Written by Ahaan Anand, a grade 9 student.
A financial crisis is one in which asset (a useful or valuable thing) prices see a steep decline in value, businesses and consumers are unable to pay their debts, and financial institutions experience liquidity shortages.
The 2008 Financial Crisis in the US started when people (even with low credit rates) started getting loans from lenders or banking institutions by putting their houses on mortgage. The demand to buy homes increased which led to the rising of prices of homes in US. Even when people defaulted, the lending institution got the house and sold it for an even higher price since there was a lot of demand. In between this, banking institutions would sell the loans to bigger institutions which would further re-sell these loans to other institutions or wealth funds. These loans were not sold individually. Banks combined loans of different credit ratings and sold them to higher institutions through a process of MBS which is Mortgage Backed Securities. These Mortgage Backed Securities reached a level to where they were traded amongst the biggest financial institutions and were even sold to the sovereign wealth funds of countries (A sovereign wealth fund (SWF) is a state-owned investment fund or entity which comprises of pools of money derived from a country’s reserves).
Then the property bubble burst in second half of 2008. The property prices crashed and the borrowers realised that they could no longer pay for their mortgages and hence defaulted on their loans. Their properties were liquidated and were taken over by the lending institutions. These institutions tried to sell the properties further but were not able to without taking a huge loss because now there was too much supply and almost no demand, which led to the crashing of prices of homes in the US.
Due to this, lending institutions failed. Financial Institutions like Lehman Brothers announced bankruptcy. Others like Merrill Lynch, AIG and Royal Bank of Scotland were on the verge of doing so and had to be rescued by government (source: the guardian). This led to the financial crisis of 2008 also known as the Great Recession.
It is believed that COVID-19 might trigger a global recession or a severe economic slowdown all over the world. One of the main reasons for slowdown is the fear of this virus itself.
The fear and the paranoia will result in people not wanting to go the malls for shopping, hotels and restaurants for dining, for movies and parties as they will not want to meet in big groups. They would instead like to sit at home, talk to their friends on video call and instead of going out for food they will order food from outside all this while maintaining the distance. Most importantly, they will stop non-essential, leisure travel within the country or abroad. The discretionary spend on consumer products will drop and people will only buy necessities. This will result in severe stress in the economic cycle.
In the Great Recession, US lost about 8.7million jobs over a period of 1 year (source: Investopedia). And with a current unemployment rate of 14.7%, US has already lost over 20.5 million jobs in just April (source: CNBC). Due to Covid-19, all businesses all over the world are hit in a large way. Manufacturing, Export, Import, Travel and Tourism are the businesses which will be hit. Indian exporters are to take $1 billion hit (source: India times). Travel contributes $1.6 trillion to the US economy which is also 7.8% of the US economy (source: Forbes). The fear of this virus is going to stay in people’s minds forever. People will as mentioned earlier, stop non-essential, leisure travel within the country or abroad. U.S. Travel Industry has already warned Of $910Billion Coronavirus Losses (source: Forbes)
The big question which is being asked these days is whether a recession like situation can happen again or not due to Covid-19. The answer to that question is yes, yes this situation can happen again Companies going bankrupt, people getting thrown out of jobs, stock markets crashing might happen again.
According to economic times, a global recession due to this pandemic might be inevitable. But there is still hope that a recession-like situation does not happen as badly as it did all over the world in 2008.
Governments all over the world have already understood the financial problems of their countries and have started giving economic stimulus packages to help revive their respective economies.
US government has given a $2 trillion stimulus package which is the biggest stimulus package ever provided. A $2 trillion coronavirus stimulus package will help (says New York Times). India too has announced one of the biggest packages of INR 20 Lakh Crore (10% of the Gross Domestic Product)(source: Indian Express). UN economic experts hail India’s ‘impressive’ stimulus package to revive economy hit by coronavirus (source: economic times).The early understanding of governments all over the world of this problem has helped in not going into a major economic slowdown.
Even though the situation may not seem perfect today, we should know that instead of becoming anxious, we should look at the brighter side of things. Our Governments are working day and night to revive economies and to prevent recessions. US, Japan, Germany, India, France and many other counties have already announced economic relief packages which is already helping millions of people in their countries. Doctors all around the world are working effortlessly to find a cure for this lethal virus.
In the midst of all this, we must know that this virus can be taken down only by cooperation of the people and the government. We must all abide by the rules which are to stay at home and we should remember that if we come together against this virus, we will definitely defeat it.
Thanks for reading!
This too shall pass
Written by Ahaan Anand, a grade 9 student of Modern School
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