RECESSION VS DEPRESSION

Recession is a slowdown or a massive contraction in economic activities. A technical recession is a decrease in the Gross Domestic Product (GDP) for the two consecutive quarters, which means six months. On the other hand, depression is an extended recession that has years, not quarters of economic contraction. It is more severe than a recession.

So last time we had a recession in 2008 was known as the most significant recession, but last time we had depression was in 1929 called the great depression. And in all of civilized history, we have only had to wait for only one depression. But there have been 33 recession since 1854.

At the time of depression, unemployment reaches 25%, international trade falls by more than two-third, price drops more than 25%. In a recession, gross domestic product contracts for at least two quarters, and there are many more economic indicators to signal a recession.

A recession is a downward trend in the business cycle one that is characterized by a decline in production and employment. This trend lowers household income and spending, which consequently causes many businesses and households to delay making significant investments or purchases. A recession can be limited geographically, like in a single country.

Depression is a significant downswing(far more severe than a downward trend ) in the business cycle. It characterized by sharply reduced widespread unemployment, a sharp decline of growth in construction and high in development, and significant reductions in international trade and capital movements. It has a global reach.

In 1929 the great depression made. It was the biggest stock market crash since records began it is impossible to underestimate the shock a sense of stunned disbelief first-time investors bought at vast amounts of money to speculate on the market broke very sharply. Many people wiped out with it. It was excruciating later that thousands of banks failed millions lost everything. Poverty was the main factor that led to depression. It was a story of a financial disaster that we hoped never would happen again.

Wednesday, October 23rd 1929 without warning share prices are plummeting on a New York stock exchange investors are waiting for the few years. The market has only gone up high for an hour, an astonishing two and a half million shares sold. The next day the dome would spiral as people came in to trade stocks. On October 24th there was something that had changed if there was something different all of sudden there were no buyers people were willing to sell, but there are no buyers to buy the stocks. Stocks and prices began to fall rapidly. That morning the stock exchange went low that was so sharp and so dire stocks suddenly dropping 10,20,30 points at the time that it said that there were murmurs and rattles in the gallery of the New York stock exchange people are stunned by what is happening and terrifying. Thousands of people began to gather outside the stock market. Ten thousand people fill the streets from Broadway to the East River. People want to know what’s going on. These massive crowds gathered around the stock exchange around statues and stairs to see the news. They don’t know what was going on and The next five days a financial catastrophe would sweep away the foundations of America’s prosperity. The reasons in the old decades undoubtedly caused this.

During the late 1990s, America was getting a massive flow of foreign funds from Russia and many Asian countries which were beset by a financial crisis at the time. American banks naturally did not want that money just lying around, earning no interest. So they made it easier to get a mortgage as a way to lend out this cash. Americans who would typically not get home loans found it very easy to get the mortgages they needed to buy houses. After all, this was the “American Dream”. Banks made it more comfortable and easier to get a loan, creating adjustable-rate mortgages with low and early payments, and accepting people with low credit scores. These less than ideal loans were called subprime mortgages.

Now the banks usually a wat to make more money is to bundle thousands of mortgages together as a single bond, known as CDO(Collateralized Debt Obligation). And then to sell these bonds to other parties, like pension funds, insurance companies or other banks. However, since subprime mortgages were riskier many of the funds that would typically buy these CDOs could not afford the risk to buy them. Unless the banks employed a little bit of financial trickery, they purchased an insurance policy for protecting from CDOs falling. AIG was at the time the largest insurance company in America with branches and offices in 80 different countries. They have been in business since 1919 and have declared America’s largest underwriter for insurance across many industries. In 2008 they had hundreds of billions of dollars in assets and were well on their way to becoming the first company in the world to achieve a trillion-dollar market cap. This company transforms CDOs very riskily into much safer products. They were selling the insurance on CDOs that had an abysmal credit rating, effectively swapping it with a score of AIG itself, an excellent and highly rated company. It had grown up. And they got greedy. Usually, if an insurance company insures for a million dollars, they should have a million in assets around to pay it, just in case. They thought that the housing market wouldn’t crash, but in 2007 it collapsed. All those subprime mortgages increased their adjustable rates, and millions of Americans that should don’t have had mortgages saw their monthly repayments increase. Leases weren’t getting paid. The bonds filled with these mortgages the CDOs also started collapsing. But later AIG realized it had insured far too many CDOs to pay up possibly. The speed of the collapse was horrible; AIG ran out of money on September 15th, 2008. It has affected all countries.

We can conclude that while there is also no standard definition for depression, defined as a more severe version of a recession.

Reference: http//wiki2.org/en/causes of the great recession