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Estimated Duration Bibek Khadgi Deepeka Shrestha Sishir KC Ritu Joshi Manisha Baral : : : : : : 20 minutes Introduction & Origin Root Causes Spillover Impact of Crisis Developing Markets and Crisis, Comparison with Great Depression & Solution.
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INTRODUCTION
It is also known as The Great Recession, Lesser Depression, the Long Recession, or the global recession of 2009. Global economic decline that began in Dec. 2007 and took a particularly sharp downward turn in Sept. 2008 Caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. Stimulated Systemic imbalances and sparked the outbreak of the financial crisis of 20072008.
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Origin
From 1820 to 1970, every decade U.S. workers experienced a rising level of wages In the 1970s this came to an end; real wages stopped rising and they have never resumed since U.S. workers became more productive, but got paid the same; wages began to stagnate and decline The gap between labor and capital grew bigger
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Origin Contd
Origin Contd
The large corporations made huge profits and had much money at their disposal They bought other corporations (mergers and acquisitions) and they put their money into banks The banks loaned that money (with interest) to workers who didnt have money to consume This was done to raise their purchasing power because their wages werent enough to buy things 6
Origin Contd
Since employers no longer raised workers wages, the workers had to go into debt to survive Debt went up and up and things got out of control
The banks continued to loan money through new loans (secondary mortgages) at high interest rates, and this was a profit bonanza for the banks
As corporations increasingly began to invest abroad (outsourcing production and services)
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Origin Contd
U.S. workers lost their jobs, and this led to greater unemployment and underemployment Unemployed workers with a lot of debt were unable to make their mortgage and credit card payments, and this led to foreclosures and bankruptcies
This, in turn, led to the collapse of the banking system, necessitating a government bailout of the banks
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Origin Contd
It is only through the nearly trillion dollar stimulus funds that the U.S. government poured into the economy to save the banks from default.
Root Causes
Lower Interest rates caused by worldwide macroeconomic imbalances over the last decades Increased risk taking by banks (sub prime lending) contributing to high assets price i.e. asset price bubbles. Changing structure of financial sector and rapid pace of financial innovation (credit market derivatives, credit default swaps) Lax regulation or failure to adequately regulate highly leveraged financial institutions
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The export based countries suffered due to lower demand from the US and other European countries.
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By the time, governments put their efforts, the crisis already was turned into sovereign debt crisis.
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Impact
The current economic crisis has been deep and widespread on a global basis, especially in the U.S. In the epicenter of the crisis, in the United States, unemployment increased from 7 million in December 2007 to 16 million in October 2010 Counting the discouraged and part-time workers, the unemployment rate reached 18% in 2010 Foreclosures have been running over 1 million a year & Poverty is on the rise (now 44 million Americans 1 in 7 live at or below the poverty line) 22
Impact contd
Loss of manufacturing sector and more Finances
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Private debt crisis into a sovereign debt crisis when the rating agency, S&P, waited for Wall Street announcing that America's debt would no longer be classed as top-notch triple A. May 2010 marked the point at which the focus of concern switched from the private sector to the public sector.
Impact Contd
Policymakers are confronted with a slowing global economy and a systemic crisis in one of its component parts, Europe.
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Impact Contd
By the time the IMF and the EU announced they would provide financial help to Greece, the issue was no longer the solvency of banks but the solvency of governments. Budget deficits had ballooned during the recession, as a result of lower tax receipts and higher nondiscretionary welfare spending Austerity became the new watchword, affecting policy decisions in the UK, the Euro zone and, most in the US, the country that stuck with expansionary fiscal policy the longest.
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Impact Contd
Greece had unique problems as it covered up the dire state of its public finances and had difficulties in collecting taxes To the extent that they are united, they are united in stupidity, wedded to blanket austerity that will make matters worse not better. And they have yet to tackle the issue that lay behind the 2007 crisis in the first place, the imbalances between the big creditor nations such as China and Germany, and big debtors like the US.
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Nepal Has no direct linkage Job Loss in foreign countries by Nepalese workers Decreased remittance Decreased exports to some European countries
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