What started out as a bursting of housing bubble soon crippled the American Banks, then Its economy and now the pinch of it is being felt all over the world except, of course, Antarctica which is least affected by it due to obvious reasons. Many factors lead to recession, which economists believe will lead to depression. Theres no absolute definition of depression or recession as such with various economists publishing their own theories and definitions of these terms which are usually different in meaing from each other.
Most widely used definition of recession is Whenever a country witness decrease in GDP growth in consecutive 2-4 quarters, we say that the respective country is in recession whereas if theres a decrease in GDP growth for more than 4 consecutive quarters, we say the respective country is in depression. My friends over here will be mentioning the obvious points like subprime crisis, bankruptcy of investment banks like AIG, Lehmann Brothers, Freddie Mac, faltering of mortgage loans and some other common points. I, on the other hand, will be talking about Foreign Investments in FOREX reserves and stock market.
Forex reserves as you know are the reserves of foreign currency which a country have. Till the starting of this millennium, Rich countries, mainly America used to invest heavily in other countries forex reserves and withdrew it for profit whenever it liked. So there was availability of dollar which is a global currency as it is one one the five currencies officially supported by UN. But the trend changed with the advent of this century with the sudden growth of second world countries like China, Saudi Arabia, India during those time had lots of excess money to invest.
So they looked offshore in America which was also growing handsomely. They invested in its Forex reserves i. e. brought lots and lots of dollars in their own country. When the real estate bubble burst and subsequent bankruptcy of Banks, credit crunch was felt and need for dollar arose which was lying with developing countries. By 2007, China had more than $500bn dollars and we had more than $200bn of them. These countries could not trade their dollars as the value of dollar had decreased in respect to their own currency since then which meant heavy losses.
Hence, credit crunch hit heavily American economy on which almost all economies are based. Now I am going to talk briefly on Stock market. During the economic boom, Foreign Institutional Investors (FIIs) invested heavily in stock markets of developing countries like Russia, China, Brazil and India as it was bound to rise due to the sudden growth which the country witnessed. So, the stock market rose, and it reached all time high in 2006-2007-2008. Then these FIIs started withdrawing money from these stock markets as there was no possibility of them going up more.
FIIs made huge profits and left only to cripple our stock market and economy alike. Its perfectly legal, but is illegal morally. When Chetan Mehta did it, he was banned but when America did it, our foolish politicians and policy makers sat quiet and enjoyed the moment only to witness the present debacle. At last, I want to thank my friends over here who surprisingly sat quietly all the time and did not make funny faces and finally sir who gave me an opportunity to speak on my favourite topic.