Developing Economic Crisis:

For those of you in the US and other parts of the world who have been consistently keeping up with the recent changes in the economy one of the world’s super power - the United States of America, then you’re probably aware of the recent cuts in interest rates by the Federal Reserve Board. For those who have not been keeping up, this is a brief summary of what has been going on in our dear Yankee!!

The sub prime mortgage crisis which has been hitting the US started in 2006, but its effects were started being severely felt in July 2007. Sub prime lending is a practice where loans are given to individuals who have bad or poor credits and cannot qualify for the loans under "normal" loan agreements. In other words, these people have bad credits and there is a high risk in giving them loans and as such the interest rates for such loans are very high and very few companies are able to do that. There are a lot of companies in the US that specialize in sub-prime loans and these can be taken out for mortgages on houses, cars, etc.

What happened: People took out mortgages on houses years ago and hoping that the US economy would continue to grow or remain stable, agreed to pay the high interest rates on the sub-prime mortgages they took out.

Causal Effects: As a result of a lot of factors including a slowdown in US economy caused partly by the Iraqi/Afghanistan war, changes in the global economy - China exports so much and keeps its currency devalued, India is fast emerging on the scene, European economy is growing -, fluctuations in oil prices caused by unrests in Nigeria, the middle east and a host of other factors which all contributed to created a cataclysmic effect on the economy of the US that resulted in huge defaults by lenders.

Although foreclosures have been occurring in the sub-prime mortgage market for sometime, it was most noticeable in 2007 and climaxing in July when there were large foreclosures of properties (where the properties are retrieved by the lenders, and resold to recover the loans). Numerous companies declared bankruptcy and a greater slowdown in the US economy occurred, leading major economies around the world to begin to shore up the values of the dollar to prevent a major collapse. Not wanting to be a dooms day prophet, you probably realize what a major recession in the US economy would mean for the entire world…it’s unimaginable!! For several weeks, Wall Street (and the entire world) has been in a pensive mood regarding what the Feds would do to help increase the liquidity in the economy and shore up the value of the dollar in order to restore confidence in the dollar. Some had suggested that the US government should help the lenders with more flexible lower interest rate loans to help them repay their sub-prime mortgages loans. In my opinion as with most others that I have discussed with, this won’t be a sound strategy because it could further encourage more people to take out such high risk loans and default on the payment if they know they have a “big brother” who would comes come to their help.

Solution: The only solution seemed to cut interest rates in the US, allowing banks to lend money to people with adjustable interest rates. The overall effect should be more liquidity in the economy and maybe leading to growth. As everyone who has taken basic economics knows, more money in the economy has a high tendency to lead to inflation and recession, and this has been predicted by Alan Greenspan (former chairman of the Federal Reserve). It’s been less than two days that the interest rates were cut in the, and today the dollar was at its weakest against the dollar, and for the first time since 1976, the US dollar and the Canadian dollar were at par.

What this means is that for consumers coming to the US to shop; things would be extremely cheap while very expensive if you’re going to countries in Europe, Asia, etc. This is a very disturbing trend for the entire world since most economies are somehow dependent on the US economy with most of their trades done with the US dollar. Several weeks ago, the price of gold went up so much as a result of the rush of people to convert their liquidity to gold, since that is an object that has its own intrinsic value. The price of crude oil has also gone up.

Let’s all keep our fingers crossed, and pray that everything turns out well.