us recession effects on other countries

8/8/2019 US RECESSION EFFECTS ON OTHER COUNTRIES

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DOON BUSINESS SCHOOL PGDM1ST

U.S. recession effects onIndia, China and Europe

Virender SinghPGDM

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EFFECTS OF RECESSIONThe United States was heading toward recession. This isno longer conjecture -- the threat is real. This wasindirectly acknowledged by the White House on Jan.18with the unveiling of an economic aid package thatpractically confirmed everyone's worst fears.

The signs have been apparent since last June or July. The stock

market has been moving sideways rather than up. There weresignals that the economy, which had been hopping from one

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record to another for the last six years, needed a breather.

Then the sub-prime loan crisis began to unfold. Banks andfinancial institutions began to take losses, followed by otherrelated companies. Later the housing market began to collapse,induced by the sub-prime loan crisis. When this was followed byless-than-spectacular Christmas retail sales, the "R"' wordbegan to be uttered.

The recession was not be officially confirmed for a while, andrapid interest rate cuts announced on Jan. 22 may reduce itsimpact. A near agreement between Congress and the WhiteHouse on an additional aid package as unveiled on Jan. 24 mayfurther reduce the impact of the upcoming slowdown -- yet ageneral slowdown is inevitable.

Half a trillion dollars spent on the Iraq war, $200 billion inlosses in the sub-prime loan crisis, and a huge trade deficit withChina are structural factors that cannot be helped by any aid

package.Global stock markets suffered catastrophic losses on Jan. 21.Japan's stock market dropped 6 per cent, India's 8 per cent,Canada's 4.5 per cent and European markets fell from 4 to 6per cent. The U.S. market, closed for a holiday, was sparedcatastrophic losses.

Luckily for U.S. markets, the Federal Reserve stepped in on themorning of Jan. 22 and cut interest rates by 75 basis points,

which had the desired effect. It curbed investors' rush to sell,and a day later profiteers stepped in to buy stocks cheap, whichhelped reduce losses.

India suffered miserably on Jan. 21, as well as a few days priorto that day of infamy. Institutional investors from abroad, whohad driven the Indian stock market sky high, pulled back. As inthe United States, the investors were back the next day,helping the stock market recover some of its losses.

The Chinese are not immune to the worldwide financial crisis,although they are less exposed to institutional investors. Their

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worst nightmare may be yet to come. With reducedmerchandize exports, factories will be idle. Layoffs may followand social unrest begin -- not good for the upcoming Olympicsin Beijing.

When the United States goes through a slowdown, Canada isnext, followed by Europe and the rest of the world. The impactof a U.S. slowdown was be:

a) A fall in commodity prices; oil for example would be out ofreach at US$100 a barrel;

b) Layoffs and the closure of factories will send theunemployment rate soaring, with the side effect of high benefitspayments;

c) With less money to spend, consumers will leave their walletsand credit cards at home, reducing retail sales. Sales ofhousing, cars and other big-ticket items will undergo a dramaticdrop;

d) Stock markets in upcoming months will perform miserably.The value of people's assets and other holdings will contract.They will be less likely to indulge in cruises or holidays or otherextravagances;

e) With less money all around, there will be less for the UnitedStates to spend on war on terror in Iraq and Afghanistan. It ispossible that the United States may prematurely wind up andleave the war halfway;

f) There may be a complete re-look at the North American FreeTrade Agreement, which has moved jobs to Mexico andCanada;

g) Unequal China trade, which has been a sore point for quitesome time, may come under the scanner. The dollar-yuancurrency relationship may be revised or, in the worst-casescenario, a few countervailing duties may be applied. In otherwords, a long-avoided protectionism may creep into the U.S.

political thought process.

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Apart from whatever happens in the United States, India andChina will be at the receiving end of a few unpleasant jolts.China's ever-increasing exports to the United States may findan uneven reception. India may suffer the consequences of thewithdrawal of investments from the stock market.

In China itself the booming real estate cum infrastructurereconstruction may cease. Cities in China are on a spendingbinge to boast of new infrastructure, which they finance by

borrowing from the banks without adequate checks andbalances. When all hell breaks loose, banks will either goinsolvent or foreign reserves stashed in the United States --now US$1.3 trillion -- will have to be transferred to keep themafloat. That is one reason China has been keeping its foreignreserves close to its chest.

This was cool off the overheated Chinese economy by a fewpercentage points. Domestic consumption may be increased to

offset the decline in exports. China may also begin investing inU.S. companies with financial troubles, like their US$5 billioninvestment in Morgan Stanley. A much greater U.S. buyingbinge by China is unlikely, however. There are domesticconsequences to worry about, and cash stashed away asreserves may be urgently needed at home.

The impact on India was be indirect. Globalization, in whichIndia is a small fry, will impact it less. It is the institutionalinvestors who will place India on the slippery slopes. In seven

days including Jan. 21, the Indian stock market lost 8 per centof its value. This translates to about US$400 billion of investors'paper money wiped out, or about two years of steady gainsmade by the little guys in the market.

The U.S. recession was thus lower expectations in India but wasnot have consequences as severe as in China. An alreadyunhappy textile export sector may find it difficult to achieve its2008 export target. Alternatively, a boom in the information

technology and business processing outsourcing sector willcontinue. U.S. companies looking for cheaper alternatives may

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outsource additional work.

One salient feature of India's spectacular economicperformance in the last six years is that it is driven by domesticconsumption. Not being dependent upon the United Statesmakes the impact of the U.S. recession a bit more manageable.This is completely opposite for China, where exports drive theeconomy and domestic life may be ruined if orders dry up.

India will have to worry about rapid interest rate cuts by theU.S. Federal Reserve Board. That would widen the gap betweenIndian and U.S. commercial interest rates, resulting in a capitaloutflow from U.S. to India where interest rates are still high.

The arrival of excessive cash in India would not be welcometoday. India would not know what to do with a huge inflow, andwould have to cut its interest rates appropriately. Combine thiswith a weakening dollar and it would erode any exportadvantage. Hence additional rapid interest rate cuts by the Fed

would require an appropriate response from India.In the end the world may emerge out of this U.S. slowdownmuch more sober. The United States will develop a bit of aprotectionist attitude. China's free reign of cheap exports maybe a thing of the past. Domestic demand will keep India'sgrowth high, though a drop by a few percentage points formiscellaneous reasons is not unexpected. India's stock marketwill receive a sobering lesson on overemphasizing foreigninvestors. Foreign investors will remain, but in a much morecontrolled manner.Top of Form

20080205-17232

Bottom of Form

It all started at the beginning of the US economic boom in

1998, when large numbers of people decided that real estate,

which still hadnt recovered from the early 1990s slump, had

become a bargain. At the same time, Wall Street was making it

easier for buyers to get loans. It was transforming the

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mortgage business from a local one, centered on banks, to a

global one, in which investors from almost anywhere could pool

money to lend. The new competition brought down mortgage

fees and spurred some useful innovation. As is often the case

with innovations, though, there was soon too much of a good

thing. Those same global investors flush with cash from Asias

boom or rising oil prices, demanded good returns. Wall Street

had an answer: subprime mortgages. Because these loans

go to people stretching to afford a house, they come with

higher interest rates even if theyre disguised by low initial

rates and thus higher returns. The mortgages were then

sliced into pieces and bundled into investments, often known

as collateralized debt obligations, or C.D.O.s. Once bundled,

different types of mortgages could be sold to different groups

of investors. Investors then goosed their returns through

leverage, the oldest strategy around. They made $100 millionbets with only $1 million of their own money and $99 million in

debt. If the value of the investment rose to just $101 million,

the investors would double their money. Home buyers did the

same thing, by putting little money down on new houses, notes

Mark Zandi of Moodys Economy.com. The Fed under Alan

Greenspan helped make it all possible, sharply reducing

interest rates, to prevent a double-dip recession after the

technology bust of 2000, and then keeping them low for

several years .All these investments, of course, were highly

risky. Higher returns almost always come with greater risk. But

the powers that be and American homeowners decided that the

usual rules didnt apply because nationwide had never fallen

before (people have short memories!). Based on that idea,

prices rose ever higher so high, says Robert Barbera of ITG,

an investment firm, that they were destined to fall. It was aself-defeating prophecy. And it largely explains why the

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mortgage mess has had such ripple effects. The American

home seemed like such a sure bet that a huge portion of the

global financial system ended up owning a piece of it. Last

summer, many policy makers were hoping that the crisis

wouldnt spread to traditional banks, like Citibank, because

they had sold off the underlying mortgages to investors. But it

turned out that many banks had also sold complex insurance

policies on the mortgage debt. That left them on the hook

when homeowners who had taken out a wishful-thinking

mortgage could no longer get out of it by flipping their house

for a profit .Many of these bets were not huge, but were so

highly leveraged that any losses became magnified. If that

$100 million investment described above were to lose just $1

million of its value, the investor who put up only $1 million

would lose everything. [Recent statistics point to potential

exposure that could run into the trillions, so you can onlyimagine how deep the impacts of these losses will be.]

This toxic combination the ubiquity of bad investments andtheir potential to mushroom through leveraging has shockedWall Street into a state of deep conservatism. The soundnessof any investment firm depends largely on other firms havingconfidence that it has real assets standing behind its bets. Sofirms are now hoarding cash instead of lending it, until they

understand how bad the housing crash will become and howexposed to it they are. Any institution that seems to have ahigh-risk portfolio, regardless of whether it has enough assetsto support the portfolio, faces the double whammy of investorsdemanding their money back and lenders shutting the door intheir face. Good-bye, Bear Stearns. The conservatism has goneso far that its affecting many solid would-be borrowers, which,in turn, is hurting the broader economy and aggravating WallStreets fears. A recession could cause credit card loans andother forms of debt, some of which were also based on over

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exuberance, to start going bad as well. Many economists, onthe right and the left, now argue that the only solution is forthe federal government to step in and buy some of theunwanted debt, as the Fed began doing last weekend. This iscalled a bailout, and there is no doubt that giving a handout toWall Street lenders or foolish home buyers as opposed to,say, laid-off factory workers is deeply distasteful. At thispoint, though, the alternative may be worse. Bubbles lead tobusts. Busts lead to panics. Panics lead investors to sell andmarkets to fall and thats why we are in the situation we are innow.

Certainly there is a lot of effect of US recession on Indianeconomy. US recession has a chain affect as US imports manythings from other countries which includes India. Primarily thishas impact on export industry in India which includes textileindustry, granite processing industry, tobacco exports and soon. It is said that already 5 lakh people have already lost their

job in Indian textile industry.This is not the end of the story. Now it has also startedshowing its direct effects on all other industries as well whichinclude IT and ITES. Proactively many of the companies havestarted taking proactive steps to protect them self from thegloomy future. Many small companies were closed and ready toclose, increasing the unemployed people. This will have lot ofimpact on peoples spending abilities and the supply chain effect

carries forward.But is every one in India is affected? Yes, but many people maynot realize it or many not have any direct effects. Especiallypeople living in cities will are more exposed to this and peoplein towns are less exposed to this situation. This is especiallybecause number of employees working in private firms aresusceptible to this situation and people working for govt. andself-employed are less (these people will have impact only atlater stages).

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What is the other side of the coin? Frankly its an overall loss toeveryone. But this is the right time for govt. to attract goodtalent to join in govt.organizations. That way government canincrease its efficiency and also help country to face thissituation. But government has to act quickly for filling alreadyvacant positions and creating new jobs.

INDIAIts almost a decade since we entered into the 2000s. Economicgrowth in these years wasnt so impressive for the westerneconomies. It proves to be one of the worst economic periodsfor those economies. Indeed, the so-called fastest growingeconomies (such as India, Brazil, China, Mexico, Russia, and

Indonesia) have seen an unprecedented economic expansionbecause, the eastern economies were the producers and thewestern economies were the consumer and the same trendwould likely to continue as the companies, nowadays, are moreconscious about the cost. Rising input cost (or raw material)are forcing the corporations in the industrialized economies toshift their focus on the cost-effective region to keep up thepricing competitiveness in the specific industry, they are in.Change in consumer trend is also major concern for the

companies to invest more in the process of innovation,research and development (R&D).

As the economic pace is picking up, global commodity priceshave staged a comeback from lows and global trade has alsoseen a decent growth over the last two years. UnprecedentedGovernment intervention and exceptionally large interest ratecuts by the central bank in advanced and emerging economieshave contributed a lot to pull the global economy up from the

deepest recession since the World War II. SeveralGovernments around the world launched the stimulus packages

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to prop up the economic growth, generate employmentopportunities and the overall economic growth with the aim toreduce uncertainty in the economy and increased confidence.In this VMW research, well discuss about the overall economicprospect for the year 2010 and the how the Indian Economyemerge from the ongoing economic repairmen.

Economic Prospects for 2010

Global economy is seems to be expanding after a recent shock.Indian Economy, however just felt the blow of the globaleconomic recession and the real economic growth have seen asharp fall followed by the lower exports, capital outflow andcorporate restructuring. It is expected that the globaleconomies continue to stay strong in the short-term as theeffect of stimulus is still strong and the tax cuts areworking. Due to strong position of liquidity in the market, largecorporations now have access to capital in corporate credit

markets.Indias Economic OutlookProjection

2007 2008 2009 2010

GDP Growth 9.40% 7.30% 7.60% 8.30%CPI 6.40% 9.30% 5.50% 4.90%

Year 2009 has started on the gloomy note, however thetrend reversed from the first quarter of the year, financialmarkets posted strong gains fueled by huge amount of capitalinflows which was set-aside during the economic downturn insearch of a higher yield. Number of companies jumped into theequity markets to raise funds to de-leverage them, corporaterisk have declined. Before the beginning of the economicrecession, several companies betted on the better economicfuture and blindly raised funds thru various options (largely in

a way of debt). Real Estate was the hardest hit industry duringthe recession. Many companies even offloaded their huge

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amount of stake, in order to meet the deadline to pay-offthe short-term debt. Not only the realty companies which havefaced that situation, actually many Small & MediumEnterprises (SMEs) have opted that option to expandthemselves aggressively and routed out of the business. As theNew Year begins, the new wave of optimism has surroundedthe economies to expand further from the recent shock, withthe expectations of fresh stimulus package, shrink inunemployment rate, expectations of the high inflation, andhigher interest rates in the emerging economies. Over the nextfew months, inflation would be a worrisome for the economies.According to the estimates, inflation would likely to reach upto 10%, resulted, the expectations of the monetary policytightening from the Reserve Bank of India in the secondquarter review of monetary policy. Asian economies Chineseeconomy in particular, along with India are in the strongestplace for a sustained recovery. There are increasing signs of a

recovery in a private domestic demand.

Inflation Direction -Since the global economies are emerging from the lows, in ashort run, inflation is expected to rise due to bounce back indemand for commodities. Although, the underlying inflation arestill on the downside. Higher unemployment rate in the west

will lead to low wage growth and pricing power would belimited for a long time as demand will be very vulnerable toprice rises. But, India would buck the trend in inflation due toample amount of liquidity in the system and rising demand.

Indian Economy 2010

In order to sustain economic growth during the time of theworst recession, government authorities of India have

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announced the stimulus packages to prop up economic growth.To finance the stimulus packages the Indian government hasraised over $100 billion over the last four quarters in a way tofinance the stimulus packages. The countries public debt,according to the RBI, has surged over 50% of total GDP andRBI has started printing new currency notes.

Central Government Debt

in Rs. Crores

(10 Million)Q3 2008 Q3 2009

% of

GDP

Public Debt

(Sum of 1

and 2)

2,099,286.232,505,450.74 50.71%

1. External

Debt237,351.77 294,941.67

2. Internal

Debt1,861,934.462,210,509.07

Stability in Indian Economy

All of us have seen an unprecedented government interventionduring the economic recession by way of announcing huge

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amount of stimulus package for the economy to prop-updomestic demand. With many recovery tools were used duringthe crisis, government deficits are in deep red and central bankrates are almost zero in certain countries and the prospect ofzero rates over a longer period and deflationary concerns willprobably gain the upper hand and send bond yields lower.Hence, there is a low scope of further announcement.

As far as the Indian economy is concerned, is suffering from

huge debt to GDP ratio, moreover India is the largest netimporter of commodities like Oil, Food, metal in relation to theGDP. Sharp decline in oil prices, could cut the subsidy burdenand those savings would be used for the fiscalstimulus. Increased and better expenditure with greater focuson improved outcomes in social and physical infrastructure,and safety nets will speed up the recovery consistent with thelong-term growth. Going forward, India will seesharp rise in supply side inflation, after the effect of large

government borrowings, printing of new currency notes, andrise in food prices due to huge gap in demand-supply. Interestrates will also expected to rise awkward, as the central bankwill take precautionary measure to contain inflation rate andexpanding money supply.

ChinaChina's economy is huge and expanding rapidly. In the last 30years the rate of Chinese economic growth has been almostmiraculous, averaging 8% growth in Gross Domestic Product(GDP) per annum. The economy has grown more than 10 times

during that period, with Chinese GDP reaching 3.42 trillion USdollars by 2007. In Purchasing Power Parity GDP, China already

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has the biggest economy after the United States. Most analystsproject China to become the largest economy in the world thiscentury using all measures of GDP. However, there are stillinequalities in the income of the Chinese people, and thisincome disparity has increased in the recent times, in part dueto a liberalization of markets within the country. The per capitaincome of China is only about 2,000 US dollars, which is fairlypoor when judged against global standards. In per capitaincome terms, China stands at a lowly 107th out of 179countries. The Purchasing Power Parity figure for China is onlyslightly better at 7,800 US dollars, ranking China 82nd out of179 countries

Economic reforms started in China in the 70s and 80s. Theinitial focus of these reforms was on collectivizing theagricultural activities of the country. The leaders of the Chineseeconomy, at that point in time, were trying to change thecenter of agriculture from farming to household activities. At

later stages the reforms extended to the liberalization of prices,in a gradual manner. The process of fiscal decentralization soonfollowed.

This meant that government officials at the local levels and themanagers of various plants had more authority than before.This led to the creation of a number of various types ofprivately held enterprises within the services sector, as well asthe light manufacturing sectors. The banking system was

diversified and the Chinese stock markets started to developand grow as economic reforms in China took hold. Theeconomic reforms made in China in the 70s and 80s had otherfar reaching effects as well. The sectors outside the control ofthe state government of China grew at a rapid pace as a resultof these reforms. China also opened its economy to the worldfor the purposes of trade and direct foreign investment.

China has adopted a slow but steady method in implementingtheir economic reforms. It has also sold the equity of some of

the major Chinese state banks to overseas companies and

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bond markets during the middle phase of the first half of the21st century. In recent years the role played by China inInternational trade has also increased.

In China, many of the larger companies tend to be focused on

domestic markets, whereas many of their small and medium

enterprises (SMEs), many of which are based in Shanghai(Long River region) and Guangzhou (Pearl River Area) tended

to be associated with the export market. These areas have

suffered the most and as a result often give visitors a slightly

skewed vision of the economic impact on the current financial

crisis on China, mainly because those are the areas we see

Only 10 per cent of Chinese exports are under Chinese brands.

The rest are just manufactured for others. When the economic

tidal wave hit, the first casualties were the export

manufacturers, especially those original equipment

manufacturers (OEMs), who saw their orders dry up overnight.

Inverted economy

In 2008, exports represented 40 per cent of Chinas GDP andgrowth was just under 10 per cent. In 2009, it is estimatedthat growth will slow to between 6 and 7 per cent. This is amarked contrast to most Western economies, where the GDPwill go negative. It underlines that the strength of the Chineseeconomy has shifted from its export manufacturing capabilitiesto its domestic market growth. There are many Chinesecompanies that had developed niche markets or had their ownbranding and distribution systems, which are using the current

situation to expand. The overall impact on the Chinese

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economy has been severe, especially in the areas that hadlarge export-based economies, but it has been offset by itsrobust domestic market, which the Chinese government isvigorously supporting.Chinas robust domestic growth has itsdark spots, such as the real estate market. The difference isthat the Chinese banks going into the crisis had twice thereserves of our banks, and people in China, even when theyare speculating, tended to pay cash when they boughtproperty. In terms of their developers, they face losing theirequity, but the banks are not in the double-whammy positionof having to cover the developers and the mortgages of thosewho bought the property, as prices decline.

In terms of small and medium enterprises (SMEs), U.S. SMEsare actually doing better than their larger businessescounterparts, they tend to be more balanced and/or in nichemarkets and many of them are looking to use the downturn toexpand. The major exceptions were those businesses that were

captive suppliers to large industry groups such as theautomotive brands.Chinas SMEs are diverse and tend to run oncash rather than credit, so while they have suffered setbacksthey are not in the same position as many U.S. companies,which assume that business ventures will use borrowing toleverage their returns as part of their business plans. ChineseOEMs, which depended on the international markets, havesuffered.

Global demand for manufactured goods has fallen in the wakeof the world-wide financial crisis and ensuing G-7 consumptionslowdown. This drop in demand has pushed Chinas economyto the brink of a growth recession conventionally defined asa period of weak economic growth and rising unemployment.To combat this, Chinas government has utilized a combination

of policy tools aimed at:

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Fiscal: Promoting domestic investment through public infrastructuredevelopment; Monetary: Loosening credit, particularly to state-owned enterprises; and

Other: Extending export rebates and incentivizing real estate

transactions

There are several indications of an economic slowdown in China(see figures below). Recent reports of labour marketpenetration problems and plant closings in thousands of textile,

apparel, hardware, and electronics firms, suggest that urbanunemployment may rise above last official estimates of 4.2%.

CHINAS GDP & PRODUCTION GROWTH HAVE FALLEN

Industrial production, led by heavy manufacturing (e.g. steel),decelerated precipitously in 2008Q4. This marked the first timesince such data Became available in 1995 that production waslimited to single digit growth during pre-holiday seasons.

CHINAS EXPORTS HAVE DECELERATED

Chinese exports exhibited 2-3% negative growth in NovemberandDecember08, marking the 1st time since the SoutheastAsian crisis that adecline occurred in the fourth quarter. Chinas

January09 total and U.S.Export fall of 18% and 10%,respectively, was notably more precipitous.

CHINAS STOCK MARKET BOOM HAS FIZZLED

The 2008 fall in Chinas major stock market indices wasattributable to a correction of its 2007 bubble and deterioratingglobal financial conditions

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CHINAS REAL ESTATE PRICES HAVE DECELERATED

After 2008Q1, Chinas nascent housing market has undergonethe most Precipitous real estate price drop in recent years, ledby residential sales

An Immediate Change of Course is Unlikely: First, Chineseenergy consumption trends, considered a harbinger ofindustrial activity, have not rebounded. Second, importdemand from the United States, Chinas largest trade partner,has remained weak. Third, Chinas intermediary productprocessing imports from other Asian countries, such asMalaysia and Taiwan, dropped precipitously in 2008Q4,inhibitingChinas capability to re-export processed electronics

and related products

Implications Rationale

1. Narrowing of U.S.-China trade deficit

United States' export growth to China is likely to deceleratesoon, given falling Chinese demand for semiconductors andother processing trade inputs, and given tightening Chineseregulations on soybean imports from the United States.Nevertheless, reductions in United States import growth fromChina forManufactured goods, clothing, toys, and otherproducts should more than offset that slowdown, and reducethe United States' bilateral trade deficit with its third largesttrading partner.

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2. Rise in Chinese domestic consumption

China's export-oriented policies have incentivized local firms tocontinue manufacturing products for exportation to Hong Kong,knowing that those products will eventually re-enter China.Because of this and rising inventory levels, Chinese consumersare purchasing higher-quality products that were originallyintended for foreign consumption -without commensurate price

increases. This may establish expectationsfor purchasing higher quality goods and support increases infuture consumption levels.

3. Renminbi stabilization

China is likely to support a stable renminbi-dollar exchangerate in the short term, thereby easing its longer term effort of

managing a renminbi-dollar appreciation (initiated in July2005). Although an outright depreciation would help supportsluggish export growth, Chinas government suggested as earlyas November 2008 that it would exercise other policy options(e.g. export tax rebates).

4. Social Unrest

Anecdotal evidence has surfaced regarding wide-spreadprotests associated with recently unemployed manufacturingworkers in such industries as electronics, toys, and clothing.

III. GOVERNMENT REACTION:

Increased fiscal expenditures. Part of

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Chinas $588 billion (~15% of Chinas GDP) fiscal stimuluspackage of October 2008 was considered new spending -nearlyhalf targeted rail construction, highway, airport, and electricdistribution network construction projects. A new fiscalstimulus is in the works, and provincial governments areresponding in kind.

Loosened credit. Chinas 216 basis points drop in interestrates since September 2008 100 basis points in Novemberalone marks the beginning of aggressive monetary policyaction by Chinas government. Lower lending rates mostlybenefit state-owned enterprises, which still employapproximately a third of the urban workforce, and whichtypically maintain close ties with state-controlled lendinginstitutions.

Supporting exports. China raised it export tax rebates in

November for the second time this year. The latest measure,significantly more comprehensive than the last, increasesrebates on some 3,486 labour intensive exported items, whichconstitute approximately 25% of Chinas 2007 exports. Theseinclude rebates on textiles, apparel, and toys. China also plansto temporarily eliminate export taxes, and provide financialsupport to certain high-tech and agricultural industries.

Incentivizing real estate sales. Several big city governments

have decreased property taxes for new homeowners andsimplified the process for attaining housing certification formigrants to urban areas.

Europe

The economy of Europe comprises more than 731 million

people in 48 different states [1]. It contributes 11% of theworld's population. Like other continents, the wealth of

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Europe's states varies, although the poorest are well above thepoorest states of other continents in terms of GDP and livingstandards. The difference in wealth across Europe can be seenin a rough East-West divide. Whilst Western European states allhave high GDPs and living standards, many ofEastern Europe'seconomies are still rising from the collapse of the communistSoviet Union and former Yugoslavia. Throughout this article"Europe" and derivatives of the word are taken to includeselected states whose territory is only partly in Europe suchas Turkey, Azerbaijan, and the Russian Federation and statesthat are geographically in Asia, bordering Europe such asArmenia and Cyprus.Europe was the first continent to industrialize led by theUnited Kingdom in the 18th century and as a result, it hasbecome one of the richest continents in the world today.Europe's largest national economy is that ofGermany, whichranks fourth globally in nominalGDP, and fourth in purchasing

power parity (PPP) GDP; followed by France, ranking fifthglobally in nominal GDP, followed by the UK, ranking sixglobally in nominal GDP followed by Italy, which ranks seventhglobally in nominal GDP, then by Spain ranking ninth globally innominal GDP.These 5 countries are all ranking in the world's top 10,therefore European economies account for half of the 10wealthiest ones. The end ofWorld War II has since broughtEuropean countries closer together, culminating in the

formation of the European Union (EU) and in 1999, theintroduction of a unified currency the euro. European Unionas a whole is, by far, the wealthiest and largest economy in theworld, topping the US by more than 2.000 billion at a time ofgreat economic slowdown see List of countries by GDP. In2009 Europe remained the world's wealthiest region. Its $37.1trillion in assets under management represented more thanone-third of the worlds wealth. Unlike North America, it wasone of few regions where wealth surpassed its pre-crisis year-

end peak

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Expansion of Europe from 2004-2007

In early 2004, 10 mostly former communist states joined theEU in its biggest ever expansion, enlarging the union to 25members, with another eight making associated tradeagreements. The acceding countries are bound to join theEurozone and adopt the common currency Euro in the future.The process includes the European Exchange Rate Mechanism,

of which some of these countries are already part.

Most European economies are in very good shape, and thecontinental economy reflects this. Conflict and unrest in someof the former Yugoslavia states and in the Caucasus states arehampering economic growth in those states, however.

In response to the massive EU growth, in 2005 the Russiandominated Commonwealth of Independent States (CIS) createda rival trade bloc to the EU, open to any previous USSR state,

(including both the European and Asian states). 12 of the 15signed up, with the three Baltic States deciding to alignthemselves with the EU. Despite this, the three Caucasusstates have said in the past they would one day considerapplying for EU membership, particularly Georgia. This is alsotrue ofUkraine since the Orange Revolution.

Impact of US subprime crisis on Europe

Impact of US Subprime crisis on Europe cannot be ignored.That this part of the world will be impacted as well, can beconcluded from the fact that signs of the same have alreadystarted showing (like falling prices of homes) in London.Northern Rock, which was an eminent mortgage lender, tookrefuge in the Bank of England for purposes of emergency

financing in the month of September, 2007. Prospectivepurchasers for the mortgage lender are still being looked for.

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Another instance in Germany, which implies the impact of USsubprime crisis on Europe, is when Germanys IKB DeutscheIndustrial bank accepted USD$11.1 billion from theGovernment as a bailout pertaining to its various United Statesmortgage investmentsBNP Paribas, the French Bank was compelled to take somedrastic steps. It stopped all withdrawals from a fund ofUSD$2.2 billion pertaining to investment funds as the truevalue of the investment portfolios could not be ascertained.

Statistical data indicating impact of US subprimecrisis on Europe:

Reports furnished by a mortgage lender known by the nameNationwide Building Society revealed that cost ofhomes dipped0.5% in the month of December. In November the drop was0.8%.According to another source, it has been revealed thatduring mid-December, the prices of property dropped by 6.8%,which reflects an average downfall of approximately USD$56,000.The biggest impact of US subprime crisis in Europe is yet tocome, it is being reckoned that in the forthcoming months, theeconomy will slow down and become sluggish. As a result ofthis the rate of unemployment will also increase. Owing to thissituation, the Properties will have to be sold at a compromising

rate.It is being anticipated by few economists that since theavailability (supply) of houses are short of demand; theincrease of price is being expected to be 3% in Britain and asmuch as 5% in London.Studies state that Britain is a country,which has the highest number of debtors. ApproximatelyUSD$2.7 trillion is yet to be paid back by the debtors of Britainon Consumer loan.

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Europe has clearly and unambiguously chosen to ensure thatcountries restore fiscal discipline, possibly providing themfinancial support in the adjustment period .The choice made byEurope is based both on economic and on political reasons.Some observers believe that the euro was created solely forpolitical reasons, for example, as a counterweight to Germanunification. According to this view, the sustainability of the eurowould be at risk if the political integration process were to stopor go into reverse.All governments and national parliaments have adopted not

only the financial support measures to Greece but also taken

the necessary measures for the creation of the European

Financial Stability Facility. The Heads of State and Government

have agreed to strengthen the economic governance of the

euro and will take concrete decisions in that respect, based on

proposals of the Van Rompuy task force which has already

started working.Past experience has shown clearly that withinan economically integrated area like the euro area a currency

devaluation does not allow a growth stimulus that would

support faster fiscal consolidation. The countries which had to

make strong corrective fiscal manoeuvres before the euro as

was the case in Italy after leaving the ERM in September 1992

have suffered large interest rate spreads for a protracted

period, because of renewed uncertainty about the monetary

regime after the devaluation, as well as about the fiscal

system. With every devaluation, inflationary risks rapidly

appeared, which required more monetary tightening than

would be the case within the euro. Several countries, like

Belgium Ireland and the Netherlands implemented fiscal

consolidation while maintaining a stable exchange rate and a

high primary budget surplus (i.e. net of debt interest.

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To sum up, given the financial and economic integration

achieved over recent years in the euro area, the hypotheses

voiced by some about a country abandoning the euro or about

reconstituting the euro area in a reduced form would have

highly detrimental effects on everyone, be they net creditors or

debtors. The impact would be far more expensive than the

alternative standard - approach, which is to implement a

strict plan of fiscal consolidation in all countries, starting with

Greece, accompanied by structural reforms aimed at sustaining

growth, and a plan to strengthen the economic governance of

euro area. This is the way chosen by the countries of the euro

area and implemented in the form of successive decisions both

at national and European level.

The consolidation of public finances will remain a major theme

in the coming years, not only in Greece but also in the rest of

Europe and in the developed countries. The experience of

recent months highlights some points on which it is worth

reflecting;

First, it is best to take the necessary steps before being put

under pressure by the financial markets, which often do not

move in a linear fashion and tend to go from white to black in

an instant. And when something passes to the black part of the

markets radar screen it takes a long time to convince them

that it can get back in a quiet location.

Second, in assessing the sustainability of budget measures

financial markets seem to be taking into account not only the

direct effects, namely the impact on the deficit and debt, but

also indirect, i.e. the effect of specific measures on economic

growth. A highly restrictive move allows a reduction of the

deficit but may adversely affect growth and thus slow down the

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adjustment of the debt. An extreme interpretation of this view

has pushed some to consider that a strong restrictive fiscal

action may create a negative spiral between debt and growth

that worsens even further the public finance situation and

makes budgetary rigour politically unsustainable. It seems to

me that the hypotheses necessary for this spiral to occur are

quite exceptional, requiring the fiscal multiplier effect to be

greater than 1. The empirical evidence does not seem to be

consistent with such a hypothesis.

An alternative interpretation of the risks associated with fiscal

retrenchment is that they are not easily sustainable politically,

especially if they have strong negative effect on growth. The

hypothesis is that public opinion in many advanced societies

might not be fully prepared to cope with the budget cuts

needed to restore public finances on a sustainable path,

because these cuts would lead to a substantial downsizing of

the current welfare system a system which may no longer be

financially sustainable in an environment of slower economic

growth, partly due to lower population growth and the higher

public debt burden. So this is not just a matter of discussing

the economic sustainability of the move that many developed

countries have to make, but its political and social

sustainability.

Another source of concern is the shadow financial system notpreviously subject to regulation. The G20 summit a year ago inLondon indicated the general commitment not to leavesignificant parts of the financial sector, such as investmentbanks, hedge funds, private equity funds and so forth, outsidethe regulatory perimeter. Work on this part of the financialsystem is not progressing as hoped, however. There is a risk,

again, of focusing only on banking, and overlooking animportant part of the financial system, whose influence has

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come to dominate the overall stability of markets, withcontagion effects on the banking system itself. Europe hasrecently adopted what may appear as somewhat restrictivelegislation in this regard. In particular, equity and investmentfunds from outside Europe are only authorised to operate tothe extent that the law of the country of origin is comparablewith European law. This has caused concern across the Atlanticabout the risk of protectionism. On the other hand, the failureof the strategy pursued in recent years, of trying to convinceour partners that this area should be regulated like any other,has necessitated a turnaround of the basis of the discussion.The talks now start on a more precise basis. These are just afew areas of financial system reform currently under discussionin the main fora. The stakes are high. The deadline for thework is the G20 summit in South Korea this autumn, two yearsafter the crisis intensified. It is essential to meet deadlines tolend credibility to the financial system and ensure that it plays

a supporting role in real economic activity.But one thing is certain: whatever form the internationalcooperation takes Europe will be part of it, not only becausethey are currently, and will be for many years, the two maineconomic and financial areas worldwide, but also because theyshare important values such as the freedom of privateenterprise, freedom of expression, social equity withoutwhich there can be no cooperation.

USAThe United States of America (US or USA) has the worlds

largest economy. According to the CIA World Fact book, 2007

GDP is believed to be $13.84 trillion. This is three times the

size of the next largest economy, Japan, which has a GDP of

$4.4 trillion. US dominance has been eroded however by the

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creation of the European Union common market, which has an

equivalent GDP of over $13 trillion, and by the rapid growth of

the BRIC economies, in particular China, which is forecast to

overtake the US in size within 30 years.

The recent failure in the US housing and credit markets has

resulted in a slowdown in the US economy. 2007 GDP growth

was estimated at 2.2% but in 2008 it is projected to be just

0.9%, down from the 10-year average of 2.8%.In commonwith most developed countries, Services is the key sector of

the economy. In 2007, services made up 78.5% of GDP,

industry 20.5% and agriculture less than 1%.

Around two-thirds of the total production of the country is

driven by personal consumption. Although the US is often

referred to as a free market economy, this is not entirely true,

since there are government regulations protecting certainsectors, notably energy and agriculture. It can be more

accurately described as a consumer economy.Since the US

economy is also the largest economy in the world, and the US

consumer drives two thirds of the US economy, the US

consumer is also a big driver of global economic activity.

The forces of supply and demand directly drive the price levels

of goods and services. What to produce, and how much of it isto be produced depends on the price level fixed by the

interaction of supply and demand.

The question of national debt is a controversial one within the

US. At the start of 2008, the US federal debt stood at $9.2

trillion. This is a worrying 67% of GDP and equates to

$79,000for each American taxpayer, a number just over 117

million people. To add to the concern, American consumers arealso increasingly dependent on debt and have been re-

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mortgaging their houses to higher loan amounts, and using the

extra cash to fund high street purchases. This debt figure is the

largest in the world in absolute terms, but as a percentage of

GDP it is less than Japan and similar to several European

countries.

Financial markets impacts

The International Monetary Fund estimated that large U.S. and

European banks lost more than $1 trillion on toxic assets and

from bad loans from January 2007 to September 2009. These

losses are expected to top $2.8 trillion from 2007-10. U.S.

banks losses were forecast to hit $1 trillion andEuropean bank

losses will reach $1.6 trillion. The IMF estimated that U.S.

banks were about 60% through their losses, but British and

Eurozone banks only 40%one of the first victims was Northern

Rock, a medium-sized British bank. The highly leveraged

nature of its business led the bank to request security from the

Bank of England. This in turn led to investor panic and a bankrun in mid-September 2007. Calls by Liberal Democrat

ShadowChancellorVince Cable to nationalize the institution

were initially ignored; in February 2008, however, the British

government (having failed to find a private sector buyer)

relented, and the bank was taken into public hands. Northern

Rock's problems proved to be an early indication of the

troubles that would soon befall other banks and financial

institutions. Initially the companies affected were those directly

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involved in home construction and mortgage lending such as

Northern Rock and Countrywide Financial, as they could no

longer obtain financing through the credit markets. Over 100

mortgage lenders went bankrupt during 2007 and 2008.

Concerns that investment bank Bear Stearns would collapse in

March 2008 resulted in its fire-sale to JP Morgan Chase. The

financial institution crisis hit its peak in September and October

2008. Several major institutions failed, were acquired under

duress, or were subject to government takeover. These

included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie

Mac, Washington Mutual, Wachovia, and AIG.

Credit markets and the shadow banking system

During September 2008, the crisis hit its most critical stage.

There was the equivalent of a bank run on the money market

mutual funds, which frequently invest in commercialpaperissued by corporations to fund their operations and

payrolls. Withdrawal from money markets was $144.5 billion

during one week, versus $7.1 billion the week prior. This

interrupted the ability of corporations to rollover (replace) their

short-term debt. The U.S. government responded by extending

insurance for money market accounts analogous to bank

deposit insurance via a temporary guarantee [136] and with

Federal Reserve programs to purchase commercial paper. The

TED spread, an indicator of perceived credit risk in the general

economy, spiked up in July 2007, remained volatile for a year,

then spiked even higher in September 2008,[137] reaching a

record 4.65% on October 10, 2008This meant that nearly one-

third of the U.S. lending mechanism was frozen and continued

to be frozen into June 2009.[140] According to the Brookings

Institution, the traditional banking system does not have thecapital to close this gap as of June 2009: "It would take a

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number of years of strong profits to generate sufficient capital

to support that additional lending volume." The authors also

indicate that some forms of securitization are "likely to vanish

forever, having been an artifact of excessively loose credit

conditions." While traditional banks have raised their lending

standards, it was the collapse of the shadow banking system

that is the primary cause of the reduction in funds available for

borrowing.

U.S. economic effects

Real gross domestic product the output of goods andservices produced by labor and property located in the UnitedStatesdecreased at an annual rate of approximately 6% inthe fourth quarter of 2008 and first quarter of 2009, versusactivity in the year-ago periods.[166] The U.S. unemploymentrate increased to 10.1% by October 2009, the highest rate

since 1983 and roughly twice the pre-crisis rate. The averagehours per work week declined to 33, the lowest level since thegovernment began collecting the data in 1964.

Wealth effects

There is a direct relationship between declines in wealth, anddeclines in consumption and business investment, which alongwith government spending represent the economic engine.Between June 2007 and November 2008, Americans lost an

estimated average of more than a quarter of their collective networth [citation needed]. By early November 2008, a broad U.S. stockindex the S&P 500 was down 45% from its 2007 high. Housingprices had dropped 20% from their 2006 peak, with futuresmarkets signaling a 30-35% potential drop. Total home equityin the United States, which was valued at $13 trillion at itspeak in 2006, had dropped to $8.8 trillion by mid-2008 andwas still falling in late 2008. Total retirement assets,Americans' second-largest household asset, dropped by 22%,from $10.3 trillion in 2006 to $8 trillion in mid-2008. During

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the same period, savings and investment assets (apart fromretirement savings) lost $1.2 trillion and pension assets lost$1.3 trillion. Taken together, these losses total a staggering$8.3 trillion since peaking in the second quarter of 2007;household wealth is down $14 trillion.Further, U.S.homeowners had extracted significant equity in their homes inthe years leading up to the crisis, which they could no longerdo once housing prices collapsed. Free cash used by consumersfrom home equity extraction doubled from $627 billion in 2001to $1,428 billion in 2005 as the housing bubble built, a total ofnearly $5 trillion over the period.[79][80][81] U.S. home mortgagedebt relative to GDP increased from an average of 46% duringthe 1990s to 73% during 2008, reaching $10.5 trillion.

Responses to financial crisis

Emergency and short-term responses

The U.S. Federal Reserve and central banks around the worldhave taken steps to expand money supplies to avoid the risk ofa deflationary spiral, in which lower wages and higherunemployment lead to a self-reinforcing decline in globalconsumption. In addition, governments have enacted largefiscal stimulus packages, by borrowing and spending to offsetthe reduction in private sector demand caused by the crisis.The U.S. executed two stimulus packages, totaling nearly$1 trillion during 2008 and 2009

This credit freeze brought the global financial system to the

brink of collapse. The response of the U.S. Federal Reserve, the

European Central Bank, and other central banks was immediate

and dramatic. During the last quarter of 2008, these central

banks purchased US$2.5 trillion of government debt and

troubled private assets from banks. This was the largestliquidity injection into the credit market, and the largest

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monetary policy action, in world history. The governments of

European nations and the USA also raised the capital of their

national banking systems by $1.5 trillion, by purchasing newly

issued preferred stock in their major banks.[135] In October

2010, Nobel laureate Joseph Stieglitz explained how the U.S.

Federal Reserve was implementing another monetary policy

creating currency as a method to combat the liquidity trap.[173] By creating $600,000,000,000 and inserting this directly

into banks the Federal Reserve intended to spur banks to

finance more domestic loans and refinance mortgages.

However, banks instead were spending the money in more

profitable areas by investing internationally in emerging

markets. Banks were also investing in foreign currencies which

Stieglitz and others point out may lead to currency wars while

China redirects its currency holdings away from the United

States.

Governments have also bailed out a variety of firms as

discussed above, incurring large financial obligations. To date,

various U.S. government agencies have committed or spent

trillions of dollars in loans, asset purchases, guarantees, and

direct spending. For a summary of U.S. government financial

commitments and investments related to the crisis, see CNN -

Bailout Scorecard. Significant controversy has accompanied thebailout, leading to the development of a variety of "decision

making frameworks", to help balance competing policy

interests during times of financial crisis.

Regulatory proposals and long-term responses

United States President Barack Obama and key advisers

introduced a series of regulatory proposals in June 2009. The

proposals address consumer protection, executive pay, bank

VIRENDER SINGH
http://en.wikipedia.org/wiki/Preferred_stockhttp://en.wikipedia.org/wiki/Joseph_Stiglitzhttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Liquidity_traphttp://en.wikipedia.org/wiki/Bailouthttp://money.cnn.com/news/specials/storysupplement/bailout_scorecard/index.htmlhttp://money.cnn.com/news/specials/storysupplement/bailout_scorecard/index.htmlhttp://en.wikipedia.org/wiki/Barack_Obamahttp://en.wikipedia.org/wiki/Preferred_stockhttp://en.wikipedia.org/wiki/Joseph_Stiglitzhttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Liquidity_traphttp://en.wikipedia.org/wiki/Bailouthttp://money.cnn.com/news/specials/storysupplement/bailout_scorecard/index.htmlhttp://money.cnn.com/news/specials/storysupplement/bailout_scorecard/index.htmlhttp://en.wikipedia.org/wiki/Barack_Obama


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financial cushions or capital requirements, expanded regulation

of the shadow banking system and derivatives, and enhanced

authority for the Federal Reserve to safely wind-down

systemically important institutions, among others.[176][177][178] In

January 2010, Obama proposed additional regulations limiting

the ability of banks to engage in proprietary trading. The

proposals were dubbed "The Volcker Rule", in recognition of

Paul Volcker, who has publicly argued for the proposed

changes.

The U.S. Senate passed a regulatory reform bill in May 2010,

following the House which passed a bill in December 2009.

These bills must now be reconciled. The New York Times

provided a comparative summary of the features of the two

bills, which address to varying extent the principles

enumerated by the Obama administration.[181] For instance, the

Volcker Rule against proprietary trading is not part of the

legislation, though in the Senate bill regulators have the

discretion but not the obligation to prohibit these trades

A variety of other regulatory changes have been proposed by

economists, politicians, journalists, and business leaders to

minimize the impact of the current crisis and prevent

recurrence. None of the proposed solutions have yet been

implemented. These include

Ben Bernanke: Establish resolution procedures for closingtroubled financial institutions in the shadow bankingsystem, such as investment banks and hedge funds.[182]

Nassim Nicholas Taleb: "Black Swan Robustness" i.e. Robustness againstHigh Impact Rare Events ("Fat Tails").

Joseph Stieglitz: Restrict the leverage that financial

institutions can assume. Require executive compensation

VIRENDER SINGH
http://en.wikipedia.org/wiki/Shadow_banking_systemhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Proprietary_tradinghttp://en.wikipedia.org/wiki/Volcker_Rulehttp://en.wikipedia.org/wiki/Paul_Volckerhttp://en.wikipedia.org/wiki/New_York_Timeshttp://en.wikipedia.org/wiki/Ben_Bernankehttp://en.wikipedia.org/wiki/Shadow_banking_systemhttp://en.wikipedia.org/wiki/Shadow_banking_systemhttp://en.wikipedia.org/wiki/Nassim_Nicholas_Talebhttp://en.wikipedia.org/wiki/Joseph_Stiglitzhttp://en.wikipedia.org/wiki/Financial_leveragehttp://en.wikipedia.org/wiki/Shadow_banking_systemhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Proprietary_tradinghttp://en.wikipedia.org/wiki/Volcker_Rulehttp://en.wikipedia.org/wiki/Paul_Volckerhttp://en.wikipedia.org/wiki/New_York_Timeshttp://en.wikipedia.org/wiki/Ben_Bernankehttp://en.wikipedia.org/wiki/Shadow_banking_systemhttp://en.wikipedia.org/wiki/Shadow_banking_systemhttp://en.wikipedia.org/wiki/Nassim_Nicholas_Talebhttp://en.wikipedia.org/wiki/Joseph_Stiglitzhttp://en.wikipedia.org/wiki/Financial_leverage


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to be more related to long-term performance.[183] Re-instate the separation of commercial (depository) andinvestment banking established by the Glass-Steagall Actin 1933 and repealed in 1999 by the Gramm-Leach-BlileyAct.[184]

Simon Johnson: Break-up institutions that are "too big tofail" to limit systemic risk.[185]

Paul Krugman: Regulate institutions that "act like banks"

similarly to banks.[70]

Alan Greenspan: Banks should have a stronger capitalcushion, with graduated regulatory capital requirements(i.e., capital ratios that increase with bank size), to"discourage them from becoming too big and to offsettheir competitive advantage."[186]

Warren Buffett: Require minimum down payments forhome mortgages of at least 10% and income verification.[187]

Eric Dinallo: Ensure any financial institution has thenecessary capital to support its financial commitments.Regulate credit derivatives and ensure they are traded onwell-capitalized exchanges to limit counterparty risk.[188]

Raghu ram Rajan: Require financial institutions tomaintain sufficient "contingent capital" (i.e., pay insurancepremiums to the government during boom periods, in

exchange for payments during a downturn.) HM Treasury: Contingent capital or capital insurance held

by the private sector could supplement common equity intimes of crisis. There are a variety of proposals (e.g. Raviv2004, Flannery 2009) under which banks would issuefixed income debt that would convert into capitalaccording to a predetermined mechanism, either bank-specific (related to levels of regulatory capital) or a moregeneral measure of crisis. Alternatively, under capital

insurance, an insurer would receive a premium for

VIRENDER SINGH
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Acthttp://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Acthttp://en.wikipedia.org/wiki/Simon_Johnson_(economist)http://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Paul_Krugmanhttp://en.wikipedia.org/wiki/Alan_Greenspanhttp://en.wikipedia.org/wiki/Warren_Buffetthttp://en.wikipedia.org/wiki/Eric_Dinallohttp://en.wikipedia.org/wiki/Counterparty_riskhttp://en.wikipedia.org/wiki/Raghuram_Rajanhttp://en.wikipedia.org/wiki/HM_Treasuryhttp://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Acthttp://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Acthttp://en.wikipedia.org/wiki/Simon_Johnson_(economist)http://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Paul_Krugmanhttp://en.wikipedia.org/wiki/Alan_Greenspanhttp://en.wikipedia.org/wiki/Warren_Buffetthttp://en.wikipedia.org/wiki/Eric_Dinallohttp://en.wikipedia.org/wiki/Counterparty_riskhttp://en.wikipedia.org/wiki/Raghuram_Rajanhttp://en.wikipedia.org/wiki/HM_Treasury


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agreeing to provide an amount of capital to the bank incase of systemic crisis. Following Raviv (2004) proposal,on November 3 Lloyds Banking Group (LBG), Britainsbiggest retail bank, said it would convert existing debt intoabout 7.5 billion ($12.3 billion) of contingent core Tier-1capital (dubbed Cocoas). This is a kind of debt that willautomatically convert into shares if the banks cushion ofequity capital falls below 5%.[190][191]

A. Michael Spence and Gordon Brown: Establish an early-warning system to help detect systemic risk.[192]

Niall Ferguson and Jeffrey Sachs: Impose haircuts onbondholders and counterparties prior to using taxpayermoney in bailouts. In other words, bondholders with aclaim of $100 would have their claim reduced to $80,creating $20 in equity. This is also called a debt for equityswap. This is frequently done in bankruptcies, where thecurrent shareholders are wiped out and the bondholders

become the new stockholders, agreeing to reduce thecompany's debt burden in the process. This is being donewith General Motors, for example.[193][194]

NourielRoubini: Nationalize insolvent banks.[195] Reducemortgage balances to assist homeowners, giving thelender a share in any future home appreciation.[196]

Adair Turner: In August 2009 in a roundtable interview inProspect Adair Turner supported the idea of new global

taxes on financial transactions, warning that a swollenfinancial sector paying excessive salaries has grown toobig for society.[197] Lord Turners suggestion that a Tobintax named after the economist James Tobin shouldbe considered for financial transactions reverberatedaround the world.[198][199]

Let Wall Street Pay for the Restoration of Main Street Bill -in the US only (not international) - Proposed legislation

introduced December 3, 2009 - Contained in the USHouse of Representatives bill entitled "H.R. 4191: Let Wall

VIRENDER SINGH
http://en.wikipedia.org/wiki/A._Michael_Spencehttp://en.wikipedia.org/wiki/Gordon_Brownhttp://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Niall_Fergusonhttp://en.wikipedia.org/wiki/Jeffrey_Sachshttp://en.wikipedia.org/wiki/Haircut_(finance)http://en.wikipedia.org/wiki/Nouriel_Roubinihttp://en.wikipedia.org/wiki/Nouriel_Roubinihttp://en.wikipedia.org/wiki/Adair_Turnerhttp://en.wikipedia.org/wiki/Prospect_(magazine)http://en.wikipedia.org/wiki/Financial_transaction_taxhttp://en.wikipedia.org/wiki/Tobin_taxhttp://en.wikipedia.org/wiki/Tobin_taxhttp://en.wikipedia.org/wiki/James_Tobinhttp://en.wikipedia.org/wiki/Let_Wall_Street_Pay_for_the_Restoration_of_Main_Street_Billhttp://en.wikipedia.org/wiki/Let_Wall_Street_Pay_for_the_Restoration_of_Main_Street_Billhttp://en.wikipedia.org/wiki/A._Michael_Spencehttp://en.wikipedia.org/wiki/Gordon_Brownhttp://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Niall_Fergusonhttp://en.wikipedia.org/wiki/Jeffrey_Sachshttp://en.wikipedia.org/wiki/Haircut_(finance)http://en.wikipedia.org/wiki/Nouriel_Roubinihttp://en.wikipedia.org/wiki/Adair_Turnerhttp://en.wikipedia.org/wiki/Prospect_(magazine)http://en.wikipedia.org/wiki/Financial_transaction_taxhttp://en.wikipedia.org/wiki/Tobin_taxhttp://en.wikipedia.org/wiki/Tobin_taxhttp://en.wikipedia.org/wiki/James_Tobinhttp://en.wikipedia.org/wiki/Let_Wall_Street_Pay_for_the_Restoration_of_Main_Street_Bill


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Street Pay for the Restoration of Main Street Act of2009"[200][201] It is a proposed piece of legislation that wasintroduced into the United States House ofRepresentatives to assess a minuscule tax on US Financialmarket ("Wall Street") securities transactions. If passed,the money it generates will be used to rebuild "MainStreet." On the day it was introduced, it had the supportof 22 representatives.[202]

Volcker Rule - (in US) - Endorsed by President BarackObama on January 21, 2010. At its heart, it is a proposalby US economist Paul Volcker to restrict banks frommaking speculative investments that do not benefit theircustomers.[180] Volcker has argued that such speculativeactivity played a key role in the financial crisis of 20072010.

On April 16, 2010, the IMF proposed two types of globaltaxes on banks: The "Financial Activities Tax" comes in

two varieties. The simple version is a straight tax on abank's gross profitsbefore deducting compensation. A"financial stability contribution", would initially be at a flatrate, this would eventually be refined so that riskierbusinesses paid more.[203] the second, more complex taxaims directly at excess bank profit and pay.[204][205] (Seealso Bank tax)

Maximum wage is an idea which has been enacted in early

2009 in the United States, where they capped executivepay at $500,000 per year for companies receivingextraordinary financial assistance from the US Taxpayers.The argument is to place a cap on the amount that anyperson may legally make, in the same way as there is afloor of a minimum wage so that people cannot earn toolittle.

THANK YOU

VIRENDER SINGH
http://en.wikipedia.org/wiki/United_States_House_of_Representativeshttp://en.wikipedia.org/wiki/United_States_House_of_Representativeshttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Wall_Streethttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Main_Streethttp://en.wikipedia.org/wiki/Main_Streethttp://en.wikipedia.org/wiki/Volcker_Rulehttp://en.wikipedia.org/wiki/Paul_Volckerhttp://en.wikipedia.org/wiki/Speculationhttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/Bank_taxhttp://en.wikipedia.org/wiki/Maximum_wagehttp://en.wikipedia.org/wiki/Minimum_wagehttp://en.wikipedia.org/wiki/United_States_House_of_Representativeshttp://en.wikipedia.org/wiki/United_States_House_of_Representativeshttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Wall_Streethttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Main_Streethttp://en.wikipedia.org/wiki/Main_Streethttp://en.wikipedia.org/wiki/Volcker_Rulehttp://en.wikipedia.org/wiki/Paul_Volckerhttp://en.wikipedia.org/wiki/Speculationhttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/Bank_taxhttp://en.wikipedia.org/wiki/Maximum_wagehttp://en.wikipedia.org/wiki/Minimum_wage


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us recession effects on other countries

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