Recession in Usa

Topics: Subprime lending, Monetary policy, Inflation Pages: 5 (1963 words) Published: April 16, 2013
2. WHAT IS RECESSION ? In economics, the term recession describes the reduction of a country's gross domestic product (GDP) for at least two quarters . A Recession is a contraction phase of the business cycle. National Bureau of Economic Research (NBER) is the official agency in charge of declaring that the economy is in a state of recession. •3. They define recession as : “ significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales ”. •4. Indicators to say a nation is in recession ; - People buying less stuff Decrease in factory production - Growing unemployment - Slump in personal income - An unhealthy stock market HOW TO KNOW RECESSION? •5. What Causes Recession ?

6. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years . A recession normally takes place when consumers loose confidence in the growth of the economy and spend less . This leads to a decreased demand for goods and services , which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment . Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment . •8. U.S ECONOMIC RECESSION HISTORY The United States has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. Let’s see a detail history of economic recession in the United States -: Late 2000's Recession Early 2000's Recession 1990's Recession 1980's Recession 1970's Oil Crisis Late 1960's Recession Early 1960's Recession Late 1950's Recession Early 1950's Recession Late 1940's Recession Recession of 1945 The Great Depression The Great Depression Recession 1926 Post World War I Recession Panic of 1907 1870's Recession 1890's Recession Panic of 1857 Panic of 1837 Depression of 1807 Panic of 1819 Panic of 1797 •9. U.S.A – Consumption based Economy. 2/3 rd Economic activity i.e. GDP – comes from consumers. Credit - free flowing for U.S consumers (SUBPRIME CRISES) •10. WHAT IS A SUB-PRIME LOAN? In the US, borrowers are rated either as ‘prime’ - indicating that they have a good credit rating based on their track record - or as ‘sub-prime’, meaning their track record in repaying loans has been below par. Loans given to sub-prime borrowers, something banks would normally be reluctant to do, are categorized as sub-prime loans. Typically, it is the poor and the young who form the bulk of sub-prime borrowers What Was The Interest Rate On Sub-prime Loans? Since the risk of default on such loans was higher, the interest rate charged on sub-prime loans was typically about two percentage points higher than the interest on prime loans. This, of course, only added to the risk of sub-prime borrowers defaulting. The repayment capacity of sub-prime borrowers was in any case doubtful. The higher interest rate additionally meant substantially higher EMIs than for prime borrowers, further raising the risk of default. For internal use only •11. WHY LOANS WERE GIVEN? In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. Government also encouraged lenders to lend to sub-prime borrowers, arguing that this would help even the poor and young to buy houses. With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh...
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