StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

What you think of the subprime crisis and how it impacts todays economy - Essay Example

Cite this document
Summary
What is it? Why do these banks suffer? When a bank provides loan to its customer, it may be an individual or company, when fails to recover…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER94.3% of users find it useful
What you think of the subprime crisis and how it impacts todays economy
Read Text Preview

Extract of sample "What you think of the subprime crisis and how it impacts todays economy"

Gopal Pottabathni 5th April 2008 Impact of Subprime Crisis on Economy It has become a common thing for the people around the world when they hear about the downfall or foreclosure of the bank, companies, etc. What is it? Why do these banks suffer? When a bank provides loan to its customer, it may be an individual or company, when fails to recover its loan from the customer, it is burdened by the loan and its interest rates to the government and thus becomes a victim which gives rise to subprime crisis and its downfall and later foreclosure.

The subprime crisis started with the lenders in the United States providing home loans to the desired people who didn’t have the capacity to maintain the house. In obvious circumstances, the lenders mortgaged the loan security to other investors in various esoteric combinations. The adverse effects of the subprime crisis lead to hike in interest rates, which forces the Fed to raise rates to combat inflation, which has to be incurred by the common man. Economies of developing countries classified as emerging markets, are still seen by developed country fund managers as risky propositions.

So the flight to safety will see some funds pull out of developing countries. This could lead to a stock markets slide in these economies, loss of confidence and slowdown of the real economy. The other source of disruption is construction-led slowdown in the US. This could hit developing economies that export a lot to the US. The subprime crisis also places downward pressure on economic growth, because fewer or more expensive loans decrease investment by businesses and consumer spending, which drive the economy.

A separate but related dynamic is the downturn in the housing market, where a surplus inventory of homes has resulted in a significant decline in new home construction and housing prices in many areas. This also places downward pressure on growth. Crisis has caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as "stores of value". Most of the recent increases in global food prices have been the result of speculation and the collapse in the value of the US dollar which is now at Indian Rupees 38.

62 per dollar. This crisis has an immense effect on the national stock markets, where the fluctuations in the market prices and shares of the corporations do create an element of doubt in the stakeholders mind and thus leading to kiosk among them. The market value chips down and which tends the financial institutions to come forward and ask for their loans given by them to the corporations. If financial institutions fail to recover the amount, their reputation is at stake. Subprime crisis does not even spares financial institutions, insurance companies, government insurers, home owners, minorities, etc.

As mentioned above, financial institutions suffer significant losses as a result of mortgage payment defaults or mortgage asset devaluation. There is concern that some insurers are turning to arson as a way to escape from mortgages they cant or refuse to pay, which is suffered in huge amounts by the Insurance companies. The subprime crisis represents the first crisis of the age of mass securitization The implication is that we should return to the simpler days of good old-fashioned banking in which commercial banks originate loans to households and firms and hold them on their balance sheets, rather than slicing them, dicing them and selling them off.

In any case, turning back the clock would not be desirable because the constellation of financial innovations referred to as securitization has real benefits for the economy. Banks should be required to hold more capital. Capital adequacy standards should be related not just to the level of bank investments but the rate of growth of those investments, and not just to the value of the collateral pledged against bank loans but the rate of growth of the value of that collateral.The reactions to the subprime crisis have sent virtually all markets tumbling.

Subprime crisis is an ongoing economic problem manifesting itself through liquidity issues in the banking system owing to foreclosures and accelerating global financial crisis presently. The effect is seen clearly world wide with the stumbling stock markets, foreclosure of branches of corporate banks, etc. Subprime crisis needs to be controlled with the support of the respective National Reserve Banks by taking some stringent measures.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“What you think of the subprime crisis and how it impacts todays Essay”, n.d.)
What you think of the subprime crisis and how it impacts todays Essay. Retrieved from https://studentshare.org/miscellaneous/1545548-what-you-think-of-the-subprime-crisis-and-how-it-impacts-todays-economy
(What You Think of the Subprime Crisis and How It Impacts Todays Essay)
What You Think of the Subprime Crisis and How It Impacts Todays Essay. https://studentshare.org/miscellaneous/1545548-what-you-think-of-the-subprime-crisis-and-how-it-impacts-todays-economy.
“What You Think of the Subprime Crisis and How It Impacts Todays Essay”, n.d. https://studentshare.org/miscellaneous/1545548-what-you-think-of-the-subprime-crisis-and-how-it-impacts-todays-economy.
  • Cited: 0 times

CHECK THESE SAMPLES OF What you think of the subprime crisis and how it impacts todays economy

Subprime Crisis and Oil Prices

housing bubble and high default rates on the subprime and adjustable rate mortgages in 2005.... Wilson (2007) and Shostak (2007) said there are three types of speculative borrowing that helped accumulate debt, specifically in the subprime mortgage crisis: first is the "hedge borrower" who intends to pay from other investments; second is the "speculative borrower" who believes that they can have service interest on the loan and even continually roll over the principal into new investments; and third, the "Ponzi borrower" who relies on the appreciation of their assets' values to pay-off their debt or loan....
8 Pages (2000 words) Essay

Mortgage Discrimination in the African American Community

Once we have created a broad definition of discriminatory lending, we must seek to understand how the African American community can fall victim to such practices on a broad level through a culture of overt and inadvertent discrimination.... Just a quick glance at a few numbers: In 1993, approximately 100,000 subprime loans were originated.... In 2001, more than a million subprime loans were originated.... In 2008, more than 65 percent of subprime loans were refinances, not direct purchase (ACORN....
17 Pages (4250 words) Essay

Asias Slowdown and British Consumers

China seems to have a good idea, and one would think that this is going to be easy for them especially with the current economic status, but after evaluating the forecasts of the target growth rate with the current one, it requires more efforts (Pilkington 2014).... In the paper “Asia's Slowdown and British Consumers” the author focuses on slow down of China's growth for sustainability purposes....
8 Pages (2000 words) Essay

Political Debates: A Struggle for Dominance

I can't think of a more important time for us to talk about the future of the country.... And I think that the fundamentals of the economy have to be measured by whether or not the middle class is getting a fair shake.... Using segments of the first two Presidential debates of 2008 between John McCain and Barack Obama as an example, the analysis presented in the following paper "Political Debates: A Struggle for Dominance" will demonstrate how competition is verbally approached in the political realm....
34 Pages (8500 words) Essay

Market Risk Examination as one of the Various Preliminaries of Investment in Securities

Besides, I learned from the seminar that what credit risks are and how effectively they can be managed.... In general, it can be concluded that bank failure is difficult to attribute to poor market discipline or increased instability of an economy.... At each session of the seminar, I was enriched by new information and ideas which inspired me to think and generate more ideas on the topic.... The seminar on Bank Failure – evidence of what happens when credit risk management procedures fail was an informative and thought-provoking one for all participants....
10 Pages (2500 words) Research Paper

What Caused the Present Economic Recession

Every economy experiences the peaks and bottoms of a business cycle that brings about wide fluctuations in the various macroeconomic indicators.... The RBC (Real Business Cycle) theory remarkably explains the economic fluctuations and shows how the economic variables change while the economy moves along the crests and troughs of the Business Cycle.... During a recession an economy hits the rock bottom of the business cycle; all the major macroeconomic variables suffer from a decline....
11 Pages (2750 words) Case Study

The Reasons which Caused the Current Hard Economic Times

Reportedly, the recent G-20 summit held in London has mainly discussed the global economic crisis and the possible solutions because of its importance.... Moreover, the UK economy may be lessened by as much as 2.... The author of the following research paper "The Reasons which Caused the Current Hard Economic Times" claims that the current economic crisis has come at a totally unexpected period.... The current crisis is only a beginning....
8 Pages (2000 words) Research Paper

Five Most Important Ideas or Contributions that are Alive Today from the Fathers of Philosophers

nbsp; To some extent, certain related situations that have ruined credit standing due to a weakening economy direct people of the modern American society into a rather distressful approach at dealing with life.... Like how Renee Descartes managed to place ample significance on 'thinking' by stating through his Meditation on the First Philosophy: “I am.... I exist – that is certain, but for how long do I exist?... By investing into alternatives amid risks during recessions with the unpredictable trend, Americans show great consideration to a traditional attitude of thoughtfulness which manifest how much they find existence very essential that despite conflicts, they are always drawn to consult intellectual faculties to facilitate corporal existence....
7 Pages (1750 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us