Good reasons to look forward in a recession.
There is much talk on everywhere on cost cutting, job losses and share market drops. But there are reasons to be enthusiastic about economic downturns. There is a silver lining in every dark cloud.
Recession will help to correct economic imbalances. More recently, the excesses have been in the housing market, fueled by low rate cuts in the early part of the decade and by lenders overextending themselves to make loans to unqualified buyers despite underlying fundamentals that didn't justify these new valuations. Periods of economic contraction eliminate these sorts of unsustainable bubbles and get the economy back on solid ground. This enables to create a stronger economy.
Stock market drops create new opportunities. Share market is a main indicator of the performance of the economy. Panic shareholders try to dispatch their shares soon allowing shares to be purchased at a discount. Stocks that have been relatively oversold in recent weeks, and many companies with incredible long-term growth prospects are now trading at a fraction of their former prices. This creates new opportunities to buy shares at a low price as this recession will not last forever.
Recessions don't last forever. There have been 10 recessions from World War 2. Stock market is a rebounded ahead of the recession's end. If thinking of starting a company, then this would be the suitable time. This will give you a lead over the competition. When the economy comes out of recession, your business will be that much further along, and that much closer to being ready to raise capital. You can get a great head start on that day by starting your business now.
Reasons for current economic recession
It all started in USA. For many past years, In US, a boom in the housing sector was driving the economy to a new level. A combination of low interest rates and large inflows of foreign funds helped to create easy credit conditions where it became quite easy for people to take home loans. As more and more people took home loans, the demands for property increased and increased the home prices up (high demand increase price). As there was enough money to lend to potential borrowers, the loan agencies started to widen their loan payment reach and relaxed the loan conditions (subprime loans with high risk). As a result, many people with low income & bad credit history or those who come under the NINJA (No Income, No Job, No Assets) category were given housing loans ignoring all principles of financial caution.
Overbuilding of houses during the boom period created a surplus of homes, causing home prices to decline beginning from the summer 2006 (high supply reduces price). Home owners, who were expecting to get a refinance on the basis of increased home prices, found them unable to refinance and began to default on loans as their loans reset to higher interest rates and payment amounts. This made homes worth less than their mortgage amount.
As this is a profitable opportunity for investment, many local and foreign investors started on investing on this. Thus, this propagated outside the US market into the world’s financial markets. This is due to heavy buying of Mortgage Backed Securities (MBS) of subprime loans by major American and European Banks. The home prices started declining and Subprime loans become risky and unprofitable. As a result many of them opted to default on their home loans and vacated the house. However, as the home prices were falling rapidly, the lending companies, which were hoping to sell them and recover the loan amount, found them in a situation where loan amount exceeded the total cost of the house. Eventually, there remained no option but to write off losses on these loans. Global banks and brokerages have had to write off an estimated $512 billion in subprime losses so far.
Since banks and other financial institutes provide other major industries with investment capital and loans, a loss in the net capital of banks meant a serious detriment in their capacity to distribute loans for various businesses and industries. This created a serious cash crunch situation for companies who needed cash for performing their business activities. Now it became extremely difficult for them to raise money from banks.
The second major factor indicating a near-term recession is the high price of crude oil. This was pushed upward by world-wide speculative Middle East war fears and increases in demand from China. As each and every industry depend directly or indirectly in crude oil, higher costs of production will lower profits; higher prices will reduce some consumption. But today, due to reduction in demand oil price has reduced drastically.
The third factor in the current recession is the continuing decline in the value of the dollar due to Iraq war and the Federal Reserve; generated oversupply of dollars. Due to devaluation of Dollar, translates into still higher crude oil prices (as most of crude oil purchases are done in US Dollars), US Treasury bill and bond investments less attractive and any disinvestment in these areas would sharply drive bond prices down and increase interest rates.
