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Recession 2008 : Comparison with The Great Depression
Presented By:
• Abhinav Sehgal• Akshay Anand• Deepika Misra• Karishma Jindal• Reuben Khanna
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What is Recession ?
In economics, a recession is a business cycle contraction, a general slowdown in economic activity.
During recessions, many macroeconomic indicators vary in a similar way.
Production, employment, investment spending, capacity utilization, household incomes and business profits all fall.
Bankruptcies and the unemployment rate rise.
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Types of Recession
V-shaped recession
The Recession of 1953 in the United States is a classic V-shape.
U-shaped recession
The Recession of 1973–75 in the United States could be considered a U-shaped recession.
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W-shaped recession
The early 1980s recession n the United States is an example of a W-shaped recession.
L-shaped recession
L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble in 1990.
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RECESSION 2008 : Causes
The Housing Bubble Burst
The Subprime Mortgage
Fiasco
Sky-High Price of Crude Oil and Refined
Product
Dollar Devaluation
RECESSION 2008 : Causes
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• In US, a boom in the housing sector was driving the economy to a new level.
• Home Loans became cheap and demand increased.
• Lending institutions and mortgage firms wanted to give loans to as many potential customers as possible.
• People even under the NINJA category were given housing loans.
• Overbuilding of houses led to decline in prices and refinancing became difficult.
• As prices declined, more homeowners were at risk of default and foreclosure.
The Housing Bubble Burst
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The Subprime Mortgage Fiasco. • Continuous Monetary Inflation suckered
individuals into low-down-payment/low-interest adjustable mortgages.
• Incentive is to sell the property quickly
• Various institutions that hold the poorly performing debt obligations were forced to 'write down' the value of these assets.
• Record supply availability, falling prices, higher insurance costs and restricted credit were prevalent.
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Sky-High Price of Crude Oil and Refined Product.
• World-wide speculative Middle East war fears .
• Increase in demand (especially from China).
• Increasing energy prices.
• High Costs of Production.
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Dollar Devaluation
• Caused by Iraq blunder and the Federal Reserve–generated oversupply of dollars.
• The bulk of crude oil purchases takes place in dollars.
• Investments such as US Treasury bills and bonds become less attractive.
• Prevents the Federal Reserve from pushing US interest rates much lower.
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EFFECT ON THE WORLD
• Worse hit are the poorest countries. • The 15-country Euro zone were defined as a shrinking economy for two consecutive quarters.
• Decreased demand for exports and remittances slowed down the Asia-Pacific economy.
• Fall in house prices and increase in unemployment in the UK economy .
• India recovered early as there was very little exposure to foreign assets and their derivative products.
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The American economy went from unprecedented prosperity in the 1920s to unprecedented misery in the 1930s .
The Great Depression
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• A depression is a sustained, long-term downturn in economic activity in one or more economies.
What is Depression?
• Considered, by some economists, a rare and extreme form of recession
• Characterized by abnormally large increases in unemployment, falls in the availability of credit and large number of bankruptcies
• Price deflation, financial crises and bank failures are also common elements
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THE GREAT DEPRESSION :
CAUSES
Stock Market Crash 1929
Bank Failures
Drought Conditions
American Economic Policy with Europe
Reduction in Purchasing Across the Board
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Stock Market Crash 1929 • Black Tuesday, October 29, 1929.
• Stockholders lost more than $40 billion dollars.
• By the end of 1930, America truly entered what is called the Great Depression.
• Dow Jones industrial average dropped over 12%.
• Result of mass panic selling of stocks, causing prices to plummet .
• Flood of sell orders provided stock prices to traders.
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Bank Failures
Reduction in Purchasing
• Throughout the 1930s over 9,000 banks failed.
• People who had their life savings in the banks – lost their money.
• Individuals from all classes stopped purchasing items.
• Reduced Production leading to reduction in Workforce.
• Unemployed were unable to pay installments on their items, which were ultimately repossessed.
• Unemployment rate rose above 25%.
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American Economic
Policy
• Government created the Smoot-Hawley Tariff in 1930.
• Charged a high tax for imports thereby leading to less trade between America and foreign countries.
Drought Condition
s
• Drought occurred in the Mississippi Valley in 1930.
• People could not even pay their taxes or other debts . • Forced to sell their farms for no profit to themselves.• The area was nicknamed "The Dust Bowl."
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KEYNESIAN APPROACH(1933-1942)
• Expansionary fiscal policies forced by the war had brought output back to potential by 1941.
• The U.S. entry into World War II led to much sharper increases in government purchases.
• It ended the Great Depression.
• By 1942, increasing aggregate demand had pushed real GDP beyond potential output.
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Comparison between Recession 2008 & The Great Depression 1929
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GDP AND LENGTH OF RECESSION AND DEPRESSION
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Great Depression Great Recession
• Bank failures 9,096 – 50% of banks(Jan. 1930 – March 1933)
57 – 0.6% of banks(Dec. 2007 – May 2009)
• Unemployment rate 25% 8.5%
• Economic decline -26.5%(1929 - 1933)
-4.1%(Last quarter 2007 - Second quarter
2009)
• Biggest decline in Dow Jones industrial average
-89.2% (Sept. 3, 1929 – July 8, 1932)
-53.8% (Oct. 9, 2007- March 9, 2009)
• Change in prices -25% (1929 – 1933)
+0.5% (Dec. 2007-March 2009)
• Emergency spending programs
1.5% of GDP for 1 year(Increase in 1934 budget deficit)
2.5% of GDP for 2 years(2009 American Reinvestment and
Recovery Act)
• States response Raise taxes, cut spendingFederal stimulus plan gives fiscal relief
to states to lessen impact of tax increases
• Increase in money supply by Federal
Reserve
17%(1933)
125%(September 2008 – May 2009)
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UNEMPLOYMENT
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PRICES,INFLATION AND DEFLATION
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