Recession : The possible causes

Hi! everyone of us is bothered about the actual causes of recession and forces which cause the downturn of financial markets specifically.Here,we will try to figure out some most appropriate reasons and also i will try to clarify the meaning of some typical economic terms.

Recession was first marked by the bankruptcy of Lehman brothers.Its main causes were :

1. Subprime mortgage crisis : The mortgage is a security for the loan that the lender makes to the borrower. Subprime are those with lesser ability to repay the loan based on various criteria.Most house loan takers in US were proved out to delinquent.
2. Bad Regulation : Reduced regulatory constraints created influatory demand of real estate market in US and most of the managers gambled by giving away loans to subprimes.
3. Lack of transparency : Lack of transparency of CDS(Credit default swap) markets which goes unregulated causes huge hike in house prices causing the downturn of major financial players.
4. Lehman financial policy : The two factors were :
   
   • High level of leverage
   • Strong reliance on short term debt financing

Now, you will be thinking how all this actually started ??I am trying to explain the origin of crisis here in simple plain English :

• It's all started by boom in US housing sector and the low interest rates fuelled the demands which cause huge hike in prices
• Overbuilding of houses during boom caused home prices to decline.
• Home owners, who were expecting to get a refinance on the basis of increased home prices, found themselves unable to re-finance and began to default on loans as their loans reset to higher interest rates and payment amounts.
• This caused great loss to banks because in case of defaulters of house loans ,they have only option to sell the house which were at low prices then. It caused great loss to financial banks.

Here, once again a new question arises as this seem to be the local problem of US so why whole world is suffering from it?????

The reason for this typical question is money market.Money Market is actually an inter-bank market where banks borrow and lend money among themselves to meet short-term need for funds.This helped quick spread of money deficit across various banks and causing them huge losses.

Again,one important question arises that why other companies are so badly affected by financial turn down????????????

The answer to this is liquidity crunch.Due to this it has become very difficult for top companies to take loans for their needs.The disbelief between the banks is on the fly and which is causing the halt of money market further freezing the world economy.


Effects on India :

Due to globalization, India is also feeling the heat of global financial down turn particularly marked by :

• Share markets are falling badly
• Rupee is weakening against dollar
  
• Banks are facing credit crunch

Major markets which are badly hit by recession are :

• IT sector further worsened by Satyam fraud
• Textile industry of TamilNadu
• Automotive sector of Chennai
• and much more...........................
  

But , the most positive point you will find that is the things are still moving in India , albeit at slower rate . Most important a major part of population is, in fact, not involved in investments in share markets, realty or other such financial activities, but is still largely dependent upon the informal trading at local level. So, the conditions are not so much worse in India as the hue-and-cry made by newspapers and electronic media.