Background of the Global Financial Crisis; What is it all about? It all began with the one and all American dream, that every American should have a home. Regardless of who you are and what you do, if you are an American, you should have something called a home. Real Estate business was in a boom, and financial agents thought that there wasn’t a better time to give away loans. The Household sector was given a boost with increased monetary supply by commercial financial companies, and people were given loans regardless of the credit rating they received. It was never expected that the boom in the Real Estate business would come to such an abrupt end, and the prices would reach all time low. The US economy being a capitalist driven economy didn’t bother to indulge itself in the policies pursued by the then prominent financial giants. Gradually these financial giants in this business started feeling the heat as “sub-prime” clients started defaulting in their repayment of loans. The properties which were mortgaged by the clients weren’t even covering the principal amount of the loan, leave alone the interest commitments. The credit offered to the people in indiscriminate fashion, achieving short term goals and ignoring warnings from leading economists about long term sustainability of the policy, backfired completely and companies like Lehmann Brothers, Merill Lynch, Freddie Mac and Fannie Mae’s “bad assets” reached magnanimous proportions. An acute credit shortage was experienced in the economy, and simultaneous negative effects started occurring. The credit crunch meant that borrowing interest rates shot up in the market, companies slowed down their investment policies, production declined, lay offs increased, consumption decreased and the whole economy followed the downward spiral. The unemployment rate in the US reached an all time high of 6.1% and industrial growth saw its largest decline in the past three years and fell to 1.1%. The US governments realized the gravity of the situation, and started using monetary as well as fiscal policies to check the diminishing economy. Fiscal policy boost in the way that, an amount of around US$ 1 trillion was pumped into the economy to increase the liquidity scenario. The financial companies which filed for bankruptcy were nationalized, or there non-performing assets were accounted for by the government. The Federal Bank of US also lowered the monetary policy rates, like Statutory Liquidity Ratio (SLR), relating to the amount of money required to be deposited by commercial banks to the Federal bank, so as to have some check on the sky high interest rates. These policies which were targeted to cushion the huge credit shortage scenario has taken somewhat affect and the situation has stabilized a bit. But, as leading economists say, it is too early to comment on whether the trough of the graph has reached or not, or it is still the “tip of the iceberg” scenario. This fear is out there still because there is uncertainty over how many more “sub-prime” creditors are still there in the economy, and how many more companies will get affected by the fallacious policy, which was followed by short-sighted profit oriented companies. Impact on the Indian Economy
The financial crisis in the US, slowly snowballed to an economic crisis, with growth in the economy stagnating. Efforts have been taken by the US authorities to restore the fully functional markets, but there’s an obvious time lag. Till then, the world economy has been affected by this deep economic crisis and India is no different. India being a net import driven economy, with exports (including the service sector) contributing 17% of GDP, is a little less vulnerable than other economies. Moreover we still have a socialistic pattern of economy where there is enough government intervention, which has somewhat checked the situation from becoming graver. At the present scenario it is a bit difficult to exactly quantify the implications of...
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