U.S. Sub-Prime Mortgage Crisis [Simplified]
Hi Everyone,
For the past few months you would’ve heard loads of reports in the news saying that the world is experiencing a recession/will experience a recession this year, and these words: sub-prime loans, credit crunch, and housing bubble.
So, what’s the buzz about?
Basically, this is what I think it’s all about:
A U.S. housing bubble began in 2001 (a bubble is an economic situation in which there is a high volume of trade of a certain good at prices much higher than what it is usually worth) after the dot.com bust (you can read up on it), and it all seemed as if the U.S. economy was doing well and better.
Wanting to do their part in boosting the economy, U.S. banks began lending money to more and more people who would otherwise not have met bank loan requirements in the past, to encourage consumerism. Such lending of money to not-so-credible people (they may have adverse financial situations and may not be able to return the money/have poor credit histories) is known as sub-prime lending. Many of the people who got the sub-prime loans used it as mortgages to participate in the housing bubble (more of a “boom” as it was known then).
Unfortunately, in 2007 last year, the housing bubble burst and housing prices plunged. Many investors lost their money, including (yep you guessed it), those sub-prime borrowers. This means many of them cannot return their loans to the banks! So, indirectly, the banks made a huge loss. In response, banks reduced their lending activity, something which we call a “credit-crunch”, or started charging higher interest rates for their loans. This makes it more difficult for businesses/consumers to get the loan they require, placing a downward pressure on the economy.
Subsequently (won’t go into the details – in fact I’m still trying to comprehend it), this had a negative impact on the wider economy and as many important economies in the world (eg. Japan, EU, China etc.) have close economic links with the U.S. economy, there is a widespread fear that the “crisis” in the U.S. may adversely affect the global economy.
Someone once said “When the U.S. economy sneezes; the rest of the world catches a cold.” While we’ll not explore how accuracy of this statement in today’s world, I hope what I’ve written above can give a rough idea of what’s happening.
Please do feel free to comment/improve on what I’ve written above – after all I’ve only been exposed to Economics for less than half a year…
Cheerio =)
Jian wei
For the past few months you would’ve heard loads of reports in the news saying that the world is experiencing a recession/will experience a recession this year, and these words: sub-prime loans, credit crunch, and housing bubble.
So, what’s the buzz about?
Basically, this is what I think it’s all about:
A U.S. housing bubble began in 2001 (a bubble is an economic situation in which there is a high volume of trade of a certain good at prices much higher than what it is usually worth) after the dot.com bust (you can read up on it), and it all seemed as if the U.S. economy was doing well and better.
Wanting to do their part in boosting the economy, U.S. banks began lending money to more and more people who would otherwise not have met bank loan requirements in the past, to encourage consumerism. Such lending of money to not-so-credible people (they may have adverse financial situations and may not be able to return the money/have poor credit histories) is known as sub-prime lending. Many of the people who got the sub-prime loans used it as mortgages to participate in the housing bubble (more of a “boom” as it was known then).
Unfortunately, in 2007 last year, the housing bubble burst and housing prices plunged. Many investors lost their money, including (yep you guessed it), those sub-prime borrowers. This means many of them cannot return their loans to the banks! So, indirectly, the banks made a huge loss. In response, banks reduced their lending activity, something which we call a “credit-crunch”, or started charging higher interest rates for their loans. This makes it more difficult for businesses/consumers to get the loan they require, placing a downward pressure on the economy.
Subsequently (won’t go into the details – in fact I’m still trying to comprehend it), this had a negative impact on the wider economy and as many important economies in the world (eg. Japan, EU, China etc.) have close economic links with the U.S. economy, there is a widespread fear that the “crisis” in the U.S. may adversely affect the global economy.
Someone once said “When the U.S. economy sneezes; the rest of the world catches a cold.” While we’ll not explore how accuracy of this statement in today’s world, I hope what I’ve written above can give a rough idea of what’s happening.
Please do feel free to comment/improve on what I’ve written above – after all I’ve only been exposed to Economics for less than half a year…
Cheerio =)
Jian wei
posted by sexys6c at
6:50 AM
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