My apprehensions of Recession

Recession is defined as the slowdown of economic activity over a period of time. Technically, the recession is identified the GDP declines for two consecutive quarters. The GDP decline is caused by a slowdown in production, falling housing prices and sales and a drop in the investments. The slowdown results in increasing unemployment which in turn causes a slowdown in retail sales. When the market has no demand, the manufacturing faces a setback and the graph declines further.

The current recession is the result of cupidity of people in the US sub-prime mortgage market. The banks lend loan by analyzing the credibility of the borrower. The people who cannot justify their credibility are given loans by the credible borrowers from the bank at a higher interest rate. This is called sub-prime lending. The prime lending refers to the loan borrowed from the bank.

How did the sub-prime lending ignite the recession? The sub-prime loans were converted into financial securities and sold to big investors who paid the loan amount to banks. This amount was used by banks to finance more home loans because the sub-prime loans were sold out at low interest rates which made them vulnerable to buying. Since more and more loans were sold out, the cost of real estate started crashing. Also, since the borrowers did not have a credibility listing, the payments started getting defaulted thus increasing the equated monthly instalment (EMI) interest rates. A vicious cycle of buying n defaulting was created. Since, the EMIs could not be paid the securities started transforming into losses thus, the beginning of the economic meltdown. To cover these losses, the investors started selling their investments in foreign markets. Since the amount of selling in the markets was much higher than the amount of buying, the financial markets in different countries started tumbling. Thus, the world faced the heat of the US sub-prime crisis.

Every problem has a solution. The economies are still fighting with this recession and have been successful to a great extent in suppressing it but the after effects remain in the market. Thus, it is always better to anticipate and plan accordingly. The recession could have been avoided if the covetousness could have been suppressed. Today, mindful people need to save money so that when the economies suffer a breakdown there could still exist a controlled flow of money in the market. The governing bodies need to deploy policies more strictly. The tax cuts also need to be revised. The money in securities is equally unsafe and the risk is even higher for higher values of securities but provides tax exemptions to some extent. In the urge to keep more money in own pockets, people tend to invest in securities. The government must revise its taxing policies to secure money with the citizens and prevent their exposure to risks.

Ignorance is not bliss anymore. Anticipation, planning and undertaking calculated risks are the needs of the hour.