As I was writing previously Recession is the result of decreasing GDP.
GDP is made up of these components :
GDP = consumption + investment + government spending
On the investment component of GDP, Fed is trying to cut interest rates drastically (75 basis points on last Tuesday) making it possible for ailing banks to borrow money at lower rates.
European markets declined drastically on Monday this week when US is celebrating Market Luther King birthday. Fed watching this decline anticipated stock market crash on Tuesday and hence convened an emergency meeting on Tuesday to lower interest rates by 75 basis points to please the stock market. Remember that Fed did this kind of emergency rate cut back in 1984 i.e 24 years back.
If you trace all events that happened on Monday seems to be a result of one rogue trader by name Jérôme Kerviel who made France Société Générale bank to loose €4.9 billion, equal to $7.2 billion in futures. This is one of the root causes of market declines in Europe and else where in the world on Monday. Jérôme Kerviel is able to manipulate back office and floor which caused this damage. Risk controls are still up in the air after history had witnessed similar incidents in the past.
Remind you that this not at all new , history is full of such rogue traders. One notable mention here is Nick Leeson who made Barings bank crash with his illegal trades. Barings bank sent Nick to Singapore to set up their future options trading operation. To save money the bank allowed Nick to operate both the floor trading and the back office facilities and forced him to employ cheap, unskilled staff. This is where manipulation occurred as he controlled both floor and as well back office. His first year of trading was a big success and he made large profits for the bank even though he has illegally broken trading rules and secretly covered up losses. Given more freedom, even more money and continuing unchecked, Nick starts to make losses and again attempts to trade out of them but this time he comes unstuck as his illegal trading generates even bigger losses.
The movie Rogue trader belongs to one of best all time business movies and may give you more insight into how this fraud made Barings bank collapse.