A REPORT ON THE CAUSES AND AFTER EFFECTS

OF RECESSION 2008

INTRODUCTION

In 2008, an economic recession throughout

the industrialized world was suggested by
several important indicators of economic
downturn.[1] Contributors to this downturn
included high oil prices, high food prices,
and a substantial credit crisis leading to the
drastic bankruptcy of large and well
established investment banks as well as
commercial banks in many nations around
the world. This crisis has led to increased
unemployment, and other signs of
contemporaneous economic downturns in
major economies of the world.

In December 2008, the NBER declared that

the United States had been in recession
since December 2007, and several
economists expressed their concern that
there is no end in sight for the downturn.

MAJOR CAUSES OF DOWNFALL IN MARKETS:

1. HIGH PRICES:

The decade of the 2000s saw a commodities

boom, in which the prices of primary
commodities rose again after the late-
twentieth century commodities recession of
1980-2000. But in 2008, the prices of many
commodities, notably oil and food, got so
high to cause genuine economic damage,
threatening stagflation and a reversal of
globalization.

In January 2008, oil prices surpassed $100 a

barrel for the first time, the first of many
price milestones to be passed in the course
of the year. In July, oil peaked at $147.30 a
barrel and a gallon of gasoline was more
than $4 across most of the U.S.A. These
high prices caused a dramatic drop in
demand and prices fell below $35 a barrel at
the end of 2008.

The food and fuel crises were both

discussed at the 34th G8 summit in July.

Sulfuric acid (an important chemical

commodity used in processes such as steel
processing, copper production and
bioethanol production) increased in price
3.5-fold in less than 1 year whilst producers
of sodium hydroxide have declared force
major due to flooding, precipitating similarly
steep price increases.

In the second half of 2008, the prices of mo

Trade:

In middle -October 2008, the Baltic Dry

Index, a measure of shipping volume, fell by
50% in one week, as the credit crunch made
it difficult for exporters to obtain letters of
credit.[

Inflation:
In February 2008, Reuters reported that
global inflation was at historic levels, and
that domestic inflation was at 10-20 year
highs for many nations. "Excess money
supply around the globe, monetary easing
by the Fed to tame financial crisis, growth
surge supported by easy monetary policy in
Asia, speculation in commodities,
agricultural failure, rising cost of imports
from China and rising demand of food and
commodities in the fast growing emerging
markets," have been named as possible
reasons for the inflation.

In mid-2008, IMF data indicated that

inflation was highest in the oil-exporting
countries, largely due to the unsterilized
growth of foreign exchange reserves, the
term “unsterilized” referring to a lack of
monetary policy operations that could offset
such a foreign exchange intervention in
order to maintain a country´s monetary
policy target. However, inflation was also
growing in countries classified by the IMF as
"non-oil-exporting LDCs" (Least Developed
Countries) and "Developing Asia", on
account of the rise in oil and food prices.

Inflation was also increasing in the

developed countries, but remained low
compared to the developing world.

Unemployment:
The International Labour Organization
predicted that at least 20 million jobs will
have been lost by the end of 2009 due to
the crisis - mostly in "construction, real
estate, financial services, and the auto
sector" - bringing world unemployment
above 200 million for the first time

Return of volatility:

For a time, major economies of the 21st

century were believed to have begun a
period of decreased volatility, which was
sometimes dubbed The Great Moderation,
because many economic variables appeared
to have achieved relative stability. The
return of commodity, stock market, and
currency value volatility are regarded as
indications that the concepts behind the
Great Moderation were guided by false
beliefs.

EARLY SUGGESSIONS OF RECESSION:

In the early months of 2008, many observers

believed that a U.S. recession had begun. As
a direct result of the collapse of Bear
Stearns, Global Insight increased the
probability of a worse-than-expected
recession to 40% (from 25% before the
collapse). In addition, financial market
turbulence signaled that the crisis will not
be mild and brief.
Alan Greenspan, ex-Chairman of the Federal
Reserve, stated in March 2008 that the 2008
financial crisis in the United States is likely
to be judged as the harshest since the end
of World War II. A chief economist at
Standard & Poor's, said in March 2008 he
has a worst-case-scenario in which the
country could endure a double-dip recession
in which the economy would briefly recover
in the summer 2008.Under this scenario, the
economy's total output, as measured by the
gross domestic product, would drop by
2.2 percentage points, making it the third
worst recession in the post World War II
period.

The former head of the National Bureau of

Economic Research said in March 2008 he
believed the country was then in a
recession, and it could be a severe one. A
number of private economists generally
predicted a mild recession ending in the
summer of 2008 when the economic
stimulus checks going to 130 million
households started being spent. A chief
economist at Moody's predicted in March
2008 that policymakers would act in a
concerted and aggressive way to stabilize
the financial markets, and that then the
economy would suffer but not enter a
prolonged and severe recession. It takes
many months before the National Bureau of
Economic Research, the unofficial arbiter of
when recessions begin and end, makes its
own ruling.
According to numbers published by Bureau
of Economic Analysis in May 2008, the GDP
growth of the previous two quarters was
positive. As one common definition of a
recession is negative economic growth for at
least two consecutive fiscal quarters, some
analysts suggest this indicates that the U.S.
economy was not in a recession at the time.
However this estimate has been disputed by
some analysts who argue that if inflation is
taken into account, the GDP growth was
negative for the past two quarters, making
it a technical recession. In a May 9, 2008,
report, the chief North American economist
for investment bank Merrill Lynch wrote that
despite the GDP growth reported for the
first quarter of 2008, "it is still reasonable
to believe that the recession started some
time between September and January", on
the grounds that the National Bureau of
Economic Research's four recession
indicators all peaked during that period.

New York's budget director concluded the

state of New York was officially in a
recession. Governor David Paterson called
an emergency economic session of the state
legislature for August 19 to push a budget
cut of $600 million on top of a hiring freeze
and a 7 percent reduction in spending at
state agencies already implemented by the
Governor. An August 1 report, issued by
economists with Wachovia, said Florida was
officially in a recession.
White House budget director Jim Nussle said
the U.S. avoided a recession following
revised GDP numbers from the Commerce
Department showing a 0.2 percent
contraction in the fourth quarter of 2007
down from a 0.6 percent increase and a
downward revision to 0.9 percent from
1 percent in the first quarter of 2008. The
GDP for the second quarter was placed at
1.9 percent below an expected 2 percent.
Martin Feldstein, who headed the National
Bureau of Economic Research until June and
serves on the group's recession-dating
panel, said he believed the U.S. was in a
very long recession and that there was
nothing the Federal Reserve could do to
change it.

In a CNBC interview at the end of July 2008

Alan Greenspan said he believed the U.S.
was not yet in a recession, but that it could
enter one due to a global economic
slowdown.

A study released by Moody's found two-

thirds of the 381 largest metropolitan areas
in the United States were in a recession. The
study also said 28 states were in recession
with 16 at risk. The findings were based on
unemployment figures and industrial
production data.

In March 2008, Warren Buffett stated in a

CNBC interview that by a "common sense
definition", the U.S. economy is already in a
recession. Warren Buffett has also stated
that the definition of recession is flawed and
that it should be 3 quarters of GDP growth
that is less than population growth.
However, the U.S. only experienced two
consecutive quarters of GDP growth less
than population growth.

RECESSION DECLARED BY ECONOMISTS:

On December 1, 2008, the National Bureau

of Economic Research (NBER) declared that
the United States entered a recession in
December 2007, citing employment and
production figures as well as the third
quarter decline in GDP. The Dow Jones
Industrial Average lost 679 points that same
day.

On January 4, 2009, Nobel prize winning

economist Paul Krugman wrote that "This
looks an awful lot like the beginning of a
second Great Depression." He continued,
"Milton Friedman, in particular, persuaded
many economists that the Federal Reserve
could have stopped the Depression in its
tracks simply by providing banks with more
liquidity, which would have prevented a
sharp fall in the money supply." and
"Friedman’s claim that monetary policy
could have prevented the Great Depression
was an attempt to refute the analysis of
John Maynard Keynes, who argued that
monetary policy is ineffective under
depression conditions and that fiscal policy
— large-scale deficit spending by the
government — is needed to fight mass
unemployment."
RISE IN UNEMPLOYMENT:

On September 5, 2008, the United States

Department of Labor issued a report that its
unemployment rate rose to 6.1%, the
highest in five years. The news report cited
the Department of Labor reports and
interviewed Jared Bernstein, an economist:

The unemployment rate jumped to 6.1

percent in August, its highest level in five
years, as the erosion of the job market
accelerated over the summer. Employers
cut 84,000 jobs last month, more than
economists had expected, and the Labor
Department said that more jobs were lost
in June and July than previously thought.
So far, 605,000 jobs have disappeared
since January. The unemployment rate,
which rose from 5.7 percent in July, is now
at its highest level since September 2003.
Jared Bernstein, economist at the
Economics Policy Institute in Washington,
said eight months of consecutive job
losses had historically signaled that the
economy was in a recession. "If anyone is
still scratching their head over that one,
they can stop," Mr. Bernstein said. Stocks
fell after the release of the report, with
the Dow Jones industrials down about 100
points after about 40 minutes of trading.
LIQUIDITY CRISIS:

Financial crisis of 2007–2008:

From late 2007 through September 2008,

before the official October 3rd bailout, there
was a series of smaller bank rescues that
occurred which totalled almost $800 billion.

In the summer of 2007, Countrywide

Financial drew down a $11 billion line of
credit and then secured an additional $12
billion bailout in September. This may be
considered the start of the crisis.

In mid-December 2007, Washington Mutual

bank cut more than 3,000 jobs and closed its
subprime mortgage business.

In mid-March 2008, Bear Stearns was bailed

out by a gift of $29 billion non-recourse
treasury bill debt assets.

In early July 2008, depositors at the Los

Angeles offices of IndyMac Bank frantically
lined up in the street to withdraw their
money. On July 11, IndyMac, a spinoff of
Countrywide, was seized by federal
regulators - and called for a $32 billion
bailout. The mortgage lender succumbed to
the pressures of tighter credit, tumbling
home prices and rising foreclosures. That
day the financial markets plunged as
investors tried to gauge whether the
government would attempt to save
mortgage lenders Fannie Mae and Freddie
Mac. The two were placed into
conservatorship on September 7, 2008.
During the weekend of September 13–14,
2008, Lehman Brothers declared bankruptcy
after failing to find a buyer, Bank of America
agreed to purchase Merrill Lynch, the
insurance company AIG sought a bridge loan
from the Federal Reserve, and a consortium
of 10 banks created an emergency fund of
at least $70 billion to deal with the effects
of Lehman's closure, similar to the
consortium put forth by J.P. Morgan during
the stock market panic of 1907 and the
crash of 1929. Stocks on "Wall Street"
tumbled on September 15.

On September 16 2008, news emerged that

the Federal Reserve may give AIG an
$85 billion rescue package; on September
17, 2008, this was confirmed. The terms of
the rescue package were that the Federal
Reserve would receive an 80% public stake
in the firm. The biggest bank failure in
history occurred on September 25 when JP
Morgan Chase agreed to purchase the
banking assets of Washington Mutual.

The year 2008, as of September 17, has

seen 81 public corporations file for
bankruptcy in the United States, already
higher than the 78 in 2007. Lehman
Brothers being the largest bankruptcy in
U.S. history also makes 2008 a record year
in terms of assets with Lehman's $691
billion in assets all past annual totals. The
year also saw the ninth biggest bankruptcy
with the failure of IndyMac Bank.

The Wall Street Journal states that venture

capital funding has slowed down which in
the past led to unemployment and slowed
new job creation.

Financial markets:

January 2008 stock market volatility:

January 2008 was an especially volatile

month in world stock markets, with a surge
in implied volatility measurements of the
US-based S&P 500 index and a sharp
decrease in non-U.S. stock market prices on
Monday, January 21, 2008 (continuing to a
lesser extent in some markets on January
22). Some headline writers and a general
news columnist called January 21 "Black
Monday" and referred to a "global shares
crash," though the effects were quite
different in different markets.

American stock markets were closed on

Monday, January 21 for Martin Luther King,
Jr. Day. Seemingly in response to the fall in
non-U.S. markets, the U.S. Federal Reserve
announced a surprise rate cut of 0.75% on
Tuesday at 8 a.m. This rate cut is believed
to have been influential in preventing large
declines in the American stock markets,
with the Dow Jones Industrial Average down
only 1.1% for the day, never closing that
week worse than a 1.6% decrease from the
previous Friday, and indeed closed up for
the week. Later it was announced that
Société Générale, one of the largest banks
in Europe, accused its employee Jérôme
Kerviel of fraudulent trades costing it €4.9
billion, and causing it to sell approximately
€50 billion in European equity derivatives
from January 21–23.

The effects of these events were also felt on

the Shanghai Composite Index in China
which lost 5.14 percent, most of this on
financial stocks such as Ping An Insurance
and China Life which lost 10 and 8.76
percent respectively. Investors worried
about the effect of a recession in the US
economy would have on the Chinese
economy. Citigroup estimates due to the
number of exports from China to America a
one percent drop in US economic growth
would lead to a 1.3 percent drop in China's
growth rate.

Market downturn Fall 2008:

As of October 2008, stocks in North America,

Europe, and the Asia-Pacific region had all
fallen by about 30% since the beginning of
the year. The Dow Jones Industrial Average
had fallen about 37% since January 2008.

There were several large Monday declines in

stock markets world wide during 2008,
including one in January, one in August, one
in September, and another in early October.

The simultaneous multiple crises affecting

the US financial system in mid-September
2008 caused large falls in markets both in
the US and elsewhere. Numerous indicators
of risk and of investor fear (the TED spread,
Treasury yields, the dollar value of gold) set
records.
Russian markets, already falling due to
declining oil prices and political tensions
with the West, fell over 10% in one day,
leading to a suspension of trading, while
other emerging markets also exhibited
losses.

On September 18, UK regulators announced

a temporary ban on short-selling of financial
stocks. On September 19 the United States'
SEC followed by placing a temporary ban of
short-selling stocks of 799 specific financial
institutions. In addition, the SEC made it
easier for institutions to buy back shares of
their institutions. The action is based on the
view that short selling in a crisis market
undermines confidence in financial
institutions and erodes their stability.

On September 22, the Australian Securities

Exchange (ASX) delayed opening by an hour
after a decision was made by the Australian
Securities and Investments Commission
(ASIC) to ban all short selling on the ASX.
This was revised slightly a few days later.[

As is often the case in times of financial

turmoil and loss of confidence, investors
turned to assets which they perceive as
tangible or sustainable. The price of gold
rose by 30% from middle of 2007 to end of
2008. A further shift in investors’ preference
towards assets like precious metals or land
is discussed in the media

IMPACT OF GLOBAL RECESSION ON INDIAN

MARKET
The recession in the US market and the
global meltdown termed as Global recession
have engulfed complete world ecomony with
a varying degree of recessional impact.
World over the impact has diversified and
its impact can be observed from the very
fact of falling Stock market, recession in
jobs availiability and companies following
downsizaing in the existing available staff
and cutting down of the perks and salary
corrections. Globally the financial sector
sacking the existing base of employees in
high numbers in US the major example
being CITI Group same still followed by
others in hospitality industry Jet and
Kingfisher Airlines too. The cut in salary for
the pilots being 90 % can anyone imagine
such a huge cut in salary.

In the globalized market scenario, the

impact of recession at one place/ indusrty/
sector perculate down to all the linked
indusrty and this can be truly interpreated
from the current market situation which is
faced by the world since approx 2 month
and still the situation is not in control
inspite of various measures taken to fight
back the recession in the market.The badly
hit setor at present being the financial
sector, and major issue being the
"LIQUIDITY Crises" in the market.

In-spite of the various measures to

subsidise the impact of the recession and
cut down the inflation present nothing really
sound have been done.
Various steps taken by RBI to curb the
present recession in the economy and
counter act the prevailing situation.
The sudden drying-up of capital inflows from
the FDI which were invested in Indian stock
markets for greater returns vizualizing the
Potential Higher Returns flying back is
continuing to challenge liquidity
management.At the heart of the current
liquidity tightening is the balance of
payments deficit, and this NRI deposit move
should help in some small way.

To curb the liquidity crises the RBI will

continue to initiate liquidity measures as
long as the current unusually tight domestic
liquidity environment prevails. The current
step to curb these being lowering of interest
rates and reduction of PLR. However, the
big-picture story remains unchanged – all
countries in the world with current account
deficits and strong credit cycles are finding
it difficult to bring cost of capital down in
the current environment. India is no
different. New measures do not change our
view on the growth outlook. Indeed, we
remain concerned about the banking sector
and financial sector. The BOP- Balance of
Payment deficit – at a time when domestic
credit demand is very high – is resulting in a
vicious loop of reduced access to liquidity,
slowing growth, and increased risk-aversion
in the financial system.

In total the recession have turned down the

growth process and have set the minds of
economists and others for finding out the
real solution to sustain the economic growth
and stability of the market which is desired
for the smooth running of the economy.

Complete business/ industry is in dolledrum

situation and this situation persist for a
longer duration will create the small
business to vanish as they have lower
stability and to run smoothly require
continious flow of liquidity which is drived
from the market.

In present situation down fall in one sector

one day leads to a negative impact on the
other sector thus altogether everyone feel
the impact of the Financial crises with the
result of the current recession which started
in US and slowly and gradually due to linked
global world have impacted everyone.

Solution for the problem still remain at the

top of the mind of every one, still everyone
facing the impact of recession but how long
is the major question which is of great
importance.

MEASURES TAKEN TO STABILISE MARKETS

Measures taken by India's central bank:

Following are measures taken by India's

central bank on Saturday in its latest move
to shield the economy from the spill over
effects of the global financial crisis and
boost growth.
* To reduce the repo rate or its main short-
term lending rate by 50 basis points to 7.5
percent with effect from Nov. 3, 2008.

* To cut banks' cash reserve ratio, or the

amount of funds banks have to hold with it
on deposit, by 100 basis points to 5.5
percent in two steps. The measure will
release 400 billion rupees ($8.1 billion) into
the banking system.

* To reduce banks' statutory liquidity ratio

or the percentage of deposits that banks
have to invest in federal debt by 1
percentage point to 24 percent.

* To provide refinance facilities to all

scheduled commercial banks from the
Reserve Bank of India for an equivalent to
up to 1.0 per cent of each bank's net
demand and time liabilities (NDTL) as on
October 24, 2008 at the repo rate up to a
maximum period of 90 days.

* Banks can borrow up to 1.5 percent of

their deposits in cash from the central bank
to onlend it to non-banking finance
companies to meet their funding
requirements.

* The Reserve Bank of India would continue

to sell dollars through agent banks to
augment supply in the domestic foreign
exchange marekt or intervene directly to
meet any demand-supply gaps.

* All transactions by the Reserve Bank would

be at prevailing market rates and per
market practice. Entities with bulk foreign
exchange requirements can approach the
central bank through their banks for this
purpose.

* In the context of forex outflows, it decided

to conduct buy-back of Market Stabilisation
Scheme (MSS) dated securities to provide
another avenue for injecting liquidity of a
more durable nature into the system.

* This will be calibrated with the market

borrowing programme of the the federal
government. The securities proposed to be
bought back. the timing and modalities for
these operations would be notified
separately. ($1=49.50 rupees)

RBI steps in to stabilise forex market, stem

outflow

In a desperate move to arrest the

unprecedented fall in the value of Indian
rupee, the Reserve Bank of India (RBI) on
Thursday announced several measures to
restore the confidence of exporters and
foreign institutional investors (FIIs) and
stem further outflow of foreign exchange
from the country.

Announcing the measures, RBI Governor

Bimal Jalan said pre-shipment export credit
for six months and post-shipment credit for
90 days has been reduced by 550 basis
points to 6.5 per cent for incremental
exports over base year 1997-98. This facility
will be available upto December 31, 1999.
The Reserve Bank will refinance credit under
the scheme at 4 per cent, which is equal to
the interest paid on CRR (cash reserve ratio)
balances. Foreign currency export credit will
be made available at 1.5 per cent over Libor
(London Inter-Bank Offered Rate), a cut of
50-100 basis points for all exports and is not
to be restricted to incremental volumes
alone.

The RBI has allowed FIIs to cover their in

cremental equity investments from today.
The central bank said that it will open a
window, enabling banks and authorised
dealers of FIIs to buy dollars to this end. FIIs
have also been allowed to invest in treasury
bills henceforth. This is to induce FIIs to
reinvest proceeds from equity sales in
treasury bills.

Sticking to his weak rupee position, the RBI

Governor said in a statement here, ``RBI
does not have a specific target for an
exchange rate.'' The statement said the day-
to-day exchange movements in the
exchange rates are ``market determined''
the RBI is only committed to maintain
orderly and reasonable conditions in the
market by providing additional supply of
forex as considered necessary from time to
time.

Financial institutions will be allowed to buy

back their debt paper or of other domestic
corporates in the international markets. The
Reserve Bank's prior approval will have to
be taken in this regard. Seeking to calm
apprehensions of an interest rate spiral,
Jalan said that he will ensure that there is
no pressure on interest rates by stating that
the RBI is ready to take on private
placement of government paper and release
them to the market gradually.

The RBI announced its half-hearted initiative

in the aftermath of the public outcry about
rupee value which has depreciated by
around 15 per cent after Bimal Jalan took
charge as the Governor. When Jalan joined
the RBI, the rupee was hovering at around
37.50 against the dollar. It has now come
down to 42.50 which implies a loss of nearly
Rs 5 per dollar. This will have a cascading
effect on the import bill and foreign debt
obligations. While justifying the current
exchange rate at 42.50, the central bank
has said the present exchange rate of the
rupee should help boost the export effort.

However, the governor did not announce

any measures to force the exporters to
bring back the overdue export bills kept
abroad. ``While the cost of export credit will
come down, exporters are encouraged to
keep their export earnings abroad as the
cost of domestic borrowing has come down
further,'' said a forex dealer. The RBI had
earlier increased the interest on pre-
shipment credit to force exporters to bring
back their earnings, but removed later.

Another sop to the exporters is more access

to foreign currency loans from banks at a
spread of 1.5 per cent over the LIBOR as
against the prevailing 2/2.5 per cent spread.
This facility will be available for entire
volume of exports (and not limited to
incremental exports).

For existing investments of FIIs in equity,

the facility of forward exchange cover will
be made available from June 12, 1998
onwards for incremental investments (over
and above the level of investment in equity
prevailing at the end of business on June 11,
1998). FIIs which wish to reduce their
investment in India can do at prevailing
market rates. The central bank attributed
the increased purchase of dollars to
uncertainty in the international exchange
markets particularly the sharp depreciation
of Japanese yen in the previous week,
thefallout of South-east Asian crisis and
uncertainty regarding immediate outlook for
economic growth in India.

Besides, FIIs were selling in the Indian

market and pulled out nearly Rs 500 crore in
June alone. Also there was general
apprehension about the slowdown in forex
inflow after the nuclear tests and sanctions.

The central bank earlier said that the fall in

Indian rupee was due to excessive
speculation in the market and conducted
some investigations into the account books
of various foreign banks and the private
corporate sector.

Even this time round the central bank has

not considered the speculative forces in the
market. For the speculators Jalan has issued
only a light piece of advice. ``Considering
the present state of the international
markets and the developments in India, the
RBI will advise banks and other participants
to realistically assess various factors and
avoid unwarranted speculative activity,'' he
said.

Reeling out statistics about the Real

Effective Exchange Rate (REER) and
economic fundamentals, the RBI has said
that it will not hesitate to use its reserves,
as needed to meet the country's external
obligations and its current account deficit, if
at all necessary. This is exactly why the
policy of keeping high reserves has been
followed by the central bank.

PERSONAL VIEWS IN TACKLING RECESSION

Pay scales of the IT professions should be

changed

Bank loans and other loans for housing etc

should be reduced and made easily
available.

NRI’S should be encouraged to invest in

india and give them high interest rates on
deposits to encourage foreign inflow.

Exports should be encouraged and rules for

exports should be stabilised.

Petroleum product prices should be

increased to discourage use of vehicles
which will lead to decrease in imports of
crude in india because crude is the highest
imported good in india.

Consumer goods should be made cheaper

for higher consumption.

Banking sectors should change their rules

and regulations and make banking easier
and friendly.

More of Indian banks should be opened in

foreign countries for more of foreign
deposits.