Subprime Mortgage Crisis in the U.S.A

Subprime Mortgage Crisis in the U.S.A

Introduction

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant facts and figures relating to the subprime mortgage crisis in United States. In this paper, we will find different sources and analyze it with reference to the problem the source has, what points the source missed discussing and the reason for choosing the source. The crisis in U.S. subprime mortgage market is fully revealed in mid-2007, although the signals indicating the crisis began to appear much earlier. Monetary policy easing cycle after the recession in the U.S. economy, the Fed began cutting interest rates from 6.5 percent, in mid-2000 to 1 percent, in June 2003, so low interest rates encourage borrowing, which both banks and credit institutions can easily afford. Since 1997 property prices in the U.S. continues to grow. Credit institutions completely ignored the basic principles of finance, grant loans to people who have no regular source of income, which must have sooner or later lead to a crisis. As a result of increased demand, real estate prices began to rise even faster. Due to the increasing cost of credit (the Fed since mid-2003 to June 2006, raised rates by 4.25 points. Percent) and unjustified increase in property prices, artificially inflated the American bubble began to burst. Clearly decreased both demand and property prices (Soros, 2008).

Unfortunately, the credit institutions do not stop further development of its lending activities. More and more people began to have trouble repaying debt. Banks began to worry about real estate and offer them for sale, which due to the increased supply, decreased prices even more. In the period from early 2006 until mid-2007 real estate prices have dropped so much that the U.S. bubble finally burst, and the effects began to spread throughout the world (Gramlich, 2007).

Discussion & Analysis

In this section, we will analyze five individual articles and find out the problems that are either discussed or not discussed in each article.

In the article by Atlas (2007), the Fed's bailout of Bear Stearns was accused of the most worrisome developments of the subprime mortgage crisis. However, "bailout" term has been loath to use the term to describe the $30 billion transaction. "We did not bail out Bear Stearns," he said in April 2008, just weeks after Bear Stearns was rescued. He also said the bailout was necessary: "Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain" (Atlas, 2007).

It was also discussed in the article that, before the subprime mortgage bubble burst, some politicians and economists downplayed warnings that "exceptional pressures on the global economy" were forthcoming. Former Federal Reserve Chairman Greenspan was one of them. Today, however, there is little question that the U.S. economy is in trouble. Indeed, many financial experts predict that the worst is yet to come. An additional 1 million subprime borrowers will ...