The Path to the.....

'The Credit Crunch'... a term that brings a lot of apprehension both on a personal and business level.  The cut backs, the job losses, the stock market drop all negative memories yet to dissolve.  2007 -2008 was when the global economy was struck by the tidal wave, that was the recession.  But what was the reason behind it? Surely, with all the academics, and historical events, someone would have seen this coming? Obviously not.

According to Paul Mizen (2008), one of the key reasons for the economic disaster was ultimately down to the US of A.  In the beginning few years of the millennium the American housing market saw a Boom, and became the driving force of the economy.

 A combination of low interest rates and large inflows of foreign funds helped to crete easy credit conditions (BBC News, 2008).

This is where it became quite easy for people to take out mortgages, and as more and more of the population acquired mortgages, the demand for property increase, fuelling the increase in house prices. Mortgages lenders were asked to find more potential home buyers in turn for bonuses and other incentives. Why was this? The fundamental word is...Greed. Since it was a good time and property prices were soaring, the only aim of most mortgage firms was to give loans to as many potential customers as possible. This resulted in many consumers with low incomes and bad credit history able to acquire mortgages for houses that, realistically, they couldn't afford. And then...POP.....the bubble burst.


The initial driving force of the ever strengthening house market was put into reverse gear. A surplus of houses could only mean one thing, not enough demand, so prices began to fall.  

10.4% of total homeowners had zero or negative equity as of March 2008. (economy.com)

This then lead to banks selling the homes of the owners that could not afford the repayments, this further effected the house prices, for the worse. With house prices reducing, as well as the demand, this resulted in the banks loosing profitability etc. So how does an american housing market problem turn into a global economy?


This whole process is only relevant when the term 'Subprime loans' comes into play.


Many big fund investors saw subprime loans as an attractive investment opportunity and invested heavily into.  This resulted in the growth in this fresh new market and the development of CDOs. The selling and then re-selling of these CDOs didn't immediately take effect and the sheer confusion was not clear.  However, all this confusion eventually took effect, and resulted in banks recording record losses.  All down to the mortgages being considerably higher than the price of the house, and in turn the banks having to write this off as losses.  And?
Well, all the huge financial corporations had invested heavily into failing product, and to make matters worse, the confusion about the complexity of CDO ment that know one truly knew how much they were set to loose.


The link below shows just how devastating the process was to huge banking corporations.


http://news.bbc.co.uk/1/hi/sci/tech/7557526.stm


This began the domino affect which effected the majority of markets throughout the world, resulting in......The Global Recession.