Introduction:

The global financial system literally went into a cardiac arrest after the Lehman
Brothers Holdings Inc. collapse and a meltdown was barely avoided through very
aggressive policy responses. The entire global economy will contract in a severe and
protracted U-shaped global recession that started a year ago. The recession in the
US market and the global meltdown termed as Global recession have engulfed
complete world economy with a varying degree of recessional impact. World over the
impact has diversified and can be observed from the very fact of falling Stock
market, recession in jobs availability and companies following downsizing in the
existing available staff and cutting down of the perks and salary corrections. The
global financial crisis started to show its effects in the middle of 2007 and into 2008.
It contributed to the failure of key businesses, declines in consumer wealth
estimated in the trillions of U.S. dollars, substantial financial commitments incurred
by government. Around the world stock markets have fallen, large financial
institutions have collapsed or been bought out.

What is Recession?
Recession or crisis is
the part of the
normal cycle of
business. It is
certain that they will
sooner or later
occur. Recessions
are the result of
reduction in the
demand of products
in the global market.
Recession can also
be associated with
falling prices known
as deflation due to lack of demand of products. According to the National Bureau of

1
Economic Research (NBER), recession is defined as a significant decline in economic
activity spread across the economy, lasting more than a few months, normally visible
in real gross domestic product (GDP), real income, employment, industrial
production and wholesale-retail sales.

A recession is characterized by:

 Rising unemployment: It takes time for unemployment to rise, but, even

when the economy is recovering; it takes time for unemployment to fall.

 Rising Government Borrowing: A recession is bad news for the

government budget. A recession leads to lower tax revenues and higher
government spending on unemployment benefits. The UK is forecast to
borrow £60 billion; a recession could make this borrowing even worse in
2009. This borrowing means higher taxes and higher interest payments in the
future.

 Falling Share Prices Generally a recession leads to lower profitability and

lower dividends. Therefore, shares are less attractive. Note share prices often
fall in anticipation of a recession. E.g. the recent falls in share prices are
largely because the market expects a recession soon. During the actual
recession, share prices often increase in anticipation of the economy
recovering.

 Lower Inflation: Typically a recession reduces demand and wage inflation.

This should result in a lower inflation rate. However, this recession is
complicated because of rising oil prices. Therefore, the forthcoming recession
may actually occur simultaneously with higher inflation - a term known as
stagflation. But, a recession will definitely reduce demand pull inflation
pressures and encourages price wars on the high street as firms seek to
retain consumers.

 Falling investment: Investment is much more volatile than economic

growth. Even a slowdown in the growth rate can lead to a significant fall in
investment.

2
Global Recession:
A global recession is a period of global economic slowdown. The International
Monetary Fund (IMF) takes many factors into account when defining a global
recession, but it states that global economic growth of 3 percent or less is
"equivalent to a global recession". Defining a global recession is more difficult,
because developing nations are expected to have a higher GDP growth than
developed nations.

Origins of the Global Recession

The global financial system has suffered a severe and virtually unprecedented blow,
leading to the failure of a number of major financial institutions in developed
countries and a worldwide economic slowdown with its accompanying job losses,
erosion in consumer and business confidence, and a tightening of credit. It all started
in the US; the boom in the housing sector was taking the economy to a new level. A
combination of low interest rates and large inflows of foreign funds the world became
awash with liquidity, with funds chasing any opportunity for good returns. In the
USA, low-income earners were encouraged to buy homes with little or no equity and
the banks moved to providing low-income mortgages. As more and more people took
home loans, the demands for property increased and fueled the home prices further.
As there was enough money to lend to potential borrowers, the loan agencies started
to widen their loan
disbursement reach and
relaxed the loan conditions.

As a result, many people with

low income & bad credit were
given housing loans in
disregard to all principles of
financial prudence. These types
of loans were known as sub-

3
prime loans as those were are not part of prime loan market. With stock markets
booming and the system flush with liquidity, many big fund investors like hedge
funds and mutual funds saw subprime loan portfolios as attractive investment

opportunities. Hence, they bought such portfolios from the original lenders. Major
(American and European) investment banks and institutions heavily bought these
loans (known as Mortgage Backed Securities, MBS) A mortgage-backed
to diversify their investment portfolios. Owing to security (MBS) is an asset-
heavy buying of Mortgage Backed Securities (MBS) backed security or debt
of subprime loans by major American and European obligation that represents
Banks, the problem, which was to remain within the a claim on the cash flows
confines of US propagated into the word's financial from mortgage loans,
markets. As the home prices started declining in
most commonly on
the US, sub-prime borrowers found themselves in a
residential property.
messy situation. Their house prices were decreasing
and the loan interest on these houses was soaring. As they could not manage a
second mortgage on their home, it became very difficult for them to pay the higher
interest rate. As a result many of them opted to default on their home loans and
vacated the house.

However, as the home prices were falling rapidly, the lending companies, which
were hoping to sell them and recover the loan amount, found them in a situation
where loan amount exceeded the total cost of the house. Eventually, there remained
Collateralized debt no option but to write off losses on these loans.
obligations (CDOs) are a The problem got worsened as the Mortgage Backed
type of structured asset- Securities (MBS), which by that time had become
backed security (ABS) parts of CDOs of giant investments banks of US &
whose value and payments Europe, lost their value. Falling prices of CDOs
are derived from a portfolio dented banks' investment portfolios and these
of fixed-income underlying losses destroyed banks' capital.
assets.
Despite efforts by the US Federal Reserve to offer some financial assistance to the
beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the
world's largest investment banks and securities trading firm. Bear Sterns was bought
out by JP Morgan Chase with some help from the US Federal Bank. The crisis has

4
also seen Lehman Brothers - the fourth largest investment bank in the US and the
one which had survived every major upheaval for the past 158 years - file for
bankruptcy. And slowly this recession started to creep into other countries like a
contagious disease.

Causes of global financial recession

5
There is little doubt that
this global

Foreclosure is the legal and

professional proceeding in which a
mortgagee, or other lien holder,
usually a lender, obtains a court
ordered termination of
a mortgagor's equitable right
of redemption.
recession was
caused by the
financial meltdown in the United States and quick spread out to touch almost
every corner of the world. It appears to be a commonly accepted theory
among economists that this US recession was a direct result of sudden
busting of house bubble, and the
house bubble was created by rapid An adjustable rate mortgage
growing yet unregulated subprime (ARM) is a mortgage
mortgages. The burst of United loan where the interest
States housing bubble were peaked rate on the note is
in approximately 2005–2006. High
periodically adjusted
default rates on "subprime lending"
based on a variety of
and "adjustable rate mortgages"
indices.
began to increase quickly thereafter.
An increase in loan incentives such as easy initial terms and a long-term trend
of rising housing prices had encouraged borrowers to assume difficult
mortgages in the belief they would be able to quickly refinance at more
favorable terms. However, once interest rates began to rise and housing
prices started to drop moderately in 2006–2007 in many parts of the U.S.,
refinancing became more difficult. Defaults and foreclosure

activity increased dramatically as easy initial terms expired, home prices failed to go
up as anticipated, and adjustable rate mortgage (ARM) interest rates reset
higher.

The main cause of a recession is a fall in Aggregate Demand. In the US 2008

recession, the main causes of falling aggregate demand have been:

6
 Growth of the Housing Bubble: This reduces consumer wealth and
prevents equity withdrawal through re-mortgaging. Also when house prices
fall, people lose confidence in spending as their main asset is declining in
value. Between 1997 and 2006, the price of the typical American house
increased by 124%. During the two decades ending in 2001, the national
median home price ranged from 2.9 to 3.1 times median household income.
This ratio rose to 4.0 in 2004 and 4.6 in 2006. This housing bubble resulted in
quite a few homeowners refinancing their homes at lower interest rates, or
financing consumer spending by taking out second mortgages secured by the
price appreciation. In a Peabody Award winning program, NPR correspondents
argued that a "Giant Pool of Money" (represented by $70 trillion in worldwide
fixed income investments) sought higher yields than those offered by U.S.
Treasury bonds early in the decade. Further, this pool of money had roughly
doubled in size from 2000 to 2007, yet the supply of relatively safe, income
generating investments had not grown as fast. Investment banks on Wall
Street answered this demand with the MBS and CDO, which were assigned
safe ratings by the credit rating agencies. In effect, Wall Street connected this
pool of money to the mortgage market in the U.S., with enormous fees
accruing to those throughout the mortgage supply chain, from the mortgage
broker selling the loans, to small banks that funded the brokers, to the giant
investment banks behind them. By approximately 2003, the supply of
mortgages originated at traditional lending standards had been exhausted.
However, continued strong demand for MBS and CDO began to drive down
lending standards, as long as mortgages could still be sold along the supply
chain. Eventually, this speculative bubble proved unsustainable. The CDO in
particular enabled financial institutions to obtain investor funds to finance
subprime and other lending, extending or increasing the housing bubble and
generating large fees. A CDO essentially places cash payments from multiple
mortgages or other debt obligations into a single pool, from which the cash is
allocated to specific securities in a priority sequence. Those securities
obtaining cash first received investment-grade ratings from rating agencies.
Lower priority securities received cash thereafter, with lower credit ratings but
theoretically a higher rate of return on the amount invested. By September
2008, average U.S. housing prices had declined by over 20% from their mid-

7
 2006 peak. As prices declined, borrowers with adjustable-rate mortgages
could not refinance to avoid the higher payments associated with rising
interest rates and began to default. During 2007, lenders began foreclosure
proceedings on nearly 1.3 million properties, a 79% increase over 2006. This
increased to 2.3 million in 2008, an 81% increase vs. 2007. By August 2008,
9.2% of all U.S. mortgages outstanding were either delinquent or in
foreclosure By September 2009, this had risen to 14.4%.

 Easy credit conditions: Lower interest rates encourage borrowing. From

2000 to 2003, the Federal Reserve lowered the federal funds rate target from
6.5% to 1.0%.This was done to soften the effects of the collapse of the dot-
com bubble and of the September 2001 terrorist attacks, and to combat the
perceived risk of deflation U.S current account or trade deficit. Additional
downward pressure on interest rates was created by the USA's high and rising
current account (trade) deficit, which peaked along with the housing bubble in
2006. Ben Bernanke explained how trade deficits required the U.S. to borrow
money from abroad, which bid up bond prices and lowered interest rates.
Bernanke explained that between 1996 and 2004, the USA current account
deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these
deficits required the USA to borrow large sums from abroad, much of it from
countries running trade surpluses, mainly the emerging economies in Asia
and oil-exporting nations. The balance of payments identity requires that a
country (such as the USA) running a current account deficit also have a
capital account (investment) surplus of the same amount. Hence large and
growing amounts of foreign funds (capital) flowed into the USA to finance its
imports. This created demand for various types of financial assets, raising the
prices of those assets while lowering interest rates. Foreign investors had
these funds to lend, either because they had very high personal savings rates
(as high as 40% in China), or because of high oil prices. Bernanke referred to
this as a "saving glut." A "flood" of funds (capital or liquidity) reached the
USA financial markets. Foreign governments supplied funds by purchasing
USA Treasury bonds and thus avoided much of the direct impact of the crisis.
USA households, on the other hand, used funds borrowed from foreigners to
finance consumption or to bid up the prices of housing and financial assets.
Financial institutions invested foreign funds in mortgage-backed securities.

8
 The Fed then raised the Fed funds rate significantly between July 2004 and
July 2006.This contributed to an increase in 1-year and 5-year adjustable-
rate mortgage (ARM) rates, making ARM interest rate resets more expensive
for homeowners. This may have also contributed to the deflating of the
housing bubble, as asset prices generally move inversely to interest rates and
it became riskier to speculate in housing. USA housing and financial assets
dramatically declined in value after the housing bubble burst.

 Subprime Mortgage/Lending: U.S. subprime lending expanded

dramatically 2004-2006.The value of U.S. subprime mortgages was estimated
at $1.3 trillion as of March 2007,with over 7.5 million first-lien subprime
mortgages outstanding.In addition to easy credit conditions, there is evidence
that both government and competitive pressures contributed to an increase in
the amount of subprime lending during the years preceding the crisis. Major
U.S. investment banks and government sponsored enterprises like Fannie
Mae played an important role in the expansion of higher-risk lending.
Subprime mortgages remained below 10% of all mortgage originations until
2004, when they spiked to nearly 20% and remained there through the 2005-
2006 peak of the United States housing bubble. A proximate event to this
increase was the April 2004 decision by the U.S. Securities and Exchange
Commission (SEC) to relax the net capital rule, which permitted the largest
five investment banks to dramatically increase their financial leverage and
aggressively expand their issuance of mortgage-backed securities. This
applied additional competitive pressure to Fannie Mae and Freddie Mac, which
further expanded their riskier lending. Subprime mortgage payment
delinquency rates remained in the 10-15% range from 1998 to 2006,[48]
then began to increase rapidly, rising to 25% by early 2008.Some, like
American Enterprise Institute fellow Peter J. Wallison believe the roots of the
crisis can be traced directly to sub-prime lending by Fannie Mae and Freddie
Mac, which are government sponsored entities. On 30 September 1999, The
New York Times reported that the Clinton Administration pushed for sub-
prime lending. Fannie Mae, the nation's biggest underwriter of home
mortgages, has been under increasing pressure from the Clinton
Administration to expand mortgage loans among low and moderate income
people... In moving, even tentatively, into this new area of lending, Fannie

9
Mae is taking on significantly more risk, which may not pose any difficulties
during flush economic times. But the government-subsidized corporation may
run into trouble in an economic downturn, prompting a government rescue
similar to that of the savings and loan industry in the 1980s.A 2000 United
States Department of the Treasury study of lending trends for 305 cities from
1993 to 1998 showed that $467 billion of mortgage credit poured out of
Community Reinvestment Act (CRA)-covered lenders into low and mid level
income borrowers and neighborhoods. Nevertheless, only 25% of all sub-
prime lending occurred at CRA-covered institutions, and a full 50% of sub-
prime loans originated at institutions exempt from CRA. While the number of
CRA sub-prime loans originated were less than non-CRA sub-prime loans
originated, it is important to note that the CRA sub-prime loans were the
more "vulnerable during the downturn, to the detriment of both borrowers
and lenders. For example, lending done under Community Reinvestment Act
criteria, according to a quarterly report in October of 2008, constituted only 7
percent of the total mortgage lending by the Bank of America, but constituted
29 percent of its losses on mortgages. "Others have pointed out that there
were not enough of these loans made to cause a crisis of this magnitude. In
an article in Portfolio Magazine, Michael Lewis spoke with one trader who
noted that "There weren’t enough Americans with [bad] credit taking out [bad
loans] to satisfy investors’ appetite for the end product." Essentially,
investment banks and hedge funds used financial innovation to enable large
wagers to be made, far beyond the actual value of the underlying mortgage
loans, using derivatives called credit default swaps and synthetic CDO. As
long as derivative buyers could be matched with sellers, the theoretical
amount that could be wagered was infinite. "They were creating [synthetic
loans] out of whole cloth. One hundred times over! That’s why the losses are
so much greater than the loans. "Economist Paul Krugman argued in January
2010 that the simultaneous growth of the residential and commercial real
estate pricing bubbles undermines the case made by those who argue that
Fannie Mae, Freddie Mac, CRA or predatory lending were primary causes of
the crisis. In other words, bubbles in both markets developed even though
only the residential market was affected by these potential causes.

10
 Predatory lending. Predatory lending refers to the practice of unscrupulous
lenders, to enter into "unsafe" or "unsound" secured loans for inappropriate
purposes. A classic bait-and-switch method was used by Countrywide,
advertising low interest rates for home refinancing. Such loans were written
into extensively detailed contracts, and swapped for more expensive loan
products on the day of closing. Whereas the advertisement might state that
1% or 1.5% interest would be charged, the consumer would be put into an
adjustable rate mortgage (ARM) in which the interest charged would be
greater than the amount of interest paid. This created negative amortization,
which the credit consumer might not notice until long after the loan
transaction had been consummated. Countrywide, sued by California Attorney
General Jerry Brown for "Unfair Business Practices" and "False Advertising"
was making high cost mortgages "to homeowners with weak credit,
adjustable rate mortgages (ARMs) that allowed homeowners to make
interest-only payments.". When housing prices decreased, homeowners in
ARMs then had little incentive to pay their monthly payments, since their
home equity had disappeared. This caused Countrywide's financial condition
to deteriorate, ultimately resulting in a decision by the Office of Thrift
Supervision to seize the lender. Former employees from Ameriquest, which
was United States’s leading wholesale lender, described a system in which
they were pushed to falsify mortgage documents and then sell the mortgages
to Wall Street banks eager to make fast profits. There is growing evidence
that such mortgage frauds may be a cause of the crisis.

 Increased debt burden or over-leveraging. Leverage ratios of investment

banks increased significantly 2003-2007. U.S households and financial
institutions became increasingly indebted or overleveraged during the years
preceding the crisis. This increased their vulnerability to the collapse of the
housing bubble and worsened the ensuing economic downturn. Key statistics
include: (1)Free cash used by consumers from home equity extraction
doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing
bubble built, a total of nearly $5 trillion dollars over the period, contributing
to economic growth worldwide. U.S. home mortgage debt relative to GDP
increased from an average of 46% during the 1990s to 73% during 2008,
reaching $10.5 trillion. (2)USA household debt as a percentage of annual

11
 disposable personal income was 127% at the end of 2007, versus 77% in
1990.(3) In 1981, U.S. private debt was 123% of GDP; by the third quarter of
2008, it was 290%.(4) From 2004-07, the top five U.S. investment banks
each significantly increased their financial leverage , which increased their
vulnerability to a financial shock. These five institutions reported over $4.1
trillion in debt for fiscal year 2007, about 30% of USA nominal GDP for 2007.
Lehman Brothers was liquidated, Bear Stearns and Merrill Lynch were sold at
fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial
banks, subjecting themselves to more stringent regulation. With the
exception of Lehman, these companies required or received government
support.(5) Fannie Mae and Freddie Mac, two U.S. Government sponsored
enterprises, owned or guaranteed nearly $5 trillion in mortgage obligations at
the time they were placed into conservatorship by the U.S. government in
September 2008.

 Financial innovation and complexity. The term financial innovation refers

to the ongoing development of financial products designed to achieve
particular client objectives, such as offsetting a particular risk exposure (such
as the default of a borrower) or to assist with obtaining financing. Examples
pertinent to this crisis included: the adjustable-rate mortgage; the bundling of
subprime mortgages into mortgage-backed securities (MBS) or collateralized
debt obligations (CDO) for sale to investors, a type of securitization; and a
form of credit insurance called credit default swaps (CDS). The usage of these
products expanded dramatically in the years leading up to the crisis. These
products vary in complexity and the ease with which they can be valued on
the books of financial institutions. As described in the section on subprime
lending, the CDS and portfolio of CDS called synthetic CDO enabled a
theoretically infinite amount to be wagered on the finite value of housing
loans outstanding, provided that buyers and sellers of the derivatives could be
found. For example, selling a CDS to insure a CDO ended up giving the seller
the same risk as if they owned the CDO, when those CDO's became
worthless. Certain financial innovation may also have the effect of
circumventing regulations, such as off-balance sheet financing that affects the
leverage or capital cushion reported by major banks. For example, Martin
Wolf wrote in June 2009: "...an enormous part of what banks did in the early

12
 part of this decade – the off-balance-sheet vehicles, the derivatives and the
'shadow banking system' itself – was to find a way round regulation.

 Incorrect pricing of risk. The pricing of risk refers to the incremental

compensation required by investors for taking on additional risk, which may
be measured by interest rates or fees. For a variety of reasons, market
participants did not accurately measure the risk inherent with financial
innovation such as MBS and CDO's or understand its impact on the overall
stability of the financial system. For example, the pricing model for CDO’s
clearly did not reflect the level of risk they introduced into the system. Banks
estimated that $450bn of CDO were sold between "late 2005 to the middle of
2007"; among the $102bn of those that had been liquidated, JPMorgan
estimated that the average recovery rate for "high quality" CDO’s was
approximately 32 cents on the dollar, while the recovery rate for mezzanine
CDO was approximately five cents for every dollar. Another example relates
to AIG, which insured obligations of various financial institutions through the
usage of credit default swaps. The basic CDS transaction involved AIG
receiving a premium in exchange for a promise to pay money to party A in
the event party B defaulted. However, AIG did not have the financial strength
to support its many CDS commitments as the crisis progressed and was taken
over by the government in September 2008. U.S. taxpayers provided over
$180 billion in government support to AIG during 2008 and early 2009,
through which the money flowed to various counterparties to CDS
transactions, including many large global financial institutions. The 'shadow
banking system' itself – was to find a way round regulation.

 Commodities boom. Rapid increases in a number of commodity prices

followed the collapse in the housing bubble. The price of oil nearly tripled
from $50 to $147 from early 2007 to 2008, before plunging as the financial
crisis began to take hold in late 2008.Experts debate the causes, with some
attributing it to speculative flow of money from housing and other
investments into commodities, some to monetary policy, and some to the
increasing feeling of raw materials scarcity in a fast growing world, leading to
long positions taken on those markets, such as Chinese increasing presence
in Africa. An increase in oil prices tends to divert a larger share of consumer
spending into gasoline, which creates downward pressure on economic growth

13
 in oil importing countries, as wealth flows to oil-producing states self – was to
find a way round regulation.

 Systemic crisis. Another analysis, different from the mainstream

explanation, is that the financial crisis is merely a symptom of another,
deeper crisis, which is a systemic crisis of capitalism itself. According to Samir
Amin, an Egyptian Marxist economist, the constant decrease in GDP growth
rates in Western countries since the early 1970s created a growing surplus of
capital which did not have sufficient profitable investment outlets in the real
economy. The alternative was to place this surplus into the financial market,
which became more profitable than productive capital investment, especially
with subsequent deregulation. According to Samir Amin, this phenomenon
has led to recurrent financial bubbles (such as the internet bubble) and is the
deep cause of the financial crisis of 2007-2010. John Bellamy Foster, a
political economy analyst and editor of the Monthly Review, believes that the
decrease in GDP growth rates since the early 1970s is due to increasing
market saturation.

 Role of economic forecasting. The financial crisis was not widely predicted
by mainstream economists, who instead spoke of The Great Moderation. A
number of heterodox economists predicted the crisis, with varying arguments.
Dirk Bezemer in his research[110] credits (with supporting argument and
estimates of timing) 12 economists with predicting the crisis: Dean Baker
(US), Wynne Godley (UK), Fred Harrison (UK), Michael Hudson (US), Eric
Janszen (US), Steve Keen (Australia), Jakob Brøchner Madsen & Jens Kjaer
Sørensen (Denmark), Kurt Richebächer (US), Nouriel Roubini (US), Peter
Schiff (US), and Robert Shiller (US). The Wharton School of the University of
Pennsylvania's online business journal examines why economists failed to
predict a major global financial crisis. Popular articles published in the mass
media have lead the general public to believe that the majority of economists
have failed in their obligation to predict the financial crisis.

 Mortgage Defaults. Many homeowners were sold mortgage products that

became unaffordable when their introductory period ended and interest rates
increased. This lowered their disposable income and caused many to default
on their mortgage payments.

14
 Financial Crisis. The prospects of banks like Northern Rock and Bear Sterns
in the US going bankrupt have made people less confident about spending
and investing. Financial crisis caused an economic slowdown for US economy
decreased US demand for foreign goods + decline in demand due to fall in
dollar.

 Credit Crunch / Difficulty of Borrowing Money. Because of high

mortgage defaults in US, many banks lost money. Therefore financial
institutions have become very reluctant to lend money; this has led to a
shortage of funds in the money markets. This has caused borrowing to be
more expensive and difficult to arrange leading to lower investment and
consumer spending.

 Global contagion: The crisis rapidly developed and spread into a global
economic shock, resulting in a number of European bank failures, declines in
various stock indexes, and large reductions in the market value of equities
and commodities. Both MBS and CDO were purchased by corporate and
institutional investors globally. Derivatives such as credit default swaps also
increased the linkage between large financial institutions. Moreover, the de-
leveraging of financial institutions, as assets were sold to pay back obligations
that could not be refinanced in frozen credit markets, further accelerated the
solvency crisis and caused a decrease in international trade. World political
leaders, national ministers of finance and central bank directors coordinated
their efforts to reduce fears, but the crisis continued. At the end of October
2008 a currency crisis developed, with investors transferring vast capital
resources into stronger currencies such as the yen, the dollar and the Swiss
franc, leading many emergent economies to seek aid from the International
Monetary Fund. Failed in their obligation to predict the financial crisis.

 Credit Default Swaps: Insurance obligations that were created to save

investment banks from loan defaults. This caused the insurance companies
get into trouble. Example AIG

 Rising Costs. Rising oil, energy and food prices have caused an increase in
the cost of production. This causes the aggregate supply curve to shift to the
left; it leaves lower discretionary income for the average consumer.

15
Stages of the Crisis:

The crisis has gone through Currently, Fannie and Freddie

several stages. guarantee about 70% of all new
 First, during late home loans. They are under
2007, over 100 mortgage “conservator-ship,” and Treasury
lending companies went
Secretary Paulson is deferring
bankrupt as subprime
mortgage-backed securities
decisions regarding the mission

could no longer be sold to of the companies for the next

investors to acquire funds. President and Congress.
 Second, starting in Q4 2007 and in each quarter since then, financial
institutions have recognized massive losses as they adjust the value of their
mortgage backed securities to a fraction of their purchased prices. These
losses as the housing market continued to deteriorate meant that the banks
have a weaker capital base from which to lend.

 Third, during Q1 2008, investment bank Bear Stearns was hastily

merged with bank JP Morgan with $30 billion in government guarantees, after
it was unable to continue borrowing to finance its operations.

 Fourth, during September 2008, the system approached meltdown. In

early September Fannie Mae and Freddie Mac, representing $5 trillion in
mortgage obligations, were nationalized by the U.S. government as mortgage
losses increased.

 Finally, investment bank Lehman Brothers filed for bankruptcy. In

addition, two large U.S. banks
(Washington Mutual and Wachovia) A credit default swap (CDS) is
became insolvent and were sold to a swap contract in which
stronger banks. The world's largest the buyer of the CDS makes a
insurer, AIG, was 80% nationalized series of payments to
by the U.S. government, due to the seller and, in exchange,
receives a payoff if a credit
instrument (typically a bond or
16 loan) goes into default
 concerns regarding its ability to honor its obligations via a form of financial
insurance called credit default swaps.

Impacts of global recession

Unemployment

ILO has projected that

because of the
ongoing economic
downturn, global job
loss was likely to be to
the tune of 18 to 51
million by the end of
2009. A major setback
will be an additional
fall of 53 million
people below the
poverty line as a result
of the global crisis in 2009 alone. In the United States, 5.4 million jobs were lost
between July, 2008 and February, 2009; Spain lost 766 thousand jobs in the first
quarter of 2009 and unemployment jumped to 17.4 per cent. A substantial number
of job losses in developed economies along with possible reduction of various
workers’ benefits led to reduction of disposable income of low-income working people
and consequently had adversely affected demand for goods and services.

Business effects

The global recession affected the various business industries, such as lather,
tourism, garment, etc.
Social effects

The living standards of people

dependent on wages and salaries are
more affected by recessions than those
who rely on fixed incomes or welfare

17
benefits. The loss of a job is known to have a negative impact on the stability of
families, and individuals' health and well-being.

Stock market

The economy and the

stock market are
closely related as the
buoyancy of the
economy gets reflected
in the stock market.
Due to the impact of
global economic
recession, Indian stock
market crashed from
the high of 20000 to a
low of around 8000
points.

FDI Flow in Developed and Developing Countries

Global FDI flow in 2008 has declined by 21 per cent compared to the previous year,
and reached US$1.4 trillion. Preliminary data issued by UNCTAD indicated that FDI
flow fell by 33.7 percent in EU and 5.5 per cent in USA during 2008, while in
developing and transition economies it was 4 per cent higher mainly because of
investment opportunities based on cheap asset prices and industry restructuring.

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Impact of global recession on Bangladesh
Since the collapse of the United States sub prime mortgage market and the
subsequent international global crisis, many developed and developing countries
have been plunged into deep recession. Bangladesh though has found itself in a
slightly different position. Its economy is not so dependent on international capital
and foreign investment, which has helped to lower the immediate impact of the
crisis.

Although it is now clear that the on going global crisis will have a significant impact
on Bangladesh, its impact is still expected to be less severe than in most other
economies. The reasons for this include:

 Bangladesh’s relatively limited exposure to the global economy, particularly in

export (about 18.0 percent of GDP)

 Bangladesh largely exports garments which are mainly low priced products for
the lower end of the market, demand for which has been relatively recession
resistant

 the continued importance of domestic agriculture as a driver of economic

growth, which performed relatively in a robust manner

 the presence of a large informal sector that comprises of domestic trade and
commerce which creates some inbuilt resilience in the economy

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  the positive impact of the plunge in commodity prices, particularly oil and
fertilizer, on costs of production

 the minimal exposure of Bangladesh to international capital markets making

the economy less vulnerable to the withdrawal of foreign capital

 the strong macroeconomic fundamentals underwritten by sustainable levels of

budget deficit and public debt

 many garment orders are shifting from China to other countries (Vietnam,
Cambodia) including Bangladesh

 Relatively low retrenchment of Bangladeshi workers in the Gulf and Middle

Eastern countries because Bangladeshi workers are engaged mainly in
unskilled low paid jobs, not affected by the recession.

The rescue programs

Governments in even the wealthiest nations have had to come up with rescue
packages to bail out their financial systems. Both market-based
and regulatory solutions have been implemented or are under consideration, while
significant risks remain for the world economy over the 2010–2011 periods.

Various Stimulus Packages Taken by Partner Governments

As the global financial crisis started to strengthen its grip on the development
prospects of countries around the world, governments came up with strategic plans
to safeguard their economies by way of putting in place various initiatives to protect
the interest of domestic producers, exporters, workers and consumers. Currently a
number of global, regional and national initiatives have been set in motion to
stimulate economic recovery in the affected countries.

The US’s US$700 billion bailout plan was the first among the many initiatives
followed by UAE’s injection of US$19 billion into the economy, and France’s €10.5
billion rescue plan for six of its largest banks.

Among the developing countries, China announced a 4 trillion yuan (US$586 billion
equivalent to 7 per cent of GDP) domestic stimulus package for the remainder of

20
2008, which would be continued till the end of 2010. Vietnam, on the other hand,
announced a stimulus package of US$1 billion focusing primarily on stimulating
domestic consumption among consumers. The Indonesian government has also
come up with a fiscal stimulus package worth about US$6.1 billion. The government
of Philippines has announced a US$6.9 billion stimulus package in order to create
about one million jobs; of this, about US$5.2 million would be used to support
retrenched overseas workers. India has so far announced three stimulus packages
with a total support of US$8 billion including various fiscal incentives to affected
industries such as textiles, leather, marine products,- particularly SMEs.

Stimulus packages taken by Bangladesh Govt.

Despite this the Bangladesh government has formed a high-level technical
committee and taskforce to monitor and advice on the crisis, and ministries and
financial institutions have taken several precautionary measures. Importantly in
October 2008 Bangladesh Bank withdrew 90 % of its total investment from foreign
banks which has helped to further shield the economy, so that it is only now that the
affects of the crisis are being felt.
Additionally the Bank has taken measures to stabilize the exchange rate, provide
extra liquidity to the financial sector and raised the limit on private foreign
borrowing. It has also relaxed the conditions for opening fresh letters of credit
(L/Cs).

Stimulus Package: FY2008-09

In April, 2009, the Govt. announced the first stimulus package in view of global
financial crisis. The underlying objective of this stimulus package was to safeguard
Bangladesh’s domestic economy from the negative impacts of the global recession by
way of maintaining robust export growth, buoyancy in revenue earnings from
imports, and resilience in remittance earnings. The special package was worth of
Tk.34.2 billion (US$495.22 million, 0.55 per cent of GDP of FY2008-09) which was
allocated to support domestic and export oriented industries and agriculture,
generation of electricity and providing social protection to workers during these times
of global crisis.

Stimulus Package of FY2009-10

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The national budget for FY2009-10 has announced a stimulus package to the tune of
Tk.50 billion (US$724 million).43 It would appear that disbursement of this fund for
FY2009-10 will be based on the guideline mentioned in the stimulus package of the
FY2008-09. These supports are expected to contribute towards boosting domestic
industries, and keeping the business of export-oriented industries running in view of
falling prices of export products. Such measures would at least indirectly contribute
to retention of jobs by workers.

What is Subprime loan?

Interestingly, the term subprime does not have an exact meaning. For all
purposes, it refers to the practice of giving loans to people who would
not normally qualify for a loan.

 Subprime loan is a type of loan that is offered at a rate above prime rate (The
interest that banks charge to their preferred customers, usually large
corporations, for short-term loans) to individuals who do not qualify for prime
rate loans. Quite often, subprime borrowers are often turned away from
traditional lenders because of their low credit ratings or other factors that
suggest that they have a reasonable chance of defaulting on the debt
repayment.

 Subprime loan is a loan made to a borrower who does not qualify for the
lowest market interest rates due to credit problems or other underwriting
deficiencies. Because of the greater risk to the lender, the borrower is
charged a higher rate and/or greater fees.

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History of Subprime Lending

Subprime lending evolved with the realization of a demand in the marketplace for
loans to high-risk borrowers with imperfect credit. The first subprime was initiated in
1993. Many companies entered the market when the prime interest rate was low,
and real interest became negative allowing modest subprime rates to flourish;
negative interest rates are hand-outs, such that the more you borrow the more you
earn. In 1998, the Federal Trade Commission estimated that 10% of new-car
financing in the US was provided by subprime loans, and that $125 billion of $859
billion total mortgage dollars were subprime.

Subprime lending of USA: a scenario

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The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March
2007, with over 7.5 million first-
lien In law, a lien is a form
of security
subprime mortgages outstanding.
There is evidence that both
interest granted over an

government and competitive item of property to secure

pressures contributed to an the payment of a debt or
increase in the amount of performance of some
subprime lending during the
other obligation. The
years preceding the crisis. Major
owner of the property,
U.S. investment banks and
who grants the lien, is
government sponsored
enterprises like Fannie Mae referred to as
played an important role in the the lienor and the person
expansion of higher-risk who has the benefit of the
lending. lien is referred to as
Subprime mortgages remained below the lienee.
10% of all mortgage originations until
2004, when they spiked to nearly 20% and remained there through the 2005-2006
peak of the United States housing By 2007, subprime loans
bubble. This applied additional
accounted for 29% of total
competitive pressure to Fannie Mae and
home loans. The vast majority
Freddie Mac, which further expanded
of the subprime loans causing
their riskier lending. Subprime mortgage
today’s massive foreclosures
payment delinquency rates remained in
were issued by institutions and
the 10-15% range from 1998 to 2006,
then began to increase rapidly, rising to independent mortgage brokers

25% by early 2008. not covered by the CRA.

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Objective of the Report
Broad Objectives

 To know about the present financial condition of the world as well as

Bangladesh economy

Specific Objectives

 To assess the likely impact of the global economic crisis on the Bangladesh
economy, particularly its impacts in terms of employment, labour market.
 To know the economic condition of Bangladesh
 To know what safety steps govt. are taking about the recession
 To make some policy implications and conclusion to avoid the financial
recession

Methodology of the Study

Data requirements:

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In fact, our aim was to collect as much information as it can be possible to make a
clear idea about the present economic condition of the world as well as Bangladesh.
Of course we had to collect enough information so that we can make an analysis of
the global financial crisis and the rescue programs of the govt. of various countries.

Sources of data:
This report was made based on the secondary information source only. The data
were collected from the different websites, as well as different articles, which were
published in internet.

Secondary data sources:

• Different Websites
• Articles about the recession from the internet

Limitations
The study has suffered from a number of barriers
• Unavailability of Primary Data.
• The analysis of the data couldn’t be done effectively.
• We had to depend on the non-statistical graph.

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Report Review
The global recession started in USA due to the boom in the housing sector was
taking the economy to a new level. A combination of low interest rates and large
inflows of foreign funds the world became awash with liquidity, with funds chasing
any opportunity for good returns. In the USA, low-income earners were encouraged
to buy homes with little or no equity and the banks moved to providing low-income
mortgages. As a result, many people with low income & bad credit were given
housing loans in disregard to all principles of financial prudence. These types of loans
were known as sub-prime loans as those were are not part of prime loan market.
Major investment banks and institutions heavily bought these loans to diversify their
investment portfolios. Owing to heavy buying of Mortgage Backed Securities (MBS)
of subprime loans by major American and European Banks, the problem, which was
to remain within the confines of US propagated into the word's financial markets. As
the home prices started declining in the US, sub-prime borrowers found themselves
in a messy situation. Their house prices were decreasing and the loan interest on
these houses was soaring. As they could not manage a second mortgage on their
home, it became very difficult for them to pay the higher interest rate. As a result
many of them opted to default on their home loans and vacated the house.

However, as the home prices were falling rapidly, the lending companies, which were
hoping to sell them and recover the loan amount, found them in a situation where
loan amount exceeded the total cost of the house. Eventually, there remained no
option but to write off losses on these loans.

The causes works behind the recession are –falling housing prices, subprime
mortgage loans, subprime mortgage backed securities, high rate of defaults, etc.
As a result of the recession the number of unemployment were increased rapidly.
global job loss was likely to be to the tune of 18 to 51 million by the end of 2009. It
also affected the various business industries, such as lather, tourism, garment, etc.
The living standards of people dependent on wages and salaries are more affected by
recessions than those who rely on fixed incomes. The economy and the stock market
are closely related as the buoyancy of the economy gets reflected in the stock
market. Due to the impact of global economic recession, Indian stock market
crashed from the high of 20000 to a low of around 8000 points.
Bangladesh though has found itself in a slightly different position. Its economy is not
so dependent on international capital and foreign investment, which has helped to
lower the immediate impact of the crisis.

Govt. of different countries including wealthy countries, like USA, France comes out
with rescue packages. The largest package was US $700 billion bailout. Bangladesh
govt. announced a special package of TK. 34.2 billion.

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Conclusion

In the globalized market scenario, the impact of recession at one place/ industry/
sector percolate down to all the linked industry and this can be truly interpreted from
the current market situation which is faced by the world. Whether a global recession
occurs or not, there will be people whose businesses go under simply because of the
speculation about a recession. It's incredibly sad but it's a fact and it's happened all
throughout history whenever the economy has faltered. These recession strategies
won't turn the business around when used independently, but if we combine several
of them, they can help to transform one's outlook for the future. This recession have
turned down the growth process and have set the minds of many for finding out the
real solution to sustain the economic growth and stability of the market which is
desired for the smooth running of the economy.

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REFERENCES

• Wikipedia
http://en.wikipedia.org/wiki/Main_Page
Financial_crisis_of_2007–2010.htm
• Ministry of Finance, Bangladesh
http://www.mof.gov.bd/en/
• J.D. Foster, October 22 2009
http://www.heritage.org/Research/Economy/bg2331es.cfm
• 2008 Financial Crisis & Global Recession
http://2008financialcrisis.umwblogs.org
• Bangladesh online research network
http://www.bdresearch.org/home/index.php?
option=com_content&view=article&id=54:impact-of-global-financial-crisis-on-
the-economy-of-bangladesh&catid=46:protifolon&Itemid=60
• Economic Help(07.07.208): The Impact of A Recession
http://www.economicshelp.org/2008/07/impact-of-recession.html
• Sify Business, 18.11.2008: Top government bailouts
http://sify.com/finance/top-government-bailouts-news-investments-
jegvtldfbcd.html

• Articlebase.com
• Google.com
• CPD report, Impact of the Global Financial and Economic Crisis on
Bangladesh A RAPID ASSESSMENT
www.ilo.org/asia/whatwedo/events/lang--en/.../index.htm

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