The current financial crisis Essay Example | Topics and Well Written Essays - 1750 words

The current financial crisis - Essay Example The banks had a liquidity issue in their hands making the given and receiving of loans very difficult as the fallout from the subprime lending bubble burst. (Magdoff and Bellamy). This paper discusses the subprime crisis of America in 2007 and the Asian financial crisis of 1997 - 1998, and explaining the possible causes of the crises. The subprime crisis happened in America in the year 2007 and involved a national banking emergency which resulted in the famous economic US economic recession of 2008 (Raymond). The American business community had involved itself extensively with mortgage-backed securities (MBS) and collateralized debt obligations (CDO) due to the high returns from the high interest rates on mortgages. When lower credit quality was onset, however, there was a massive default with the disruptions in the flow of credit to both the businesses and the consumers. The result was a marked severe global recession. Several reasons were put up to explain the cause of the crisis but the fallout is generally considered to be from the sudden rise in the rates of subprime lending. According to Pierre (233), the rates of mortgages were originally low, about 8%. However, when the rates suddenly hiked to about 20% in the year 2006, it became apparently very high for the institutions offering these mortgage services. This hiked lending lead to a lowered standard of lending and a rise in higher-risk products from mortgages. Consequently, the US households became highly indebted with a sharp rise in the ratio of the amount that each of these households would dispose to the amount of debt in mortgages (Robert, 126). As was observed in mid-2006, it became very difficult for borrowers in the US to refinance their loans following a deep decline in the US home prices (James, 198). Mortgage felony was observed to rise following a reset of adjustable-mortgage rates to higher