EXECUTIVE SUMMARY

The world economy is engaged in a spiraled mortgage crisis, starting in the United States,

which is carving the route to the largest financial shock since the Great Depression. A

loss of confidence by investors in the value of securitized mortgages in the United States

was the beginning of a financial crisis that swept the global economy off its feet. The

major financial crisis of the 21st century involves esoteric instruments, unaware

regulators, and nervous investors. Starting in the summer of 2007, the United States

experienced startling contraction in wealth, triggered by the sub prime crisis, thereby

leading to increase in spreads, and decrease in credit market functioning. During boom

years, mortgage brokers, enticed by the lure of big commissions, talked buyers with poor

credit into accepting housing mortgages with little or no down payment and without

credit checks. Higher default levels, particularly among less credit- worthy borrowers,

magnified the impact of the crisis in the financial sector.

The ability to raise cash, i.e. liquidity, is an essential component for the markets

and for the economy as a whole. The freezing liquidity has closed shops of a large

number of credit markets. Interest rates had been rising across the world, even rates at

which banks lend to each other. The freezing up of the financial markets eventually lead

to a severe reduction in the rate of lending, followed by slow and drastically reduced

business investments, paving the way for a nasty recession in the overall economic state

of the globe. A collapse of trust between market players has decreased the willingness of

lending institutions to risk money. The bursting of the housing bubble has caused a lot of

AAA labeled investments to turn out to be junk. Nervous investors have been sending

markets plunging down. Markets all over the world

Including those of Britain, Germany, and Asia, had to confront all-time low figures since

the past couple of years or more. Britain also witnessed the so-called ―bursting of the

Brown Bubble, in the form of the highest personal debt per capita in the G7, combined

with an unsustainable rise in housing prices. The longest period of expansion, which

Britain claimed to be undergoing, eventually revealed itself as an illusion. The illusion of

rising to prosperity had been maintained by borrowing to spend, often in the form of

equity withdrawal from increasingly expensive houses. The bubble ultimately burst,

exposing Britain to the most serious financial crisis since the 1920s. This brings a lot of

misery to the home owners who are set to see the cost of mortgages soar following the

deepening of the banking crisis and the Libor –the rate at which banks lend to each other.

The impact of the crisis is more vividly observable in the emerging markets which are

suffering from one of their biggest sell offs. Economies with disproportionate offshore

borrowings (like that of Australia) are adversely affected by the western financial crunch.

Globalization has ensured that none of the economies of the world stay insulated from the

financial crisis in the developed economies. Contrary to the “decoupling theory”,

emerging economies too have been hit by the crisis. According to the decoupling theory,

even if advanced economies went into a downturn, emerging economies would remain

unscathed because of their substantial foreign exchange reserves, improved policy

framework, robust corporate balance sheets, and a relatively healthy banking sector. In a

rapidly globalizing world, the “decoupling theory” was never totally persuasive.

The decoupling theory‘stands totally invalidated today in the face of capital flow

reversals, sharp widening of spreads on sovereign and corporate debt and abrupt currency

depreciations. In the subsequent parts of the project, several issues will be discussed
which will provide a detailed account of the origin of the crisis and the ripple effect of

economic downturn of the world‘s largest economy which engulfed even the fast growing

emerging economies into the crisis. The impact of the crisis on the Indian economy will

also be dealt with. The main aim of the study is to find relevant answers to questions like

why and how India has been hit by the crisis and how the Indian economy and the

Reserve Bank of India have responded to the crisis.

The recommendations include the outlook for the Indian economy in the wake of

the economic turmoil. The project concludes with an analysis of Entrepreneurship in

times of the financial crisis and a swift overview of the various aspects of

entrepreneurship which can help in the revival of a plummeting economy.