first thing what is the reason ?
The reason for the slowdown is very simple.Its because of the subprime financial crisis. The reasons for that are:1) Government intervention in the mortgage market2) Financial institutions inappropriately assesing risks, and lending people money who couldn't pay it back.3) People asking for loans they couldn't repay4) Interest Rate policies from the US Fed. Originally with low rates, people overinvested in housing. When the rates rose, people couldn't afford to pay their debts. (The reasons for the rate movements were understandable however, rates were low originally to avoid a recession, the rates were increased to stop inflation.)5) Once a few people couldn't pay their debts, they had to sell their houses. This lead to a spiral effect as house prices were pushed down, resulting in more selling, and further downward pressure on house prices.The subprime financial crisis has had 4 major effects on the world.1) Banks were less willing to lend to each other. This meant that they had liquidity issues, or in other words, were scared they wouldn't have enough cash. This meant they lent less money to firms/consumers, leading to lower investment and consumption, which basically means there is less spending in the economy, which is a slowdown2) People started to expect bad things. Most schools of economics agree that when this happens, bad things do start happening, as people spend less money and tighten their belts.3) As stock prices, house prices, etc fell, people felt less wealthy, and wanted to spend less. This is known as the wealth effect4) As a few countries began slowing down, people began buying less goods, including imports. When people buy less imports, that causes other countries to slow down, spreading the effect around the world.
There are two big questions about this downturn for America and the world: how long? And how deep ?
The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the panel recognized as the official arbiter of business cycles, said it made the determination the recession began in December 2007.
Although a recession is generally defined as two consecutive quarters of declining activity, the panel has its own criteria for determining a downturn, including data on employment, income and industrial output.
Because of the lag time in officially declaring a recession, some analysts say the worst is generally over by the time the news becomes public.
But John Ogg, analyst at 24/7 Wall Street, said it may not be the case this time: "We still think more pain is on the way."
That message was hammered home with a survey showing the US manufacturing sector sank to its lowest level of activity in November since 1982.
The Institute of Supply Management (ISM) said its manufacturing index slumped 2.7 points to 36.2 percent, far below the 50-percent level that separates expansion and contraction.
Analysts pointed out the overall economy will have trouble escaping deep recession with manufacturing so weak. "Recession fears have now become a reality, and the questions that remain are just how bad and for how long this recession will linger over us." The NBER makes no forecast on how long a recession will last, but said that in the past they have run from six to 18 months. The panel said it has no definition of the term "depression."
"This time around, the recession is not due to tight monetary policy, higher tax rates, or protectionism," .
"It's due to a sudden and sharp plunge in the velocity of money -- what we have been calling 'risk aversion hysteria' -- where the speed with which money moves its way through the economy slows down as both consumers and businesses decide they want to increase their cash holdings."
