Friday, 9 September 2011

The credit crunch

The recent financial crisis affected the whole world. Why the Americans caused our problems again?! Can’t they think about the consequences of their actions?!... Why would anybody sell subprime mortgages?

Actually, it was not exactly like that. The risks were shared amongst other financial institutions. The risky loans were put together with other mortgages into packages and then divided in tranches sold to intermediaries. (You can imagine it as the game of pass the parcel.) Nobody could predict that everything would go wrong...

The credit crunch is a situation when a sudden shortage of funds for lending, leading to a resulting decline in loans available occurs. Recently it was caused by a sharp rise in defaults on subprime mortgages. It happened mainly because of the house prices rising and a sudden increase of interest rates. “Interest rates hit rock bottom in America in 2004 at just 1 per cent, but in June that year they began to rise. As interest rates jumped, US house prices started to fall and borrowers began to default on their mortgage payments sparking trouble for us all.” ( (Unpredicted) Lower house prices resulted in reduction of the value of mortgage loans and banks were no longer able to sell houses to recoup the loan.

The problems in the US impacted other economies very quickly. It got more difficult to buy a mortgage in other countries and the cash flow was slower, which caused problems around the whole world.

That’s what I think.


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