caused what we all know as global meltdown.
Impact of global economic meltdown on India:

What I think India is not greatly affected by the economic slowdown because the banking structure which India has does not provide space for such a downturn. There is no doubt that if the global economies suffer then India is also bound to suffer. But the very fact that India is a domestic consumption-and-investment-driven market where contribution of exports to the growth is not as big goes in her favor to tackle this crisis in much better way than few of the other emerging economies. The inflation rate has also reached in some what comfortable zone and thus economists believe that the government has more room now to focus on the growth rate of our economy.

The stock market crash in India is nothing but the market correction which the large investors are creating to increase their profits at the cost of small investors. The Indian employers are trying to increase the hidden reserves by taking the advantage of foreign crash. I am not saying that the Indian firms are not affected by the economic slowdown but it’s not affected to such an extent as it seems to be.
In India a body with the name ICRA (Investment Information and Credit Rating Agency of India) provides individual credit ratings as a result of which the credit worthiness of every individual can be easily measured. This helps the Indian banks to provide loans to the individuals and avoid malinvestment.

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