“ In my adult life time , I don’t think I have ever seen people as fearful ” .

-Super investor Warren Buffet on the 2008 economic meltdown

FINANCIAL COLLAPSE 2008

A look into the events that lead to a global financial crisis

Submitted by : Arihant Kr. Seraogi (Group 1 MCA 1st year)

Overview

Introduction Causes Impacts Damage Control Measures How India survived Conclusion

WHAT IS A FINANCIAL COLLAPSE ?

A Financial Collapse takes place when a country experiences a sudden downturn in the state of its economy. During the occurrence of such event, many people will be unemployed or underemployed, companies may go out of business, wages and benefits will drop or stagnate, inflation will occur, the nation's gross domestic product (GDP) will decrease and it may be difficult for many prospective borrowers to obtain a loan .

2008 Crisis! Where it all began ?

The Lehman Banking Group filled for Bankruptcy with a $630 billion debt at 2am on the Monday morning of 15 September 2008. This event is widely considered as the beginning of the crisis

This was a chain reaction and triggered down the World Banking system as it was the largest bankruptcy in history

The crisis list Saving and loans Crisis – 1984 Junk Bond Crisis – 1989 Japanese Bubble Bursts – 1992 Mexico Currency Devaluation – 1994 Barings collapse – 1995 Asian Currency Crisis -1997 Russian Currency Devaluation and Default – 1998 LTCM Bailout – 1998 Dot-com bubble Bursts – 2000 Bear Stearns Bails Out funds – 2007 Lehman Goes Bankruptcy – 2008

Causes for the Collapse

Boom and bust in the housing market . High risk loans and lending practices (prominence of Ninja Loans) Failure of Banks and financial institutions Central bank policies . Government policies .

NINJA LOANS

One of the causes with the worst impact was NINJA loans it is a highly risky form of subprime lending, often found in the mortgage market.

A NINJA loan is a slang term for a loan extended to a borrower with “NO INCOME NO JOB NO ASSETS". Whereas most lenders require the borrower to show a stable stream of income or sufficient collateral, a NINJA loan ignores the verification process.

Main cause for the failure of Banking Institutions.

Failure of Banks and Financial Institutions

Financial Institutions – Write Down

Financial Institutions – Bankruptcy

Impacts Stock Market crashdown. Consumer spending slowed down due to lack of cash / unwillingness . Uncertainty in international capital markets . Bankruptcy U.S.A’s economic condition affected the global economy . World economy slipped into recession ( low economic activities ) . Exports from India , china , Korea and Taiwan decreased . Collapse of financial system . Job loss- Rapid Unemployment and the starting of a very long period of

recession Very low GDP growth .

Stock Downfall The immediate impact of the US financial crisis has been felt when India’s stock

market started falling. On 10 October, Rs. 250,000 crores was wiped out on a single day bourses of the India’s share market.

The Sensex lost 1000 points on that day before regaining 200 points, an intraday loss of 200 points.

As of mid-December of 2008, stock returns were down by 37 percent since the beginning of the year

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Damage Control

Central banks to the Rescue Fed pumps money into the system Interest rates in the US are nearly zero EU and Asian central banks brought rates down dramatically . The emergency of incorporation companies and sales of a number of big

companies to save it from bankruptcy . The US government’s rescue plan presented to the house of representatives $ 700

billion and, after deliberations between rejection and acceptance was approved by the council of representatives and the senate .

How India survived ? Despite an unprecedented global recession, India remained the

second fastest growing in the world.

India’s GDP grew by more then 6% though out this period .

India is much less dependent than most other countries on global

flows of trade and capital .

India relies on external trade for about 20% of its GDP

To lift the economy out of the recession the government announced

a package of Rs.35,000 crores in the first instance on Dec 7,2008.

Conclusion

It can be ascertained that the economic meltdown or the financial collapse of 2008 wasn’t a instantaneous phenomenon it was in the building up for years.

Its tremors are still predominant in the global economy the recovery even after 8 long years has not been absolute.

Ill decision making by governments financial institutions, human greed for rapid growth, lack of political morality all contributed in the buildup of this man made calamity.

The global systemic crisis, which itself has built up over decades, will not be overcome until the vulnerabilities/ and contradictions that caused it are resolved effectively.