What Is A Market Crash, A Recession & A Financial Crisis? What Is The Difference Among The 3 Economic Activities! (#19)

 

A Crash; a Recession & a Crisis.... are some terms many of you might have came across many times but never were told the true meaning of.... Or maybe you found it really complicated!

Well, today I'll try defining a Crash, a Crisis & a Recession in simple words & also I'll let you know how does the Economy looks like if there's a Crash; a Crisis; or a Recession, going on! We'll know about the differences & all....!

So here we go,

Well, let's first understand how does an economy simply works!

Now there's no complexity in this.... Just take a look around you & you'll find almost everybody engaged in certain tasks which are closely tied & therefore affects a specific place's economy!

Like—

You see! There are people all around us who do jobs in different companies.

Now no matter if that company is of our own country or if it's an international company.... they provide job opportunities to people & pays them for the work they do.

The people working are doing the job (working for the company as the company want such sort of people to improve its sales, produce more high quality products, etc. etc.) & the company hence produces stuff.

& people are buying it.

So the company gets paid/benefited. & It pays its employees!

Now the people working their gets paid every month & with that money they run their household, you know they fulfill their own needs (necessities; like— medicines, food, etc.) & the remaining amount is either kept in the bank by the majority of people.

International & National Companies are all producing stuff & we all/people from all around the world are buying it & consuming it! GDP of a country is affected by that!

Businesses are doing well! — they can raise funds via Share Market & even take loan from Banks!

Real Estate is performing fine!

Banks are giving returns; which are quite satisfactory!

Banks are giving home loans, business loans, etc. & charging interests.... Hence, making a good amount of profit.

Etc. Etc.

These all things are some what closely tied & are working quite well, as we've seen!

So now all of these things depicts a Stable Economy!

& the major changes in a economy which occurs during a Crisis, a Recession &/OR a Crash are/is mainly within these, only.

Let's now see what'll happen to the Economy (comparing with the same previous Economy example/overview of the Stabled Economy) if their is a Crisis!

Do you know about The Great Recession Of 2008 &/OR The Great Crisis Of 2008?

Well! These 2 are the same things! The Great RECESSION/CRISIS of 2008!

You know, that is b'coz they kind of affect the economy in a very similar manner.... like— high inflation; high unemployment rate, etc. etc. (It'll make some more sense within a while!) However the causes of the 2 (Recession & Crisis) may be different!

These two don't/shouldn't last for "very" long or else it results in a Crash.

& there is a Crash because the Economy's condition kept on worsening over time! & the GDP can become negative during this time!

& it's not always necessarily about Share Market & not even about just one country's economy. Like— if a country is a very strong one. Then it will clearly impact other countries.

& there may be a global take down!

Let's understand about a Crisis, a Crash & a Recession more deeply,

So to make y'all understand about What "A Crisis" is? & also within that What "A Recession" is? I'll talk a bit 'bout the 2008 CRISIS & RECESSION Economic Condition!

Ok!

So here we began;

In between 2000 to 2002 the dot com bubble bursted!

So the people were taking their money out of the Share Market. Hence, the Share Market was not performing well!

So people were not willing to invest in Share Market!

& during the same time, the interest rates in the banks were very low.

So the investors didn't wanted to keep their money at rest in the banks, either!

But; During that time the Housing Market in the US was rising.

People were buying new houses.

& the prices of the houses were rising!

& US Government also was encouraging people to buy houses.

& the Banks were giving housing loans to people.

So in short, that seemed a very good investment to investors.

As the housing market was performing so well.

All the investors were now attracted towards it rather than any other investment.

The investors assumed that the housing market will always keep on paying high returns.

So now here understand one thing, that, generally when ever a bank 🏦 gives a home loan, it first verifies every single important detail of that particular person to make sure that he/she will be able to pay back the loan.

In short, he or she won't default the loan.

Definition Of Default!

As we know people have to repay fixed part of the loan with interest within a specific period of time & they have to pay it until they completely repay the loan.

& when somebody fails to make the payment which is to be made or for any reason declines it then it is known as a DEFAULT!

So; in short, banks only gives loans to people who are capable of paying back the loan!

But something different happened in the year 2002 in the US.

& we can even say that it was the major cause of the 2008 CRISIS & RECESSION.

Whereas, banks were supposed to check people's records.... Shockingly, They didn't; this time!

The Banks were giving home loans even to such people who didn't even had a Stabled job or any such source of income.

& there is one more thing, that, while a bank is giving housing loan/home loan to someone then that person is also supposed to pay a part of it.

But the banks didn't follow this, too, this time.

Which means, banks have paid the entire amount by themselves.

But anyhow, even if some people were paying back the loan on time everytime, regularly. They couldn't later & this is why.... Actually, these were all Adjustable Interest Rates on which people had taken the housing loan.

Adjustable Interest Rates are basically such rates which in the beginning are very less in Interest (interest charged is very less) but with time they increase.... henceforth, people are supposed to pay more interest later!

& the fact that banks didn't even bothered letting most of the people know about the "Adjustable Interest Rates" is what exactly made almost everyone to default/decline their loan(s) back payment!

So now, as of everyone was defaulting their loans!

The banks didn't received any back payment. So banks were short on money!

The banks had no other option then selling those homes to get their fund back!

So the banks had no other option than selling those homes to recover those loan(s) money! & they did the exact same thing also.

BUT; Now the problem was that the banks were unable to find any buyers.

& b'coz there were so many houses which were to be sold.... you know as the supply of the houses was alot.... But as we can see, the demand for the houses was not as high at all!

So therefore it resulted in a drastic fall in the price of the houses!

If you want to know of how the Supply & Demand Rule works then you may....

Also Read: What Makes The Share Prices Fluctuate So Much?

*Finally, the Housing Bubble Bursted!*

( & due to this Demand & Supply Rule the prices of the Houses went down!)

The owners of the houses (who took the loan) noticed the sudden fall in the prices of their houses, which triggered'em to think that they are paying too much for the house that is not worth that much in reality!

In other words, the fall in the house(s) prices made people to default even more! & this was on purpose OR/& with the will of people, THIS TIME!

Banks were out of cash, already! So the people who kept their money at the banks were unable to get it back!

This made the situation even worse!

Many companies & startups & even some of the big companies (which provided jobs to people) went bankrupt, in the year 2008.

& this led to unemployment among people.

& this became hard for those— some people who were still trying to pay back the loans.... As of NOW they couldn't pay it back because of being jobless.

This was a depressing downfall in the Economy!

Note— This is to inform all the readers that *THIS* 2008 CRISIS &/OR RECESSION INFORMATION is not wholly provided *HERE*.

I'll soon write an article entirely based on the 2008 Crisis &/or Recession; & its sole purpose will be to cover what caused the 2008 Crisis OR RECESSION & how the things went.

For in this article, it's just a BASIC OVERVIEW, not the entire story. As we have some other topic of this article/blog.

So this entire thing was the basic overview of the US Economy in the 2008 Crisis &/OR Recession.

So now here comes the basic definition of the Crisis & the Recession....

& don't worry; it is not that complex— as it'll make enough sense to you already!

So these are some basic Economic Conditions In A Crisis....

• A Crisis is something which is caused by uncontrollable human behaviour.
• Stock Market performs too well. Encouraging overvalued stock/shares as people kept on investing in Share Market, anyways.... & then finally resulting in a bubble burst.
• Due to bubble burst, the prices of shares FALLS, suddenly. & Investors have a real negative reaction & starts panicking.... there actions make share prices fall even more.
• Worsening The Situation!
• This further leads to Companies going bankrupt.
• & then unemployment!
• The Debt Collection WORSENS, overtime!
• & there is no cash at the bank!"

You are free to MATCH this entire Scenario/Situation (as given in the CRISIS definition) with the 2008 Crisis Economic Condition!

[As we've already discussed about just a moment ago!]

Let us now come to Conditions Of The Economy In A Recession....

• A recession is an economic activity caused by a negative growth in the real GDP (& negative GDP is somehow accompanied by the rise in the rate of unemployment within a specific country.) 
• Stocks are very weak during a Recession.
• A Recession is also caused by Such Government Policies which TRIGGERS people to act in a certain way &/OR careless handling of the monetary system (Money Management System is not good!).
• In 2008, the monetary system was not managed properly at all.

Well, we can clearly see that there were all the above mentioned conditions of both (the Crisis & the Recession) in the US Economy of the Year 2008.

• Banks gave loans with out doing any research.

      & also

• There was uncontrollable human behaviour (a ppl were definitely against paying back the loan as soon as the value of the houses decreased.)
• I might have not mentioned about how Share Market was going. I Know! But do you remember in the very beginning (year 2001) I told y'all 'bout the dot com bubble burst & thats why people weren't into Share Market, a lot. Yeah that was there! But ofcourse.... upto 2008 that dot com boom did recovered! & people really were into Share Market during this time. & to let y'all know "The Share Market did crashed in the year 2008". (Yes! It did! But I won't get into that!)

Anyways....

• The companies went bankrupt.
• The people working there were left jobless.
• It became hard to get a job now.
• As per of being jobless almost all were NOW defaulting the loan back payments.
• The debt collection worsens.

& 

• Banks were short on money already.
• The growth of GDP became negative.
• Stocks were weak! 
• In 2008, the monetary system was not managed properly at all.

& so with this you might have successfully understood about the things which go wrong during a Recession & also a Crisis.

--So with this I hope all of you are clear with what a recession or a crisis may look like or moreover what is it all about!

I hope you also did noted the changes among an Healthy Economy (as I mentioned in the beginning of how a [healthy] Economy Works & an Unhealthy Economy (the one with a Crisis &/OR a Recession).

A crisis and a recession may last from weeks and months or sometimes in the worst scenarios, it may be year(s).

& the fact that if this Economic condition keeps on worsening over time & there is no source of recovery then it may be reffered to as a CRASH!

& THAT IS IN THE WORST SCENARIOS.

[Moreover , if some Crisis/Recessions last for some years!]

So basically, in a Crash the Economic condition keeps on worsening even more over time instead of recovering.

Like— GDP growth was already negative and it still is going down.

The unemployment is way too much.

, etc. etc.

So with this we've understood about What a Crash, a Crisis & a Recession are!!!!

Here are the basic definitions of the three....

In a Crisis— There is uncontrollable Human Behaviour. Stock Market was performing OVER Well! & finally the bubble bursts....causing Companies go bankrupt & then leading to unemployment. The Debt collection worsens & there is no cash left at the bank! It lasts from weeks to months & sometimes even for years (IN THE WORST SCENARIOS).

In a Recession— The growth of the real GDP becomes negative. Stocks are weak during a Recession. As the Monetary system is not managed properly....silly mistakes are made which leads to worsening a situation & seeming its hard to recover the money. It lasts from weeks to months & sometimes even for years (IN THE WORST SCENARIOS).

In a Crash— Every single situation of a Crisis & a Recession is there but it's level of the ECONOMIC DOWNFALL increases to a huge extent & it may cause it to maintain that Economic position for years until it's recovery.

So this was all about how do the Economy looks like if the things don't go well, now you might have noticed one thing, here....

& that is that people started investing in the Housing Market in the year 2001 where as the bubble bursted OR the Crisis &/OR the Recession took over in the beginning of the year 2008. So you might have an idea that a Recession OR a Crisis OR a Crash is an outcome of a long term mistake (made long time back or maybe something one started doing long time ago);

Now the miskate may be of a banker(s) or a investor(s)!

Anyways, So this was all about, the Crash, the Crisis & the Recession!

I hope you are clear with the 3 Concepts!

LEAVE A COMMENT if you have any queries & you may also let me know what are your views on this article/blog! Is there any mistake I made.... Feel free to let me know & Correct Me!

You may also let me know if you want me to write an article/a blog on a specific topic!

Thanks For Reading!