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Business

A recession glossary

©

Text by Euny HONG

Latest update : 2010-11-01

The ABC of finance, just when you need it most.

A

AAA - "triple A rating" - The highest rating a financial instrument or fund can receive, as assessed by independent rating agencies like Morningstar or Moody's. Some believe the sub-prime mortgage crisis arose in part because AAA ratings were given too liberally to inferior mortgage-backed securities.

B

Bad bank – A financial entity that purchases bad debt from regular (“good”) banks, thereby allowing good banks to clear their balance sheets and focus on their primary functions.

Bad debt – A debt that has been defaulted on, or has little likelihood of being repaid. Bad debt was at the centre of the 2007 subprime mortgage crisis (see entry: subprime mortgage crisis).

Bailout – A measure designed to rescue ailing banks or companies, allowing them to operate at normal capacity in a time of crisis. A prime example is the controversial $700 billion bailout approved towards the end of George W. Bush’s presidency to address the subprime mortgage crisis (see entry: TARP).

Basis point – A numerical unit used to express interest rates. 100 basis points = 1%.

Bear market – A market on the downswing (see entry: Bull market).

Bretton Woods agreement – An international accord signed in 1944, designed to create an international financial infrastructure after the tumult of the Second World War. The name is taken from the site in New Hampshire where the meeting took place.

Bubble – A phenomenon in which prices are overly or artificially inflated in a fashion that does not necessarily reflect actual supply and demand. The textbook example of a bubble is the “Dutch Tulip Bubble” of 1637. When tulip prices crashed, the entire economy – including its credit system – plunged into crisis.

Bull market – A market on the upswing (see entry: Bear market).

Buffet, Warren – Named after one of the most influential and successful investors in the US, Buffet’s methodology is based on studying such aspects as a company’s future research and development budget before making an investment. This is distinct from, for example, the method proposed by Peter Lynch, who recommends looking at retail sales of a product for clues as to the future performance of the manufacturer’s stock. Buffet’s methods have never been revealed by the master himself but have been closely studied, and are often referred to as “Buffetology.” He, too, however, has suffered losses in the financial crisis.

C

Commodities – Raw goods, such as pork bellies, cattle, oil, etc. that are traded on the market like any other financial instrument, in accordance with fluctuations in supply and demand.

D

Deflation – Falling prices; distinct from slowing inflation, where prices are still rising albeit at a slower rate.

Depression – This term entered the vocabulary of economists after it was used by US President Franklin D. Roosevelt in the context of the "Great Depression", a period of widespread poverty and unemployment that followed the stock market crash of 1929. Unlike the word “recession", “depression” has no formal definition.

Derivative – A financial instrument mathematically derived from other, more basic financial instruments, designed to hedge against unexpected losses in the underlying instrument. Examples of derivatives include options, futures, and mortgage-backed securities. Derivatives are a form of statistical arbitrage, in which traders exploit small market anomalies to make a profit.

E

ECB (European Central Bank) – Established in 1998 and located in Frankfurt, it is the central bank of the Eurozone, i.e. the group of nations that have adopted or are in the process of adopting the euro single currency. The ECB is the sole body with the authority to print euro currency. The president of the ECB is currently French national Jean-Claude Trichet.

F

FDIC (Federal Deposit Insurance Corporation) –  Set up by the US government, the FDIC insures individual banking accounts in the event of bank failure. Part of the controversial 2008 financial bailout package included increasing FDIC coverage. Official site

Federal Reserve – Also known as the “Fed”, this Washington-based institution governs all US banks and acts as the country's central bank. The Fed is headed by Ben Bernanke. Official site

G

Global recession – The IMF defines a global recession as one in which global GDP growth is less than 3%. (see entries: IMF and Recession)

GDP (Gross Domestic Product) – The total monetary value of all goods and services produced by a country, minus the differential between import and exports. This is different from GNP, or Gross National Product, in that the latter includes the differential between money made overseas by Americans and money made in America by foreigners.

H


Hedge fund – A type of investment bank, usually with a relatively small staff, that specialises in high-yield investments that are “hedged,” or offset, by multiple positions to minimise risk.

I

Icelandic financial crisis – In late 2008, Iceland’s three largest banks collapsed, wreaking havoc on the economy, damaging the currency, and entailing losses for account holders outside of the small island state. The Icelandic government demanded and received bailout funds from the IMF. The nation’s government summarily resigned in 2009.


IMF (International Monetary Fund) – The IMF's primary purpose is to assist nations suffering from financial emergencies by offering loans, usually on the condition that the nation make certain changes in its economic policies, including the removal of barriers to a free market. The IMF, whose current chief is French national Dominique Strauss-Kahn, is a by-product of the Bretton Woods agreement (see entry: Bretton Woods). Official site

K

Kerviel, Jérôme – a French derivatives trader (see entry) at French bank Société Générale, charged in a January 2008 fraud that led to 5 billion euros worth of losses at the bank. He had made up to 50 billion euros worth of unauthorised trades, hiding his losses by logging fake trades and false profits.

M

Madoff, Bernard – A former head of NASDAQ who became infamous in December 2008 when he was convicted of masterminding a pyramid scheme (see entry) that concealed total losses of 50 billion dollars for his clients, the largest investor fraud perpetrated by an individual.

Market correction – When a bull market plummets, this phenomenon is sometimes referred to as a market correction. This is based on the assumption that the market was over-valued to begin with.

P

Prime interest rate – The base interest rate set by central financial entities like the ECB.

Pyramid/Ponzi scheme – A type of financial fraud in which a fund manager uses new investors to pay off old investors. The term “Ponzi” comes from Charles Ponzi, an Italian-American financier and con artist. (see entry: Madoff, Bernard)

R

Rate cut – The lowering of an interest rate. An economic governing entity such as the ECB might choose to lower its interest rate in order to stimulate spending, lending and job creation.


Recession – Two or more consecutive quarters of declining GDP, or “negative economic growth”.

S

SEC (Securities and Exchange Commission) – A US governmental body formed as a byproduct of the Securities Act of 1933 at the height of the Great Depression. Its intention was to prevent crashes such as that which occurred in 1929, as well as prevent fraud and corruption.

Security – An umbrella term for financial instruments that can be bought and sold, including stocks, bonds, options, and futures.

Stimulus package – An umbrella term for measures taken to jump-start an ailing economy. Stimulus packages generally draw on fiscal policy tools, such as tax rebates for houselholds and firms, to boost demand. A prime example is the $800 billion package proposed by Obama as he took up office.


Subprime mortgage crisis – A financial disaster that began in 2007, when US homeowners who had been granted credit beyond their means all began to default at once. This created a chain reaction, exposing banks that issued the loans, as well as investors in collateralised mortgage options (CMOs – financial instruments dependent upon the healthy functioning of the mortgage market), and investors who did not realise their investments were linked to CMOs. In turn, businesses found they could no longer operate because banks were unable to lend them money. Some believe the subprime mortgage crisis to have initiated the present worldwide financial crisis.  

Sustainable banking – Socially conscious banking practises, analogous to the idea of sustainable development.

T

TALF (Term Asset-Backed Securities Loan facility) – A safety net facility created in November 2008 as part of the Bush administration's financial bailout package, designed to make potential investors more assured in the safety of their investments.

TARP (Troubled Asset Relief Programme) – The main component of the 2008 financial bailout package, in which $700 billion was allocated to ease the subprime mortgage crisis by pumping cash into ailing banks.

Trade deficit – Occurs when the total monetary value of imports exceeds the total monetary value of exports.

Trade surplus – Occurs when the total monetary value of exports exceeds the total monetary value of imports.

U

US Treasury – The bank that handles the US government’s own funds. The term is often used to refer to the US Department of the Treasury, in charge of managing federal revenue and printing paper currency. The head of the US Treasury is Timothy GeithnerOfficial site

W

World Bank – One of two major institutions set up at Bretton Woods (see entry), the World Bank makes loans to nations, focusing on long-term global financial stability and development projects. The World Bank also publishes important economic indicators to measure the development of each of the world’s countries. The head of the World Bank is US national Robert Zoellick. Official site

Date created : 2009-05-21

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