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Recession: What is it all about?
- By Douglas Kelly
- Published Saturday 21st 2009
- Money and Finance
- Unrated
Many people today are confused about all the talk of recession. They do not understand how it would have an impact on them. This article throws light on the recession and its repercussions
Recessions are actually a very normal part of the economy and always follow certain phases. The only thing that is unpredictable is the timing of the stages. The various stages of recession are:
Stage 1: Credit and Housing Deflation: A rapid write-down on housing prices caused the burst of the housing bubble. The burst saw market prices falling. Subsequently, the collateralized debt products that were sold by banks and financial institutions suddenly having their asset backing value slashed by a similar margin as housing prices. The over-spending and over-consumption of easy credit meant that housing prices were in such a bubble that once burst sent shock-waves across the whole economy.
Stage 2: The Credit Crisis: The burst of the bubble led to the collateralized debt products suddenly losing their 100% asset backed guarantee. The toxic debt products sold were so far reaching and resold and repackaged to many times that a very wide range of investors suddenly saw their portfolio value drop a large degree overnight. Banks and financial institutions soon stopped lending to one another thus seizing up the secondary mortgage markets. Now capital for loan or mortgage is almost impossible to obtain as market players re-evaluate their assets.
Stage 3: Application of Stimulus: The government recognizes that the credit crisis is extremely dangerous to the economy the Federal Reserve drops rates to stimulate spending. The government had tax rebates legislated, bailouts and rescues are arranged on the banks so they don't get swallowed up by the increasing number of loan defaults that they are plagued.
Stage 4: Loss of Confidence: With the huge bail-outs and news of the credit seizing up normal investors and consumers start to loose confidence. Investors will be presented with corporations that issue notes or bonds at very high rates but with little takers as the situation looking forward doesn't look very promising.
Stage 5: Equity Collapse: Stock markets in the US and around the world start their collapse with plunges as much as 30% - 50%. This is one of the biggest and most apparent indicator of the health of the overall economy. Overall confidence takes a further fall.
Stage 6: Redemptions / Margin Calls & Forced Unwinding of Trades: Due to the initial selling pressure, momentum builds and hedge funds are forced to meet redemption requests and margin calls due to the falling stocks and are also forced to reduce their positions drastically.
Stage 7: Economic Data: Confidence is further eroded when lagging economic indicators finally confirm the worst. Exports nose-dive, GDP contracts, unemployment rises and manufacturing contracts shrink.
Stage 8: Capacity Reduction / Budget Crises / Main Street Blues: It is at this point that the normal everyday people start feeling the pinch of the economic situation. Due to the nature of the recession and its credit based origin, this phase will be much longer than other recessions. Households will have to react to increasing redundancies, increase saving and reduce consumption.
Stage 9: Government Regulation: With the credit seizure, recession and use of public money for bail-outs and rescue packages the government is forced to look into the regulation of the credit and financial markets.
Stage 10: Treasury Market: Due to the huge bail-out and government measures to curb the recession from getting worst, the Federal Reserve is forced to fund the its financial deficit by issuance of treasure notes that are bought up by foreign countries who are dependant on the US. It isn't wrong to predict that treasuries will start to take a fall when foreign countries start to become weary of buying US treasury notes. The fall in demand for US treasury notes will first be accompanied with an increase in Federal Reserve rates then also be accompanied with a fall in the US dollar.
Stage 11: Inflation: As a side affect to the huge amounts of money that the government has injected into the market and the predominantly low rates all the factors are set for inflation to increase dramatically when consumer and business sentiments increase again.
If this sounds too complicated, just remember that the fundamental reason that we are in the recession is due to the banks. Any recession that is due to banks will take a long time to recover.
Recessions are actually a very normal part of the economy and always follow certain phases. The only thing that is unpredictable is the timing of the stages. The various stages of recession are:
Stage 1: Credit and Housing Deflation: A rapid write-down on housing prices caused the burst of the housing bubble. The burst saw market prices falling. Subsequently, the collateralized debt products that were sold by banks and financial institutions suddenly having their asset backing value slashed by a similar margin as housing prices. The over-spending and over-consumption of easy credit meant that housing prices were in such a bubble that once burst sent shock-waves across the whole economy.
Stage 2: The Credit Crisis: The burst of the bubble led to the collateralized debt products suddenly losing their 100% asset backed guarantee. The toxic debt products sold were so far reaching and resold and repackaged to many times that a very wide range of investors suddenly saw their portfolio value drop a large degree overnight. Banks and financial institutions soon stopped lending to one another thus seizing up the secondary mortgage markets. Now capital for loan or mortgage is almost impossible to obtain as market players re-evaluate their assets.
Stage 3: Application of Stimulus: The government recognizes that the credit crisis is extremely dangerous to the economy the Federal Reserve drops rates to stimulate spending. The government had tax rebates legislated, bailouts and rescues are arranged on the banks so they don't get swallowed up by the increasing number of loan defaults that they are plagued.
Stage 4: Loss of Confidence: With the huge bail-outs and news of the credit seizing up normal investors and consumers start to loose confidence. Investors will be presented with corporations that issue notes or bonds at very high rates but with little takers as the situation looking forward doesn't look very promising.
Stage 5: Equity Collapse: Stock markets in the US and around the world start their collapse with plunges as much as 30% - 50%. This is one of the biggest and most apparent indicator of the health of the overall economy. Overall confidence takes a further fall.
Stage 6: Redemptions / Margin Calls & Forced Unwinding of Trades: Due to the initial selling pressure, momentum builds and hedge funds are forced to meet redemption requests and margin calls due to the falling stocks and are also forced to reduce their positions drastically.
Stage 7: Economic Data: Confidence is further eroded when lagging economic indicators finally confirm the worst. Exports nose-dive, GDP contracts, unemployment rises and manufacturing contracts shrink.
Stage 8: Capacity Reduction / Budget Crises / Main Street Blues: It is at this point that the normal everyday people start feeling the pinch of the economic situation. Due to the nature of the recession and its credit based origin, this phase will be much longer than other recessions. Households will have to react to increasing redundancies, increase saving and reduce consumption.
Stage 9: Government Regulation: With the credit seizure, recession and use of public money for bail-outs and rescue packages the government is forced to look into the regulation of the credit and financial markets.
Stage 10: Treasury Market: Due to the huge bail-out and government measures to curb the recession from getting worst, the Federal Reserve is forced to fund the its financial deficit by issuance of treasure notes that are bought up by foreign countries who are dependant on the US. It isn't wrong to predict that treasuries will start to take a fall when foreign countries start to become weary of buying US treasury notes. The fall in demand for US treasury notes will first be accompanied with an increase in Federal Reserve rates then also be accompanied with a fall in the US dollar.
Stage 11: Inflation: As a side affect to the huge amounts of money that the government has injected into the market and the predominantly low rates all the factors are set for inflation to increase dramatically when consumer and business sentiments increase again.
If this sounds too complicated, just remember that the fundamental reason that we are in the recession is due to the banks. Any recession that is due to banks will take a long time to recover.