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How to explain the subprimes crisis in USA?
Jan 23, 2008 9:07 AM
Answers · 2
It's pretty complicated... I'm not sure I can explain it. When interest rates are low, this increases the incentives for people looking to buying a home. Real estate (and other financial assets, such as stocks) prices increase in value as interest rates decline (imagine there are more buyers of houses, and more people willing to borrow to invest). Subprime mortgages are generally higher risk borrowers. These are people with bad credit. They have to pay higher interest rates. While real estate prices are going up, and the economy is ok, it is very profitable to lend to this group (they have high interest rates and are able to pay). When the economy gets weaker or interest rates, they are at a higher risk of defaulting on their debt. There was a significant amount of this type of lending in the US in the past several years due to low interest rates, and the real estate boom. The crisis comes partly from the extent of this lending and the financial derivatives based on these loans. Many banks were exposed to this risk. Now that the higher mortgages are starting to default, many banks have been forced to write down very heavy losses. In addition, the liquidity in many of these derivatives was very weak, so asset managers sometimes found themselves with an instrument that was declining in value and also illiquid. What this has to do with learning English, and why I decided to write this, I have no idea.
February 1, 2008
Basically, banks loan money to people who are in no position to repay the loan. Why do they do this? Because those people are desperate enough to pay an outrageous interest rate in order to get the loan. Through life's circumstances the people can't make their payments on the loan, so the bank takes the house, and doesn't get the money they were supposed to. As you can tell from the article, the effect this has on Wall Street is somewhat of a mystery beyond it 'spooking' investors. It's all just a money game for the people who are 'in the know' to get rich at everyone else's expense. Sorry if I used alot of American idioms in this response.
February 1, 2008
Language Skills
Chinese (Mandarin), English
Learning Language