Genesis of a Recession

A recession is a period of sustained falling GDP rates for two consecutive quarters. The Global Economic Recession or the Global Financial Crisis, as it is called in india, is caused when there is a lack of aggregate demand. Aggregate demand is the total demand for final goods and services in an economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is gross domestic product of a country when inventories of the country are static.

The current financial crisis has often been compared to the Great Depression of the 1930s US. This is because markets then, as now, collapsed; banks had to file for bankurptcy; and thousands of people were left jobless, with nations reporting double digit or near double digit unemployement figures for their populations and workforce. This current economic recession was caused due to the bursting of a housing "bubble" which started in 2005-06. The housing bubble was a bubble which was created because of unsound loans and financing of houses way beyond their real woths. People were pushed into buying houses they couldn't afford, using financial loans and schemes which were dodgy at best and criminally negligent at worst. As a result, in 2005, housing prices peaked, and in 2006 they began to decline, and ultimately collapsing. Suddenly, the best of houses in the best of locations were worthless. People defaulted on their loans, the financial structure shivered massively, threatening to bring the entire financial superstructure down. Greed in the housing sector was now threatening to toxify everything it touched. Banks were scared of lending. Credit was in crunch. A vicious cycle was playing out: banks were unwilling to lend to businesses, these businesses were unable to pay their employees, and employees were now losing their purchasing power, thereby putting the entire economy, including its vangaurds- the banks- in grave jeopardy. Liquidity dried up, loans were defaulted upon by those who were never eligiblefor them in the first place, and banks now stood on the percipice of bankurptcy. Indeed, Lehmann Brothers, Bear Streams, Merrill Lynch, Northern Rock and countless others, in a scary but faricial reenactment of the "Great Depression", collapsed. Innovative money making devices- securities, derivatives, credit default swaps, subprime mortgages and loans- heretofore the shining stars of capital, were now its biggest, most vile criminals. These were primary causes, along with the Federal Reserve and SEC'S negligence to respond to frequent warnings and red flags.

There is a difference between economic recession and slowdown. A slowdown is when the industrial production dips whereas in a recession the whole economy comes to a halt. So what India is experiencing right now is an economic sslowdown wherein we are seeing that only the industrial production is going down and the GDP of the country is positive. But in the US the GDP had been negative for two consecutive quarters and the industrial production has been very low for 6 quarters and hence we can say that US, along with a large part of the world, is experiencing recession.