Background of the Global Financial Crisis; What is it all about?
It all began with the one and all American dream, that every American should have a home. Regardless of who you are and what you do, if you are an American, you should have something called a home. Real Estate business was in a boom, and financial agents thought that there wasn’t a better time to give away loans. The Household sector was given a boost with increased monetary supply by commercial financial companies, and people were given loans regardless of the credit rating they received. It was never expected that the boom in the Real Estate business would come to such an abrupt end, and the prices would reach all time low. The US economy being a capitalist driven economy didn’t bother to indulge itself in the policies pursued by the then prominent financial giants. Gradually these financial giants in this business started feeling the heat as “sub-prime” clients started defaulting in their repayment of loans. The properties which were mortgaged by the clients weren’t even covering the principal amount of the loan, leave alone the interest commitments. The credit offered to the people in indiscriminate fashion, achieving short term goals and ignoring warnings from leading economists about long term sustainability of the policy, backfired completely and companies like Lehmann Brothers, Merill Lynch, Freddie Mac and Fannie Mae’s “bad assets” reached magnanimous proportions. An acute credit shortage was experienced in the economy, and simultaneous negative effects started occurring. The credit crunch meant that borrowing interest rates shot up in the market, companies slowed down their investment policies, production declined, lay offs increased, consumption decreased and the whole economy followed the do ...