Monday, November 24, 2008

Recession: An Introduction

Slowdown, recession, bailout; nowadays in every newspaper, on every news channel, and every techie speaks about these words. This is a simple and humble attempt to explain what has been done, result of which is going on and where future lies?

What is recession?
In simple words it is flying of money (huge to very huge) from market. When it begins? How it begins? Where it started? It started with a very small thing. At that time very few could have thought of this disaster. It is surprise to many but all begins with disbursement of loan (bad) to buy houses, to people who don't have credit worthiness. They called it NINJA loans (No Income No Job Approval). The providers of loans were US Bankers supported by policies of US Government and Federal Reserve (Central Bank of USA). Loans were given to those people who don't have job or any income source to repay the loan. Though stringent conditions were attached with such disbursement e.g. in the initial period of loan no interest or very small interest rate has been charged and in later period of loan (after 2-3 yrs) higher interest has been charged for the rest of loan period. That was the point (when higher interest started), when many started defaulting on repayment of these loans.

But you must be thinking that how this small thing, a small sparkle can create this big fire? It was a "Systematic Plan". US government created two mortgage companies (Fannie Me and Freddie Mac) to disburse the loans. They created bonds of these loans (loans were assets of those companies, they converted loans into bonds) and sold them to investors. Investors included bankers, financial institutions, investment companies (like Lehaman Brothers), foreign banks, foreign governments and small investors (like you and me). Bad loans disbursed were to the tune of some Trillian US dollars. When default started in repayment of these loans the value of bonds started shrinking. That has impacted liquidity as well as profitability of many banks. Many banks shows losses or lesser profits compare to previous periods. Some banks closed down, some sacks employees for cost cutting. Financial impact of this was so huge that it spread across the globe. Overall demand comes down heavily which results in more loss to many companies.

Right now nobody can predict how far this will go? Analysis by some economist predicts that this will last for next 1.5 to 2 yrs. So we should be well prepared for this, if it is true as, as of now India has not seen any major event of recession. But we may face trouble in 2009.

To reduce the impact of recession these are some tips which might help:

  1. SPEND less, SAVE more.
  2. Utilize resources (Electricity, Paper, Food, Oil and Gas etc) efficiently at your residence as well as at your workplace.
  3. Try to reduce cost of your being at your office i.e. switch off fans and tubes when not in use, use printer least etc. as your employer is also thinking of cutting the cost.
  4. If you are having shares with you, don't sale them in panic. If possible keep it for long term period. If you regularly trade in the market, you must know how to make profit in this fluctuating market also.
  5. At personnel level some spending can be deferred e.g. travel with family, weekly outings, hoteling etc.

Note: These suggestions may not be useful for all. These are situation based so for everybody suggestions are different. These are common and general suggestions.