DOON BUSINESS SCHOOL PGDM

1ST

U.S. recession effects on

India, China and Europe

Virender Singh
PGDM

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

EFFECTS OF RECESSION
The United States was heading toward recession. This is
no longer conjecture -- the threat is real. This was
indirectly acknowledged by the White House on Jan.18
with the unveiling of an economic aid package that
practically confirmed everyone's worst fears.
The signs have been apparent since last June or July. The stock
market has been moving sideways rather than up. There were
signals that the economy, which had been hopping from one

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

record to another for the last six years, needed a breather.

Then the sub-prime loan crisis began to unfold. Banks and
financial institutions began to take losses, followed by other
related companies. Later the housing market began to collapse,
induced by the sub-prime loan crisis. When this was followed by
less-than-spectacular Christmas retail sales, the "R"' word
began to be uttered.
The recession was not be officially confirmed for a while, and
rapid interest rate cuts announced on Jan. 22 may reduce its
impact. A near agreement between Congress and the White
House on an additional aid package as unveiled on Jan. 24 may
further reduce the impact of the upcoming slowdown -- yet a
general slowdown is inevitable.
Half a trillion dollars spent on the Iraq war, $200 billion in
losses in the sub-prime loan crisis, and a huge trade deficit with
China are structural factors that cannot be helped by any aid
package.
Global stock markets suffered catastrophic losses on Jan. 21.
Japan's stock market dropped 6 per cent, India's 8 per cent,
Canada's 4.5 per cent and European markets fell from 4 to 6
per cent. The U.S. market, closed for a holiday, was spared
catastrophic losses.
Luckily for U.S. markets, the Federal Reserve stepped in on the
morning of Jan. 22 and cut interest rates by 75 basis points,
which had the desired effect. It curbed investors' rush to sell,
and a day later profiteers stepped in to buy stocks cheap, which
helped reduce losses.
India suffered miserably on Jan. 21, as well as a few days prior
to that day of infamy. Institutional investors from abroad, who
had driven the Indian stock market sky high, pulled back. As in
the United States, the investors were back the next day,
helping the stock market recover some of its losses.
The Chinese are not immune to the worldwide financial crisis,
although they are less exposed to institutional investors. Their

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

worst nightmare may be yet to come. With reduced

merchandize exports, factories will be idle. Layoffs may follow
and social unrest begin -- not good for the upcoming Olympics
in Beijing.
When the United States goes through a slowdown, Canada is
next, followed by Europe and the rest of the world. The impact
of a U.S. slowdown was be:
a) A fall in commodity prices; oil for example would be out of
reach at US$100 a barrel;
b) Layoffs and the closure of factories will send the
unemployment rate soaring, with the side effect of high benefits
payments;
c) With less money to spend, consumers will leave their wallets
and credit cards at home, reducing retail sales. Sales of
housing, cars and other big-ticket items will undergo a dramatic
drop;
d) Stock markets in upcoming months will perform miserably.
The value of people's assets and other holdings will contract.
They will be less likely to indulge in cruises or holidays or other
extravagances;
e) With less money all around, there will be less for the United
States to spend on war on terror in Iraq and Afghanistan. It is
possible that the United States may prematurely wind up and
leave the war halfway;
f) There may be a complete re-look at the North American Free
Trade Agreement, which has moved jobs to Mexico and
Canada;
g) Unequal China trade, which has been a sore point for quite
some time, may come under the scanner. The dollar-yuan
currency relationship may be revised or, in the worst-case
scenario, a few countervailing duties may be applied. In other
words, a long-avoided protectionism may creep into the U.S.
political thought process.

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

Apart from whatever happens in the United States, India and

China will be at the receiving end of a few unpleasant jolts.
China's ever-increasing exports to the United States may find
an uneven reception. India may suffer the consequences of the
withdrawal of investments from the stock market.
In China itself the booming real estate cum infrastructure
reconstruction may cease. Cities in China are on a spending
binge to boast of new infrastructure, which they finance by
borrowing from the banks without adequate checks and
balances. When all hell breaks loose, banks will either go
insolvent or foreign reserves stashed in the United States --
now US$1.3 trillion -- will have to be transferred to keep them
afloat. That is one reason China has been keeping its foreign
reserves close to its chest.
This was cool off the overheated Chinese economy by a few
percentage points. Domestic consumption may be increased to
offset the decline in exports. China may also begin investing in
U.S. companies with financial troubles, like their US$5 billion
investment in Morgan Stanley. A much greater U.S. buying
binge by China is unlikely, however. There are domestic
consequences to worry about, and cash stashed away as
reserves may be urgently needed at home.
The impact on India was be indirect. Globalization, in which
India is a small fry, will impact it less. It is the institutional
investors who will place India on the slippery slopes. In seven
days including Jan. 21, the Indian stock market lost 8 per cent
of its value. This translates to about US$400 billion of investors'
paper money wiped out, or about two years of steady gains
made by the little guys in the market.
The U.S. recession was thus lower expectations in India but was
not have consequences as severe as in China. An already
unhappy textile export sector may find it difficult to achieve its
2008 export target. Alternatively, a boom in the information
technology and business processing outsourcing sector will
continue. U.S. companies looking for cheaper alternatives may

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

outsource additional work.

One salient feature of India's spectacular economic
performance in the last six years is that it is driven by domestic
consumption. Not being dependent upon the United States
makes the impact of the U.S. recession a bit more manageable.
This is completely opposite for China, where exports drive the
economy and domestic life may be ruined if orders dry up.
India will have to worry about rapid interest rate cuts by the
U.S. Federal Reserve Board. That would widen the gap between
Indian and U.S. commercial interest rates, resulting in a capital
outflow from U.S. to India where interest rates are still high.
The arrival of excessive cash in India would not be welcome
today. India would not know what to do with a huge inflow, and
would have to cut its interest rates appropriately. Combine this
with a weakening dollar and it would erode any export
advantage. Hence additional rapid interest rate cuts by the Fed
would require an appropriate response from India.
In the end the world may emerge out of this U.S. slowdown
much more sober. The United States will develop a bit of a
protectionist attitude. China's free reign of cheap exports may
be a thing of the past. Domestic demand will keep India's
growth high, though a drop by a few percentage points for
miscellaneous reasons is not unexpected. India's stock market
will receive a sobering lesson on overemphasizing foreign
investors. Foreign investors will remain, but in a much more
controlled manner.
Top of Form
20080205-17232

Bottom of Form
It all started at the beginning of the US economic boom in
1998, when large numbers of people decided that real estate,
which still hadn’t recovered from the early 1990s slump, had
become a bargain. At the same time, Wall Street was making it
easier for buyers to get loans. It was transforming the

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

mortgage business from a local one, centered on banks, to a

global one, in which investors from almost anywhere could pool
money to lend. The new competition brought down mortgage
fees and spurred some useful innovation. As is often the case
with innovations, though, there was soon too much of a good
thing. Those same global investors flush with cash from Asia’s
boom or rising oil prices, demanded good returns. Wall Street
had an answer: subprime mortgages. Because these loans
go to people stretching to afford a house, they come with
higher interest rates — even if they’re disguised by low initial
rates — and thus higher returns. The mortgages were then
sliced into pieces and bundled into investments, often known
as collateralized debt obligations, or C.D.O.’s. Once bundled,
different types of mortgages could be sold to different groups
of investors. Investors then goosed their returns through
leverage, the oldest strategy around. They made $100 million
bets with only $1 million of their own money and $99 million in
debt. If the value of the investment rose to just $101 million,
the investors would double their money. Home buyers did the
same thing, by putting little money down on new houses, notes
Mark Zandi of Moody’s Economy.com. The Fed under Alan
Greenspan helped make it all possible, sharply reducing
interest rates, to prevent a double-dip recession after the
technology bust of 2000, and then keeping them low for
several years .All these investments, of course, were highly
risky. Higher returns almost always come with greater risk. But
the powers that be and American homeowners decided that the
usual rules didn’t apply because nationwide had never fallen
before (people have short memories!). Based on that idea,
prices rose ever higher — so high, says Robert Barbera of ITG,
an investment firm, that they were destined to fall. It was a
self-defeating prophecy. And it largely explains why the

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

mortgage mess has had such ripple effects. The American

home seemed like such a sure bet that a huge portion of the
global financial system ended up owning a piece of it. Last
summer, many policy makers were hoping that the crisis
wouldn’t spread to traditional banks, like Citibank, because
they had sold off the underlying mortgages to investors. But it
turned out that many banks had also sold complex insurance
policies on the mortgage debt. That left them on the hook
when homeowners who had taken out a wishful-thinking
mortgage could no longer get out of it by flipping their house
for a profit .Many of these bets were not huge, but were so
highly leveraged that any losses became magnified. If that
$100 million investment described above were to lose just $1
million of its value, the investor who put up only $1 million
would lose everything. [Recent statistics point to potential
exposure that could run into the trillions, so you can only
imagine how deep the impacts of these losses will be.]

This toxic combination — the ubiquity of bad investments and

their potential to mushroom through leveraging — has shocked
Wall Street into a state of deep conservatism. The soundness
of any investment firm depends largely on other firms having
confidence that it has real assets standing behind its bets. So
firms are now hoarding cash instead of lending it, until they
understand how bad the housing crash will become and how
exposed to it they are. Any institution that seems to have a
high-risk portfolio, regardless of whether it has enough assets
to support the portfolio, faces the double whammy of investors
demanding their money back and lenders shutting the door in
their face. Good-bye, Bear Stearns. The conservatism has gone
so far that it’s affecting many solid would-be borrowers, which,
in turn, is hurting the broader economy and aggravating Wall
Street’s fears. A recession could cause credit card loans and
other forms of debt, some of which were also based on over

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

exuberance, to start going bad as well. Many economists, on

the right and the left, now argue that the only solution is for
the federal government to step in and buy some of the
unwanted debt, as the Fed began doing last weekend. This is
called a bailout, and there is no doubt that giving a handout to
Wall Street lenders or foolish home buyers — as opposed to,
say, laid-off factory workers — is deeply distasteful. At this
point, though, the alternative may be worse. Bubbles lead to
busts. Busts lead to panics. Panics lead investors to sell and
markets to fall and that’s why we are in the situation we are in
now.
Certainly there is a lot of effect of US recession on Indian
economy. US recession has a chain affect as US imports many
things from other countries which includes India. Primarily this
has impact on export industry in India which includes textile
industry, granite processing industry, tobacco exports and so
on. It is said that already 5 lakh people have already lost their
job in Indian textile industry.
This is not the end of the story. Now it has also started
showing its direct effects on all other industries as well which
include IT and ITES. Proactively many of the companies have
started taking proactive steps to protect them self from the
gloomy future. Many small companies were closed and ready to
close, increasing the unemployed people. This will have lot of
impact on peoples spending abilities and the supply chain effect
carries forward.
But is every one in India is affected? Yes, but many people may
not realize it or many not have any direct effects. Especially
people living in cities will are more exposed to this and people
in towns are less exposed to this situation. This is especially
because number of employees working in private firms are
susceptible to this situation and people working for govt. and
self-employed are less (these people will have impact only at
later stages).

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

What is the other side of the coin? Frankly it’s an overall loss to
everyone. But this is the right time for govt. to attract good
talent to join in govt.organizations. That way government can
increase its efficiency and also help country to face this
situation. But government has to act quickly for filling already
vacant positions and creating new jobs.

INDIA
It’s almost a decade since we entered into the 2000s. Economic
growth in these years wasn’t so impressive for the western
economies. It proves to be one of the worst economic periods
for those economies. Indeed, the so-called fastest growing
economies (such as India, Brazil, China, Mexico, Russia, and
Indonesia) have seen an unprecedented economic expansion
because, the eastern economies were the producers and the
western economies were the consumer and the same trend
would likely to continue as the companies, nowadays, are more
conscious about the cost. Rising input cost (or raw material)
are forcing the corporations in the industrialized economies to
shift their focus on the cost-effective region to keep up the
pricing competitiveness in the specific industry, they are in.
Change in consumer trend is also major concern for the
companies to invest more in the process of innovation,
research and development (R&D).
As the economic pace is picking up, global commodity prices
have staged a comeback from lows and global trade has also
seen a decent growth over the last two years. Unprecedented
Government intervention and exceptionally large interest rate
cuts by the central bank in advanced and emerging economies
have contributed a lot to pull the global economy up from the
deepest recession since the World War II. Several
Governments around the world launched the stimulus packages

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

to prop up the economic growth, generate employment

opportunities and the overall economic growth with the aim to
reduce uncertainty in the economy and increased confidence.
In this VMW research, we’ll discuss about the overall economic
prospect for the year 2010 and the how the Indian Economy
emerge from the ongoing economic repairmen.

Economic Prospects for 2010

Global economy is seems to be expanding after a recent shock.
Indian Economy, however just felt the blow of the global
economic recession and the real economic growth have seen a
sharp fall followed by the lower exports, capital outflow and
corporate restructuring. It is expected that the global
economies continue to stay strong in the short-term as the
effect of stimulus is still strong and the tax cuts are
working. Due to strong position of liquidity in the market, large
corporations now have access to capital in corporate credit
markets.
India’s Economic Outlook
Projection

2007 2008 2009 2010

GDP Growth 9.40% 7.30% 7.60% 8.30%

CPI 6.40% 9.30% 5.50% 4.90%
Year 2009 has started on the gloomy note, however the
trend reversed from the first quarter of the year, financial
markets posted strong gains fueled by huge amount of capital
inflows which was set-aside during the economic downturn in
search of a higher yield. Number of companies jumped into the
equity markets to raise funds to de-leverage them, corporate
risk have declined. Before the beginning of the economic
recession, several companies betted on the better economic
future and blindly raised funds thru various options (largely in
a way of debt). Real Estate was the hardest hit industry during
the recession. Many companies even offloaded their huge

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

amount of stake, in order to meet the deadline to pay-off

the short-term debt. Not only the realty companies which have
faced that situation, actually many Small & Medium
Enterprises (SMEs) have opted that option to expand
themselves aggressively and routed out of the business. As the
New Year begins, the new wave of optimism has surrounded
the economies to expand further from the recent shock, with
the expectations of fresh stimulus package, shrink in
unemployment rate, expectations of the high inflation, and
higher interest rates in the emerging economies. Over the next
few months, inflation would be a worrisome for the economies.
According to the estimates, inflation would likely to reach up
to 10%, resulted, the expectations of the monetary policy
tightening from the Reserve Bank of India in the second
quarter review of monetary policy. Asian economies – Chinese
economy in particular, along with India are in the strongest
place for a sustained recovery. There are increasing signs of a
recovery in a private domestic demand.

Inflation Direction -
Since the global economies are emerging from the lows, in a
short run, inflation is expected to rise due to bounce back in
demand for commodities. Although, the underlying inflation are
still on the downside. Higher unemployment rate in the west
will lead to low wage growth and pricing power would be
limited for a long time as demand will be very vulnerable to
price rises. But, India would buck the trend in inflation due to
ample amount of liquidity in the system and rising demand.

Indian Economy 2010

In order to sustain economic growth during the time of the
worst recession, government authorities of India have

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

announced the stimulus packages to prop up economic growth.

To finance the stimulus packages the Indian government has
raised over $100 billion over the last four quarters in a way to
finance the stimulus packages. The countries public debt,
according to the RBI, has surged over 50% of total GDP and
RBI has started printing new currency notes.

Central Government Debt

in Rs. Crores % of
Q3 2008 Q3 2009
(10 Million) GDP

Public Debt

(Sum of 1 2,099,286.232,505,450.74 50.71%

and 2)
1. External
237,351.77 294,941.67
Debt

2. Internal
1,861,934.462,210,509.07
Debt

Stability in Indian Economy

All of us have seen an unprecedented government intervention
during the economic recession by way of announcing huge

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

amount of stimulus package for the economy to prop-up

domestic demand. With many recovery tools were used during
the crisis, government deficits are in deep red and central bank
rates are almost zero in certain countries and the prospect of
zero rates over a longer period and deflationary concerns will
probably gain the upper hand and send bond yields lower.
Hence, there is a low scope of further announcement.
As far as the Indian economy is concerned, is suffering from
huge debt to GDP ratio, moreover India is the largest net
importer of commodities like Oil, Food, metal in relation to the
GDP. Sharp decline in oil prices, could cut the subsidy burden
and those savings would be used for the fiscal
stimulus. Increased and better expenditure with greater focus
on improved outcomes in social and physical infrastructure,
and safety nets will speed up the recovery consistent with the
long-term growth. Going forward, India will see
sharp rise in supply side inflation, after the effect of large
government borrowings, printing of new currency notes, and
rise in food prices due to huge gap in demand-supply. Interest
rates will also expected to rise awkward, as the central bank
will take precautionary measure to contain inflation rate and
expanding money supply.

China
China's economy is huge and expanding rapidly. In the last 30
years the rate of Chinese economic growth has been almost
miraculous, averaging 8% growth in Gross Domestic Product
(GDP) per annum. The economy has grown more than 10 times
during that period, with Chinese GDP reaching 3.42 trillion US
dollars by 2007. In Purchasing Power Parity GDP, China already

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

has the biggest economy after the United States. Most analysts
project China to become the largest economy in the world this
century using all measures of GDP. However, there are still
inequalities in the income of the Chinese people, and this
income disparity has increased in the recent times, in part due
to a liberalization of markets within the country. The per capita
income of China is only about 2,000 US dollars, which is fairly
poor when judged against global standards. In per capita
income terms, China stands at a lowly 107th out of 179
countries. The Purchasing Power Parity figure for China is only
slightly better at 7,800 US dollars, ranking China 82nd out of
179 countries
Economic reforms started in China in the 70s and 80s. The
initial focus of these reforms was on collectivizing the
agricultural activities of the country. The leaders of the Chinese
economy, at that point in time, were trying to change the
center of agriculture from farming to household activities. At
later stages the reforms extended to the liberalization of prices,
in a gradual manner. The process of fiscal decentralization soon
followed.
This meant that government officials at the local levels and the
managers of various plants had more authority than before.
This led to the creation of a number of various types of
privately held enterprises within the services sector, as well as
the light manufacturing sectors. The banking system was
diversified and the Chinese stock markets started to develop
and grow as economic reforms in China took hold. The
economic reforms made in China in the 70s and 80s had other
far reaching effects as well. The sectors outside the control of
the state government of China grew at a rapid pace as a result
of these reforms. China also opened its economy to the world
for the purposes of trade and direct foreign investment.
China has adopted a slow but steady method in implementing
their economic reforms. It has also sold the equity of some of
the major Chinese state banks to overseas companies and

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

bond markets during the middle phase of the first half of the
21st century. In recent years the role played by China in
International trade has also increased.

In China, many of the larger companies tend to be focused on

domestic markets, whereas many of their small and medium
enterprises (SMEs), many of which are based in Shanghai
(Long River region) and Guangzhou (Pearl River Area) tended
to be associated with the export market. These areas have
suffered the most and as a result often give visitors a slightly
skewed vision of the economic impact on the current financial
crisis on China, mainly because those are the areas we see
Only 10 per cent of Chinese exports are under Chinese brands.
The rest are just manufactured for others. When the economic
tidal wave hit, the first casualties were the export
manufacturers, especially those original equipment
manufacturers (OEMs), who saw their orders dry up overnight.

Inverted economy
In 2008, exports represented 40 per cent of China’s GDP and
growth was just under 10 per cent. In 2009, it is estimated
that growth will slow to between 6 and 7 per cent. This is a
marked contrast to most Western economies, where the GDP
will go negative. It underlines that the strength of the Chinese
economy has shifted from its export manufacturing capabilities
to its domestic market growth. There are many Chinese
companies that had developed niche markets or had their own
branding and distribution systems, which are using the current
situation to expand. The overall impact on the Chinese

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

economy has been severe, especially in the areas that had

large export-based economies, but it has been offset by its
robust domestic market, which the Chinese government is
vigorously supporting.China’s robust domestic growth has its
dark spots, such as the real estate market. The difference is
that the Chinese banks going into the crisis had twice the
reserves of our banks, and people in China, even when they
are speculating, tended to pay cash when they bought
property. In terms of their developers, they face losing their
equity, but the banks are not in the double-whammy position
of having to cover the developers and the mortgages of those
who bought the property, as prices decline.
In terms of small and medium enterprises (SMEs), U.S. SMEs
are actually doing better than their larger businesses
counterparts, they tend to be more balanced and/or in niche
markets and many of them are looking to use the downturn to
expand. The major exceptions were those businesses that were
captive suppliers to large industry groups such as the
automotive brands.China’s SMEs are diverse and tend to run on
cash rather than credit, so while they have suffered setbacks
they are not in the same position as many U.S. companies,
which assume that business ventures will use borrowing to
leverage their returns as part of their business plans. Chinese
OEMs, which depended on the international markets, have
suffered.

Global demand for manufactured goods has fallen in the wake

of the world-wide financial crisis and ensuing G-7 consumption
slowdown. This drop in demand has pushed China’s economy
to the brink of a “growth recession” –conventionally defined as
a period of weak economic growth and rising unemployment.
To combat this, China’s government has utilized a combination
of policy tools aimed at
:

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

• Fiscal: Promoting domestic investment through public infrastructure

development;
• Monetary: Loosening credit, particularly to state-owned enterprises; and
• Other: Extending export rebates and incentivizing real estate
transactions

There are several indications of an economic slowdown in China

(see figures below). Recent reports of labour market
penetration problems and plant closings in thousands of textile,
apparel, hardware, and electronics firms, suggest that urban
unemployment may rise above last official estimates of 4.2%.

CHINA’S GDP & PRODUCTION GROWTH HAVE FALLEN

Industrial production, led by heavy manufacturing (e.g. steel),

decelerated precipitously in 2008Q4. This marked the first time
since such data Became available in 1995 that production was
limited to single digit growth during pre-holiday seasons.

CHINA’S EXPORTS HAVE DECELERATED

Chinese exports exhibited 2-3% negative growth in November

andDecember’08, marking the 1st time since the Southeast
Asian crisis that adecline occurred in the fourth quarter. China’s
January‘09 total and U.S.Export fall of 18% and 10%,
respectively, was notably more precipitous.

CHINA’S STOCK MARKET BOOM HAS FIZZLED

The 2008 fall in China’s major stock market indices was

attributable to a correction of its 2007 bubble and deteriorating
global financial conditions

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

CHINA’S REAL ESTATE PRICES HAVE DECELERATED

After 2008Q1, China’s nascent housing market has undergone

the most Precipitous real estate price drop in recent years, led
by residential sales

An Immediate Change of Course is Unlikely: First, Chinese

energy consumption trends, considered a harbinger of
industrial activity, have not rebounded. Second, import
demand from the United States, China’s largest trade partner,
has remained weak. Third, China’s intermediary product
processing imports from other Asian countries, such as
Malaysia and Taiwan, dropped precipitously in 2008Q4,
inhibitingChina’s capability to re-export processed electronics
and related products

Implications Rationale
1. Narrowing of U.S.-China trade deficit

United States' export growth to China is likely to decelerate

soon, given falling Chinese demand for semiconductors and
other processing trade inputs, and given tightening Chinese
regulations on soybean imports from the United States.
Nevertheless, reductions in United States import growth from
China forManufactured goods, clothing, toys, and other
products should more than offset that slowdown, and reduce
the United States' bilateral trade deficit with its third largest
trading partner.

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

2. Rise in Chinese domestic consumption

China's export-oriented policies have incentivized local firms to

continue manufacturing products for exportation to Hong Kong,
knowing that those products will eventually re-enter China.
Because of this and rising inventory levels, Chinese consumers
are purchasing higher-quality products that were originally
intended for foreign consumption -without commensurate price
increases. This may establish expectations
for purchasing higher quality goods and support increases in
future consumption levels.

3. Renminbi stabilization

China is likely to support a stable renminbi-dollar exchange

rate in the short term, thereby easing its longer term effort of
managing a renminbi-dollar appreciation (initiated in July
2005). Although an outright depreciation would help support
sluggish export growth, China’s government suggested as early
as November 2008 that it would exercise other policy options
(e.g. export tax rebates).

4. Social Unrest

Anecdotal evidence has surfaced regarding wide-spread

protests associated with recently unemployed manufacturing
workers in such industries as electronics, toys, and clothing.

III. GOVERNMENT REACTION:

• Increased fiscal expenditures. Part of

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

China’s $588 billion (~15% of China’s GDP) fiscal stimulus

package of October 2008 was considered new spending -nearly
half targeted rail construction, highway, airport, and electric
distribution network construction projects. A new fiscal
stimulus is in the works, and provincial governments are
responding in kind.

• Loosened credit. China’s 216 basis points drop in interest

rates since September 2008 – 100 basis points in November
alone– marks the beginning of aggressive monetary policy
action by China’s government. Lower lending rates mostly
benefit state-owned enterprises, which still employ
approximately a third of the urban workforce, and which
typically maintain close ties with state-controlled lending
institutions.

• Supporting exports. China raised it export tax rebates in

November for the second time this year. The latest measure,
significantly more comprehensive than the last, increases
rebates on some 3,486 labour intensive exported items, which
constitute approximately 25% of China’s 2007 exports. These
include rebates on textiles, apparel, and toys. China also plans
to temporarily eliminate export taxes, and provide financial
support to certain high-tech and agricultural industries.

• Incentivizing real estate sales. Several big city governments

have decreased property taxes for new homeowners and
simplified the process for attaining housing certification for
migrants to urban areas.

Europe
The economy of Europe comprises more than 731 million
people in 48 different states [1]. It contributes 11% of the
world's population. Like other continents, the wealth of

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

Europe's states varies, although the poorest are well above the
poorest states of other continents in terms of GDP and living
standards. The difference in wealth across Europe can be seen
in a rough East-West divide. Whilst Western European states all
have high GDPs and living standards, many of Eastern Europe's
economies are still rising from the collapse of the communist
Soviet Union and former Yugoslavia. Throughout this article
"Europe" and derivatives of the word are taken to include
selected states whose territory is only partly in Europe – such
as Turkey, Azerbaijan, and the Russian Federation – and states
that are geographically in Asia, bordering Europe – such as
Armenia and Cyprus.
Europe was the first continent to industrialize – led by the
United Kingdom in the 18th century – and as a result, it has
become one of the richest continents in the world today.
Europe's largest national economy is that of Germany, which
ranks fourth globally in nominalGDP, and fourth in purchasing
power parity (PPP) GDP; followed by France, ranking fifth
globally in nominal GDP, followed by the UK, ranking six
globally in nominal GDP followed by Italy, which ranks seventh
globally in nominal GDP, then by Spain ranking ninth globally in
nominal GDP.
These 5 countries are all ranking in the world's top 10,
therefore European economies account for half of the 10
wealthiest ones. The end of World War II has since brought
European countries closer together, culminating in the
formation of the European Union (EU) and in 1999, the
introduction of a unified currency – the euro. European Union
as a whole is, by far, the wealthiest and largest economy in the
world, topping the US by more than 2.000 billion at a time of
great economic slowdown– see List of countries by GDP. In
2009 Europe remained the world's wealthiest region. Its $37.1
trillion in assets under management represented more than
one-third of the world’s wealth. Unlike North America, it was
one of few regions where wealth surpassed its pre-crisis year-
end peak

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

Expansion of Europe from 2004-2007

In early 2004, 10 mostly former communist states joined the
EU in its biggest ever expansion, enlarging the union to 25
members, with another eight making associated trade
agreements. The acceding countries are bound to join the
Eurozone and adopt the common currency Euro in the future.
The process includes the European Exchange Rate Mechanism,
of which some of these countries are already part.
Most European economies are in very good shape, and the
continental economy reflects this. Conflict and unrest in some
of the former Yugoslavia states and in the Caucasus states are
hampering economic growth in those states, however.
In response to the massive EU growth, in 2005 the Russian
dominated Commonwealth of Independent States (CIS) created
a rival trade bloc to the EU, open to any previous USSR state,
(including both the European and Asian states). 12 of the 15
signed up, with the three Baltic States deciding to align
themselves with the EU. Despite this, the three Caucasus
states have said in the past they would one day consider
applying for EU membership, particularly Georgia. This is also
true of Ukraine since the Orange Revolution.

Impact of US subprime crisis on Europe

Impact of US Subprime crisis on Europe cannot be ignored.

That this part of the world will be impacted as well, can be
concluded from the fact that signs of the same have already
started showing (like falling prices of homes) in London.
Northern Rock, which was an eminent mortgage lender, took
refuge in the Bank of England for purposes of emergency
financing in the month of September, 2007. Prospective
purchasers for the mortgage lender are still being looked for.

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

Another instance in Germany, which implies the impact of US

subprime crisis on Europe, is when Germany’s IKB Deutsche
Industrial bank accepted USD$11.1 billion from the
Government as a bailout pertaining to its various United States
mortgage investments
BNP Paribas, the French Bank was compelled to take some
drastic steps. It stopped all withdrawals from a fund of
USD$2.2 billion pertaining to investment funds as the true
value of the investment portfolios could not be ascertained.

Statistical data indicating impact of US subprime

crisis on Europe:

Reports furnished by a mortgage lender known by the name

Nationwide Building Society revealed that cost of homes dipped
0.5% in the month of December. In November the drop was
0.8%.According to another source, it has been revealed that
during mid-December, the prices of property dropped by 6.8%,
which reflects an average downfall of approximately USD$
56,000.
The biggest impact of US subprime crisis in Europe is yet to
come, it is being reckoned that in the forthcoming months, the
economy will slow down and become sluggish. As a result of
this the rate of unemployment will also increase. Owing to this
situation, the Properties will have to be sold at a compromising
rate.
It is being anticipated by few economists that since the
availability (supply) of houses are short of demand; the
increase of price is being expected to be 3% in Britain and as
much as 5% in London.Studies state that Britain is a country,
which has the highest number of debtors. Approximately
USD$2.7 trillion is yet to be paid back by the debtors of Britain
on Consumer loan.

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

Europe has clearly and unambiguously chosen to ensure that

countries restore fiscal discipline, possibly providing them
financial support in the adjustment period .The choice made by
Europe is based both on economic and on political reasons.
Some observers believe that the euro was created solely for
political reasons, for example, as a counterweight to German
unification. According to this view, the sustainability of the euro
would be at risk if the political integration process were to stop
or go into reverse.
All governments and national parliaments have adopted not
only the financial support measures to Greece but also taken
the necessary measures for the creation of the European
Financial Stability Facility. The Heads of State and Government
have agreed to strengthen the economic governance of the
euro and will take concrete decisions in that respect, based on
proposals of the Van Rompuy task force which has already
started working.Past experience has shown clearly that within
an economically integrated area like the euro area a currency
devaluation does not allow a growth stimulus that would
support faster fiscal consolidation. The countries which had to
make strong corrective fiscal manoeuvres before the euro – as
was the case in Italy after leaving the ERM in September 1992
– have suffered large interest rate spreads for a protracted
period, because of renewed uncertainty about the monetary
regime after the devaluation, as well as about the fiscal
system. With every devaluation, inflationary risks rapidly
appeared, which required more monetary tightening than
would be the case within the euro. Several countries, like
Belgium Ireland and the Netherlands implemented fiscal
consolidation while maintaining a stable exchange rate and a
high primary budget surplus (i.e. net of debt interest.

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

To sum up, given the financial and economic integration

achieved over recent years in the euro area, the hypotheses
voiced by some about a country abandoning the euro or about
reconstituting the euro area in a reduced form would have
highly detrimental effects on everyone, be they net creditors or
debtors. The impact would be far more expensive than the
alternative – standard - approach, which is to implement a
strict plan of fiscal consolidation in all countries, starting with
Greece, accompanied by structural reforms aimed at sustaining
growth, and a plan to strengthen the economic governance of
euro area. This is the way chosen by the countries of the euro
area and implemented in the form of successive decisions both
at national and European level.

The consolidation of public finances will remain a major theme

in the coming years, not only in Greece but also in the rest of
Europe and in the developed countries. The experience of
recent months highlights some points on which it is worth
reflecting;

First, it is best to take the necessary steps before being put

under pressure by the financial markets, which often do not
move in a linear fashion and tend to go from white to black in
an instant. And when something passes to the black part of the
markets’ radar screen it takes a long time to convince them
that it can get back in a quiet location.

Second, in assessing the sustainability of budget measures

financial markets seem to be taking into account not only the
direct effects, namely the impact on the deficit and debt, but
also indirect, i.e. the effect of specific measures on economic
growth. A highly restrictive move allows a reduction of the
deficit but may adversely affect growth and thus slow down the

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

adjustment of the debt. An extreme interpretation of this view

has pushed some to consider that a strong restrictive fiscal
action may create a negative spiral between debt and growth
that worsens even further the public finance situation and
makes budgetary rigour politically unsustainable. It seems to
me that the hypotheses necessary for this spiral to occur are
quite exceptional, requiring the fiscal multiplier effect to be
greater than 1. The empirical evidence does not seem to be
consistent with such a hypothesis.

An alternative interpretation of the risks associated with fiscal

retrenchment is that they are not easily sustainable politically,
especially if they have strong negative effect on growth. The
hypothesis is that public opinion in many advanced societies
might not be fully prepared to cope with the budget cuts
needed to restore public finances on a sustainable path,
because these cuts would lead to a substantial downsizing of
the current welfare system – a system which may no longer be
financially sustainable in an environment of slower economic
growth, partly due to lower population growth and the higher
public debt burden. So this is not just a matter of discussing
the economic sustainability of the move that many developed
countries have to make, but its political and social
sustainability.

Another source of concern is the “shadow” financial system not

previously subject to regulation. The G20 summit a year ago in
London indicated the general commitment not to leave
significant parts of the financial sector, such as investment
banks, hedge funds, private equity funds and so forth, outside
the regulatory perimeter. Work on this part of the financial
system is not progressing as hoped, however. There is a risk,
again, of focusing only on banking, and overlooking an
important part of the financial system, whose influence has

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

come to dominate the overall stability of markets, with

contagion effects on the banking system itself. Europe has
recently adopted what may appear as somewhat restrictive
legislation in this regard. In particular, equity and investment
funds from outside Europe are only authorised to operate to
the extent that the law of the country of origin is comparable
with European law. This has caused concern across the Atlantic
about the risk of protectionism. On the other hand, the failure
of the strategy pursued in recent years, of trying to convince
our partners that this area should be regulated like any other,
has necessitated a turnaround of the basis of the discussion.
The talks now start on a more precise basis. These are just a
few areas of financial system reform currently under discussion
in the main fora. The stakes are high. The deadline for the
work is the G20 summit in South Korea this autumn, two years
after the crisis intensified. It is essential to meet deadlines to
lend credibility to the financial system and ensure that it plays
a supporting role in real economic activity.
But one thing is certain: whatever form the international
cooperation takes Europe will be part of it, not only because
they are currently, and will be for many years, the two main
economic and financial areas worldwide, but also because they
share important values – such as the freedom of private
enterprise, freedom of expression, social equity – without
which there can be no cooperation.

USA
The United States of America (US or USA) has the world’s
largest economy. According to the CIA World Fact book, 2007
GDP is believed to be $13.84 trillion. This is three times the
size of the next largest economy, Japan, which has a GDP of
$4.4 trillion. US dominance has been eroded however by the

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

creation of the European Union common market, which has an

equivalent GDP of over $13 trillion, and by the rapid growth of
the BRIC economies, in particular China, which is forecast to
overtake the US in size within 30 years.

The recent failure in the US housing and credit markets has

resulted in a slowdown in the US economy. 2007 GDP growth
was estimated at 2.2% but in 2008 it is projected to be just
0.9%, down from the 10-year average of 2.8%.In common
with most developed countries, Services is the key sector of
the economy. In 2007, services made up 78.5% of GDP,
industry 20.5% and agriculture less than 1%.

Around two-thirds of the total production of the country is

driven by personal consumption. Although the US is often
referred to as a free market economy, this is not entirely true,
since there are government regulations protecting certain
sectors, notably energy and agriculture. It can be more
accurately described as a ‘consumer economy’.Since the US
economy is also the largest economy in the world, and the US
consumer drives two thirds of the US economy, the US
consumer is also a big driver of global economic activity.

The forces of supply and demand directly drive the price levels
of goods and services. What to produce, and how much of it is
to be produced depends on the price level fixed by the
interaction of supply and demand.

The question of national debt is a controversial one within the

US. At the start of 2008, the US federal debt stood at $9.2
trillion. This is a worrying 67% of GDP and equates to
$79,000for each American taxpayer, a number just over 117
million people. To add to the concern, American consumers are
also increasingly dependent on debt and have been re-

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

mortgaging their houses to higher loan amounts, and using the

extra cash to fund high street purchases. This debt figure is the
largest in the world in absolute terms, but as a percentage of
GDP it is less than Japan and similar to several European
countries.

Financial markets impacts

The International Monetary Fund estimated that large U.S. and

European banks lost more than $1 trillion on toxic assets and
from bad loans from January 2007 to September 2009. These
losses are expected to top $2.8 trillion from 2007-10. U.S.
banks losses were forecast to hit $1 trillion andEuropean bank
losses will reach $1.6 trillion. The IMF estimated that U.S.
banks were about 60% through their losses, but British and
Eurozone banks only 40%one of the first victims was Northern
Rock, a medium-sized British bank. The highly leveraged
nature of its business led the bank to request security from the
Bank of England. This in turn led to investor panic and a bank
run in mid-September 2007. Calls by Liberal Democrat
ShadowChancellorVince Cable to nationalize the institution
were initially ignored; in February 2008, however, the British
government (having failed to find a private sector buyer)
relented, and the bank was taken into public hands. Northern
Rock's problems proved to be an early indication of the
troubles that would soon befall other banks and financial
institutions. Initially the companies affected were those directly

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

involved in home construction and mortgage lending such as

Northern Rock and Countrywide Financial, as they could no
longer obtain financing through the credit markets. Over 100
mortgage lenders went bankrupt during 2007 and 2008.
Concerns that investment bank Bear Stearns would collapse in
March 2008 resulted in its fire-sale to JP Morgan Chase. The
financial institution crisis hit its peak in September and October
2008. Several major institutions failed, were acquired under
duress, or were subject to government takeover. These
included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie
Mac, Washington Mutual, Wachovia, and AIG.

Credit markets and the shadow banking system

During September 2008, the crisis hit its most critical stage.
There was the equivalent of a bank run on the money market
mutual funds, which frequently invest in commercial
paperissued by corporations to fund their operations and
payrolls. Withdrawal from money markets was $144.5 billion
during one week, versus $7.1 billion the week prior. This
interrupted the ability of corporations to rollover (replace) their
short-term debt. The U.S. government responded by extending
insurance for money market accounts analogous to bank
deposit insurance via a temporary guarantee [136] and with
Federal Reserve programs to purchase commercial paper. The
TED spread, an indicator of perceived credit risk in the general
economy, spiked up in July 2007, remained volatile for a year,
then spiked even higher in September 2008,[137] reaching a
record 4.65% on October 10, 2008This meant that nearly one-
third of the U.S. lending mechanism was frozen and continued
to be frozen into June 2009.[140] According to the Brookings
Institution, the traditional banking system does not have the
capital to close this gap as of June 2009: "It would take a

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

number of years of strong profits to generate sufficient capital

to support that additional lending volume." The authors also
indicate that some forms of securitization are "likely to vanish
forever, having been an artifact of excessively loose credit
conditions." While traditional banks have raised their lending
standards, it was the collapse of the shadow banking system
that is the primary cause of the reduction in funds available for
borrowing.

U.S. economic effects

Real gross domestic product — the output of goods and
services produced by labor and property located in the United
States—decreased at an annual rate of approximately 6% in
the fourth quarter of 2008 and first quarter of 2009, versus
activity in the year-ago periods.[166] The U.S. unemployment
rate increased to 10.1% by October 2009, the highest rate
since 1983 and roughly twice the pre-crisis rate. The average
hours per work week declined to 33, the lowest level since the
government began collecting the data in 1964.
Wealth effects
There is a direct relationship between declines in wealth, and
declines in consumption and business investment, which along
with government spending represent the economic engine.
Between June 2007 and November 2008, Americans lost an
estimated average of more than a quarter of their collective net
worth [citation needed]. By early November 2008, a broad U.S. stock
index the S&P 500 was down 45% from its 2007 high. Housing
prices had dropped 20% from their 2006 peak, with futures
markets signaling a 30-35% potential drop. Total home equity
in the United States, which was valued at $13 trillion at its
peak in 2006, had dropped to $8.8 trillion by mid-2008 and
was still falling in late 2008. Total retirement assets,
Americans' second-largest household asset, dropped by 22%,
from $10.3 trillion in 2006 to $8 trillion in mid-2008. During

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

the same period, savings and investment assets (apart from

retirement savings) lost $1.2 trillion and pension assets lost
$1.3 trillion. Taken together, these losses total a staggering
$8.3 trillion since peaking in the second quarter of 2007;
household wealth is down $14 trillion.Further, U.S.
homeowners had extracted significant equity in their homes in
the years leading up to the crisis, which they could no longer
do once housing prices collapsed. 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 over the period.[79][80][81] 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.

Responses to financial crisis

Emergency and short-term responses
The U.S. Federal Reserve and central banks around the world
have taken steps to expand money supplies to avoid the risk of
a deflationary spiral, in which lower wages and higher
unemployment lead to a self-reinforcing decline in global
consumption. In addition, governments have enacted large
fiscal stimulus packages, by borrowing and spending to offset
the reduction in private sector demand caused by the crisis.
The U.S. executed two stimulus packages, totaling nearly
$1 trillion during 2008 and 2009
This credit freeze brought the global financial system to the
brink of collapse. The response of the U.S. Federal Reserve, the
European Central Bank, and other central banks was immediate
and dramatic. During the last quarter of 2008, these central
banks purchased US$2.5 trillion of government debt and
troubled private assets from banks. This was the largest
liquidity injection into the credit market, and the largest

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

monetary policy action, in world history. The governments of

European nations and the USA also raised the capital of their
national banking systems by $1.5 trillion, by purchasing newly
issued preferred stock in their major banks.[135] In October
2010, Nobel laureate Joseph Stieglitz explained how the U.S.
Federal Reserve was implementing another monetary policy —
creating currency— as a method to combat the liquidity trap.
[173]
By creating $600,000,000,000 and inserting this directly
into banks the Federal Reserve intended to spur banks to
finance more domestic loans and refinance mortgages.
However, banks instead were spending the money in more
profitable areas by investing internationally in emerging
markets. Banks were also investing in foreign currencies which
Stieglitz and others point out may lead to currency wars while
China redirects its currency holdings away from the United
States.

Governments have also bailed out a variety of firms as

discussed above, incurring large financial obligations. To date,
various U.S. government agencies have committed or spent
trillions of dollars in loans, asset purchases, guarantees, and
direct spending. For a summary of U.S. government financial
commitments and investments related to the crisis, see CNN -
Bailout Scorecard. Significant controversy has accompanied the
bailout, leading to the development of a variety of "decision
making frameworks", to help balance competing policy
interests during times of financial crisis.

Regulatory proposals and long-term responses

United States President Barack Obama and key advisers
introduced a series of regulatory proposals in June 2009. The
proposals address consumer protection, executive pay, bank

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

financial cushions or capital requirements, expanded regulation

of the shadow banking system and derivatives, and enhanced
authority for the Federal Reserve to safely wind-down
systemically important institutions, among others.[176][177][178] In
January 2010, Obama proposed additional regulations limiting
the ability of banks to engage in proprietary trading. The
proposals were dubbed "The Volcker Rule", in recognition of
Paul Volcker, who has publicly argued for the proposed
changes.

The U.S. Senate passed a regulatory reform bill in May 2010,

following the House which passed a bill in December 2009.
These bills must now be reconciled. The New York Times
provided a comparative summary of the features of the two
bills, which address to varying extent the principles
enumerated by the Obama administration.[181] For instance, the
Volcker Rule against proprietary trading is not part of the
legislation, though in the Senate bill regulators have the
discretion but not the obligation to prohibit these trades

A variety of other regulatory changes have been proposed by

economists, politicians, journalists, and business leaders to
minimize the impact of the current crisis and prevent
recurrence. None of the proposed solutions have yet been
implemented. These include

• Ben Bernanke: Establish resolution procedures for closing

troubled financial institutions in the shadow banking
system, such as investment banks and hedge funds.[182]
Nassim Nicholas Taleb: "Black Swan Robustness" i.e. Robustness against
High Impact Rare Events ("Fat Tails").

• Joseph Stieglitz: Restrict the leverage that financial

institutions can assume. Require executive compensation

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

to be more related to long-term performance.[183] Re-

instate the separation of commercial (depository) and
investment banking established by the Glass-Steagall Act
in 1933 and repealed in 1999 by the Gramm-Leach-Bliley
Act.[184]
• Simon Johnson: Break-up institutions that are "too big to
fail" to limit systemic risk.[185]
• Paul Krugman: Regulate institutions that "act like banks"
similarly to banks.[70]
• Alan Greenspan: Banks should have a stronger capital
cushion, with graduated regulatory capital requirements
(i.e., capital ratios that increase with bank size), to
"discourage them from becoming too big and to offset
their competitive advantage."[186]
• Warren Buffett: Require minimum down payments for
home mortgages of at least 10% and income verification.
[187]

• Eric Dinallo: Ensure any financial institution has the

necessary capital to support its financial commitments.
Regulate credit derivatives and ensure they are traded on
well-capitalized exchanges to limit counterparty risk.[188]
• Raghu ram Rajan: Require financial institutions to
maintain sufficient "contingent capital" (i.e., pay insurance
premiums to the government during boom periods, in
exchange for payments during a downturn.)
• HM Treasury: Contingent capital or capital insurance held
by the private sector could supplement common equity in
times of crisis. There are a variety of proposals (e.g. Raviv
2004, Flannery 2009) under which banks would issue
fixed income debt that would convert into capital
according to a predetermined mechanism, either bank-
specific (related to levels of regulatory capital) or a more
general measure of crisis. Alternatively, under capital
insurance, an insurer would receive a premium for

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

agreeing to provide an amount of capital to the bank in

case of systemic crisis. Following Raviv (2004) proposal,
on November 3 Lloyds Banking Group (LBG), Britain’s
biggest retail bank, said it would convert existing debt into
about £7.5 billion ($12.3 billion) of “contingent core Tier-1
capital” (dubbed Cocoas). This is a kind of debt that will
automatically convert into shares if the bank’s cushion of
equity capital falls below 5%.[190][191]
• A. Michael Spence and Gordon Brown: Establish an early-
warning system to help detect systemic risk.[192]
• Niall Ferguson and Jeffrey Sachs: Impose haircuts on
bondholders and counterparties prior to using taxpayer
money in bailouts. In other words, bondholders with a
claim of $100 would have their claim reduced to $80,
creating $20 in equity. This is also called a debt for equity
swap. This is frequently done in bankruptcies, where the
current shareholders are wiped out and the bondholders
become the new stockholders, agreeing to reduce the
company's debt burden in the process. This is being done
with General Motors, for example.[193][194]
• NourielRoubini: Nationalize insolvent banks.[195] Reduce
mortgage balances to assist homeowners, giving the
lender a share in any future home appreciation.[196]
• Adair Turner: In August 2009 in a roundtable interview in
Prospect Adair Turner supported the idea of new global
taxes on financial transactions, warning that a “swollen”
financial sector paying excessive salaries has grown too
big for society.[197] Lord Turner’s suggestion that a “Tobin
tax” – named after the economist James Tobin – should
be considered for financial transactions reverberated
around the world.[198][199]
• Let Wall Street Pay for the Restoration of Main Street Bill -
in the US only (not international) - Proposed legislation
introduced December 3, 2009 - Contained in the US
House of Representatives bill entitled "H.R. 4191: Let Wall

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

Street Pay for the Restoration of Main Street Act of

2009"[200][201] It is a proposed piece of legislation that was
introduced into the United States House of
Representatives to assess a minuscule tax on US Financial
market ("Wall Street") securities transactions. If passed,
the money it generates will be used to rebuild "Main
Street." On the day it was introduced, it had the support
of 22 representatives.[202]
• Volcker Rule - (in US) - Endorsed by President Barack
Obama on January 21, 2010. At its heart, it is a proposal
by US economist Paul Volcker to restrict banks from
making speculative investments that do not benefit their
customers.[180] Volcker has argued that such speculative
activity played a key role in the financial crisis of 2007–
2010.
• On April 16, 2010, the IMF proposed two types of global
taxes on banks: The "Financial Activities Tax" comes in
two varieties. The simple version is a straight tax on a
bank's gross profits—before deducting compensation. A
"financial stability contribution", would initially be at a flat
rate, this would eventually be refined so that riskier
businesses paid more.[203] the second, more complex tax
aims directly at excess bank profit and pay.[204][205] (See
also Bank tax)
• Maximum wage is an idea which has been enacted in early
2009 in the United States, where they capped executive
pay at $500,000 per year for companies receiving
extraordinary financial assistance from the US Taxpayers.
The argument is to place a cap on the amount that any
person may legally make, in the same way as there is a
floor of a minimum wage so that people cannot earn too
little.

THANK YOU

VIRENDER SINGH
DOON BUSINESS SCHOOL PGDM
1ST

VIRENDER SINGH