The Subprime crisis

Dear readers,

First step

The origin of the subprime was cause by “a number of borrowers took out loans, in order to gain cash on buying house due to very good expectation of the house market price”. (W. Kolb, 2010, p558) However, the speculation was going in the wrong way due to a spill-over “ten years of ballooning properties prices in the united States les to excessive optimism by lenders and borrowers emphasis by the growth of investments made by business and governments” (W. Kolb, 2010, p106) and therefore increasing the mortgages lending, mortgage lending to contribute to rising houses price, “the average US house prices roses 86 percent between 1995 to 2006, and mortgages origination  rose by five times.” (W. Kolb, 2010, p558)   This created and result, a “property bubble deflated in 2006 to 2007, rising subprime defaults spurred a re-evaluation of the credit spread and credit market conditions that reflected boarder and more fundamental issues” (W. Kolb, 2010, p558). And therefore, people thought making money, were actually loosing cash and borrowers were not necessarily sure to get payback, and the all financial system was in panic, creating inside the bubble huge fears reinvestments and refunding risk, and a shortage of liquidity (increase of interest rates) (L. H. Janseng, K. Linsmann, Beulig N., 2008, p26)

The second step

After the property bubble, the banks were in difficulties, due to horrific future perspective. Therefore, the all financial system was in shock and the flow of investments decreased by a huge amount. This event will pinpoint the problems of reorganization and refunding the crisis due to higher risk on the interest rates and loosing money. (L. H. Janseng, K. Linsmann, Beulig N., 2008, p26). The reason of the financial system fears was amplified by the fact that all borrower are in petrifying by increasing the risk of loosing money “the all financial according to the rates of financial quota, such as AAA, AA, A, B etc were downgraded due to maximum risk of lost” (appendix).

In summary, the all investments created by firms and governments is going down and causing unemployment increasing and therefore the consumption decreasing.

The third step

The crisis becoming as a world mate due to decreasing of the balance of payment (imports increasing causing disequilibrium of the invisible balance of trade) of the riches countries and capital account in danger (financial system crash) create the subprime as terrible affect of the world economy.