If we talk about now, the market has come down a lot and many people are saying that recession has come about
But if we talk about recession then one very important time comes up, 2008
People say that recession came in 2008
And many people compare this time's crash to the crash of 2008
Do you think that comparing this to 2008
Will be right or not
But for that it will be very important to understand
Why did the recession come about in 2008
Now you know that because of Coronavirus
The economic activity came on a complete hold
But it is very important to know
How did the recession happen in 2008, what were the reasons behind it
And how that impacted US' economy
And after that how was the indian economy impacted
I, Jagdeep Singh, welcome you to the Groww channel
Today we are going to talk about the recession of 2008
How that recession was started
And what we can get to learn from that
Before talking about recession I want to talk to you about a few things that are very important
If you want to understand how the recession came about
You must have heard many times that Central bank is reducing its interest rate
So whenever the Central bank reduces its interest rate, people remove money from one bank and invest it some where else
So when the interest rate reduces, more people invest in the stock market
But is this right every time?
Many times it isnt right
If I talk about 2001
So to understand 2008
You have to understand 2001
Because from there was started the foundation of 2008
When the recession came in 2008
So you must know about 2001, when the tech bubble was burst
When the stock of tech companies started to come down
And when there is some crash in the stock market, people get afraid
Like what is happening in the current scenario
People start selling in panic
So in 2008, the interest rates in US were only 1%
So at that time, people didn't consider it safe to keep their money in banks
And even the stock market started to come down
Because of which people started looking for such an asset
Where investing is safe and from where they get good returns
So at that time people got such an asset
Which until now we considered very safe
And at that time it even started to give good returns
And the name of that asset is Real estate, housing
So people started investing in real estate because the prices of real started going up at that time
When people get afraid of the share market
People like to invest in such an asset which normally is safe
So even that time when people started investing in real estate
There was a small boom in real estate
Because of which its prices started to go up
After that when people don't have money, they go to the banks to get money
They take loans from banks so that they can buy a house
So I will explain to you again
When there was a boom in the real estate, people went to banks to get loans
Banks started giving loans
And what happens initially is that banks give loans to those people
Whose credit score is very good
Because banks wants to see that in the case of housing loans
A lot of the money that banks give as loans, will their money come back or not
So even in the case of US banks started giving loans to people
But after that when there was a bigger boom in real estate
After that, a lot of money in banks
That came out as loans for real estate
When a lot of money started coming out of banks
The banks had to raise more money
To raise money, banks started making and selling bonds
In that case, investment banks come into the picture, they felt that
If they take those loans from banks and sells it as a different investment option for investors
In the coming time, there will a good demand for it
Because of which, investment banks
Bought those loans from banks
And made it a complex investment option
And sold it further to investors
And the name of that complex investment option was CDO
Which stands for Collateralized Debt option
So a new investment option was made
The people who want to invest in those bonds whose intrinsic value
Comes out of the mortgage of real estate
That was a good investment option for them
Because of which people considered it safe
And people started buying CDOs
So you have to understand the chain again
People wanted to buy houses for which they took loans
And the loans which those banks gave were sold to investment banks
And investment banks made those loans as an investment option called CDO
And started selling that to normal investors
And investors started buying them
So in the whole cycle, when the demand started increasing, the price of everything started increasing
And everyone started earning a lot of money
So in this time, AIG comes into the picture
So here the people who started buying CDOs
They saw a little risk here, that made CDOs will be in default some day
Which means that the people who took loans from banks, they will be unable to repay it
Because of which the price of CDOs can come down
So those people started buying insurance on CDOs
So the insurance on CDOs was given by AIG
AIG, at that time, was US' biggest isurance company
So AIG started giving insurance on CDOs which was called CDS
Credit Default Swaps
CDS' were loans on CDOs
Which means that if someone defaults on repaying loans
The banks will suffer a loss
If the bank faces loss, the CDS value will go down
Because of which if the investors face a loss
The AIG will pay money if they have bought CDS
Because of which, the people who thought that this boon can be burst at anytime
Even they started buying CDS
Because CDS could be bought by anyone
To buy CDS it wasn't necessary for you to buy CDOs
Because of which many CDS' were sold
Everyone started earning money
The profit of AIG also started increasing
The profit of investment banks started increasing
And the banks who were giving the loans, their profits increased as well
Everyone was content, everyone's profit was increasing
At that time, everyone's bubble started bursting
So how did this start
At that time, US' interest rate started increasing
And when the interest rate starts increasing, people think its safer to keep their money in banks
And at that time, the price of EMIs starts increasing
So the interest rate at which mortgage was given, was variable
And when the interest rate started increasing, the EMI price started increasing
And when the EMI amount started increasing
People started facing problem in paying it
And when there was problem, people started defaulting
Now you would have understood the picture
That people had taken loans from banks which they were unable to repay now
So what will the bank do in that case
So in that case when people are unable to pay the loan, the bank will sell those houses
On the houses the loans were taken for
But when banks got a lot of houses
Which they had to sell, they started an auction
At that time, the supply of houses was a lot but the demand was very less
And whenever the supply is higher than demand then the prices started to come down
Then that real estate
On which the bank gave very high loans
The sale they were making was at a very low price
Because of which the banks started facing losses
And as I told you
The loan that these banks give against these houses
They were sold to investors by investment banks
So when these prices started falling
When there was a problem there in loan payment
The CDOs that were sold as an investment option by investment banks
Even the value of that started to fall down
So investors faced losses
So when investors started facing losses, investors started asking for refunds by their CDS from AIG
Because CDOs had defaulted there
And now they had to get insurance money
So AIG suddenly got a huge liability
All the incsurance they had given, everyone started asking for money
Because of which AIG had reached the point of bankruptcy
Because now you have to understand the chain again
People failed to pay loans because of which banks faced problems
Banks faced problem
The CDOs fell suddenly
The value of CDOs fell a lot
The insurance people had taken aganist that, they started claiming it
At one time AIG gave so much insurance
That there were unable to fulfil the claims
Because of which AIG came to point of bankruptcy
Because of which the losses faced were not only by AIG
Because they had to repay the insurance
A bigger loss was faced by investment banks
Now you must be thinking how Lehman Brother comes here
And how Lehman Brothers became bankrupt
Because the people had to pay the money and it was meant to be paid to the bank
So how was the biggest loss to investment banks
So investment banks had a lot of CDOs
The loans that they had to buy from banks
So banks got their money but the CDOs of investment banks stopped selling
Because of which many CDOs were there with investment banks
And when they were unable to sell CDOs
Because of which investment banks faced a big loss
Because of which a very big bank Lehman Brothers stopped
Apart from this, there were many other investment banks
Which was bought by other or acquired by other
Because of which this recession which started in the US spread not only to India but all over the world
But if we look at its impact in India, it wasn't that big
As compared to its impact in other countries
So now I will talk about another very important character in this story
About which I did not speak during the story
This was credit rating agencies
So as you know, whenever there is a debt instrument, it has a credit rating
And credit rating agencies like in the US there is Moody's and many others
Which rates debt instruments and tell us how safe they can be
So now you must be thinking that in the US there were credit rating agencies
Why didn't they say before that the rating of CDOs
It isn't good
And they can default in the coming time
So if I tell you a very interesting figure
Around 2007-2008
All the ratings credit agencies gave was AAA
Which means that these agencies weren't able to quantify these risks
They were unable to say which instrument will fail in the coming time
A bigger mistake here was made by banks
Because the initial loan given by banks
Gave it to people with good credit ratings
But after that when they thought that the demand is increasing a lot
They started subprime lending
If I talk about subprime lending, they gave money to those people whose capabilities was lesser
To repay loans
Because of which this bubble was burst
And many people had to face the loss of this
The loss of this wasn't only by investment banks
But even to common people, investors
The employment of common people went away who worked in these banks
Now I will come to the question
Can we compare that recession to today's times
I will give you a direct answer for that, no
We cannot compare that recession to today's times
Because the recession that took place at that time was an economic recession
Behind which there were fundamental reasons because of which it failed
Apart from this, there were failures of some institutions because of which it failed
And it came out from that country and spread to other countries
Which if I talk about it today
The recession today happened because of a pandemic
Because of a disease
Because a disease has spread in ever country
Because of which the economic activity there has completely stopped for some time
Because of which there was problems everywhere
And people started panicking in the share market
So there the problem was because of institutional failure
Which is the biggest problem now
That is the problem of panic
The selling people do in panic
Yes there are chances of this becoming a fundamental problem in the coming time
If our economic activity doesn't get started properly again
The chances to predict that is impossible
And to compare that to today's time is very wrong
So at this time I would like to tell you
If you want to invest then find a good investment option and invest for the longer horizon
Now I will come to key learnings
For key learnings I would like to tell you that in the time of 2008-09
When there was a problem there, there were many such stocks
Which people started selling
Where there wasn't a big effect, there was panic selling
So if anyone had invested there, they would have gotten good returns in the next 3-4 years
That can happen even in today's case
Maybe you might a good investment option
You might find a stock whose fundamentals aren't that good
There you can find a good investment opportunity
But I want to tell you another important thing here
You should try to time the market
You should not see what the point of the dip was
Like in the case of 2007-08
The dipping point was in 2008
We don't know that the dipping point is now
But even at that time in 2007, if you would have invested in small tickets
Maybe your average price would have been lesser
So even in today's scenario what we get to learn is
We should start investing
We should not stop SIPs
Which I have been telling you for the past few videos
If you continue to invest, your average price will be lesser
And there are chances of you getting good returns in the coming time
So whenever there is a recession or an activity like this
Many time we get an opportunity
We get an opportunity to invest
And it is a good opportunity to learn a lot
Which I have told you, maybe you learnt a lot
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Why did the financial recession come about, what was the reason behind it
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