The Great Recession of 2008: Financial Lessons We Can’t Overlook


The Great Recession of 2008-09 was the worst global economic crisis after the Great Depression of 1930s. The ‘sub-prime crisis’ in the US housing market was the epicentre of the catastrophe that led to a global financial meltdown. The collapse of the large iconic investment bank, Lehman Brothers, led to a contagion, impacting financial institutions.

Globally, stock markets and currency markets crashed. Credit almost froze, business confidence nosedived, and the global economy slipped into a massive recession. Global GDP contracted by 2 per cent in 2009. US suffered an economic contraction of 5 per cent and job losses of 10 million.

Europe was severely impacted with contraction of the European economy by 4 per cent. Southern Europe, particularly Portugal, Ireland, Italy, Greece and Spain were severely impacted pushing Europe into a debt crisis by 2010. International trade contracted by 13 per cent in 2009. Asia was one of the least affected regions. China and India were least affected even though both countries experienced decline in growth rates.

Governments and central banks across the globe implemented massive stimulus programmes to revive economies from the slump. Central banks resorted to unprecedented rate cuts and governments slashed taxes and stepped up public expenditure. Even though global growth remained sluggish for many years after the crisis, the stimulus programmes finally started yielding results.

Presently the global economy is in the pink of health. The US is now going through one of the longest periods of economic expansion in history. Europe has recovered from the debt crisis and is growing at a decent rate. Some of the emerging economies like Argentina and Turkey are in trouble due to sharp depreciation in their currencies. China has succeeded in slowing down its growth rate, without crash landing its economy. Indian economy has recovered from the twin shocks of demonetisation and GST implementation. In spite of the recent sharp depreciation in INR, the Indian economy is doing well and is well-positioned to achieve the fastest growth rate this year, among the large economies of the world.

India and the Global Recession

India was one of the few large economies that were not impacted by the crisis. India’s well-regulated banking system played an important role in insulating the Indian economy from the global financial crisis. But it is also a fact that some of the excesses during the crisis later led to a severe banking distress with huge NPA mess of more than Rs. 10 lakh crore.

The stimulus provided by the RBI and the government did succeed in reviving the economy. India’s growth rate, which had slumped to less than 5 per cent in 2007-08, quickly recovered and rebounded to more than 8 per cent growth in 2009-10 and 2010-11. But the economy had to pay a heavy price for this stimulus.

Very low interest rates emboldened businessmen to make reckless investments. The government, as part of its fiscal stimulus package, encouraged public sector banks to lend massively to large projects. Huge investments were made, particularly in steel and power projects. PSU banks with very little expertise in financing such projects, lent money without adequate care. Result? Most of these loans became NPAs.

The Chinese policy of dumping steel impacted the steel industry globally. India, too, was impacted. The Supreme Court verdict cancelling coal allocations inflicted a massive blow to the power sector. Even though the Vijay Mallya and Nirav Modi loans are prominent in public discourse, the worst blow to the Indian banking system was delivered by the loans to the steel and power sectors.

Economics is not an exact science capable of making accurate diagnosis of a problem and prescribing perfect solutions. Some of the policies will be known to be excessive or inadequate only in retrospect. Therefore, it is important that we learn lessons and move forward.