Recession 2008 : Comparison with The Great Depression

Presented By:

• Abhinav Sehgal• Akshay Anand• Deepika Misra• Karishma Jindal• Reuben Khanna

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.

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.

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.

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

• 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

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.

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.

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.

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.

The American economy went from unprecedented prosperity in the 1920s to unprecedented misery in the 1930s .

The Great Depression

• 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

THE GREAT DEPRESSION :

CAUSES

Stock Market Crash 1929

Bank Failures

Drought Conditions

American Economic Policy with Europe

Reduction in Purchasing Across the Board

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.

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%.

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."

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.

Comparison between Recession 2008 & The Great Depression 1929

GDP AND LENGTH OF RECESSION AND DEPRESSION

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)

UNEMPLOYMENT

PRICES,INFLATION AND DEFLATION

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