| The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption. While housing prices were increasing, consumers were saving less and both borrowing and spending more. This credit and house price explosion led to a building boom and eventually to a surplus of unsold homes, which caused U.S. housing prices to peak and begin declining in mid-2006. This major and unexpected decline in house prices means that many borrowers have zero or negative equity in their homes, meaning their homes were worth less than their mortgages. The crisis that originated in the final years of the 20th century became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system.Many USA. mortgages issued in recent years were made to subprime borrowers, defined as those with lesser ability to repay the loan based on various criteria. When USA house prices began to decline in 2006-07, mortgage delinquencies soared, and securities backed with subprime mortgages and widely held by financial firms, lost most of their value. It caused a large decline in the capital of many banks and the enterprises sponsored by USA government. The credit around the world became constrictive.The reasons proposed for this crisis are varied and complex. But they can be attributed to a number of pervasive factors in both housing and credit markets, which emerged over a number of years. Including the boom and bust in the housing market, the inability of homeowners because of speculation to pay for their mortgage, poor judgment by borrowers and lenders, speculation and overbuilding during the boom period, risky mortgage products, inaccurate credit ratings, financial institution debt levels and incentives, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, monetary policy, international trade imbalances of international trade, and government regulation .The result of the crisis was a tidal wave of damage to financial institutions and investors in the U.S.. From June 2007 to November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45 percent from its culmination in 2007 . House prices dropped 20% from peak in 2006, and the nominal value of futures markets also had a 30-35% potential drop.During 2007, the crisis caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as "stores of value". Financial speculation in commodity futures follow the collapse of the financial derivatives markets and contributed to the world food price crisis and oil price increases . Financial speculators seeking quick returns have removed trillions of dollars from equities and mortgage bonds, some of which has been invested into food and raw materials.Financial market impacts due to this crisis is very enormous. As at August 2008, financial firms around the globe have written down their holdings of subprime related securities by US$501 billion. The IMF estimates that financial institutions around the globe will eventually have to write off $1.5 trillion of their holdings of subprime MBSs. About $750 billion in such losses had been recognized as at November 2008. These losses have wiped out much of the capital of the world banking system. Banks headquartering in nations have signed the Basel Accords, and they must have so many cents of capital for every dollar of credit extended to consumers and businesses. Thus the massive reduction of bank capital just described as the reducing of the credit available to businesses and households.Indirect economic effects are as follows. The subprime crisis has had a number of adverse effects on the overall American economic situation. USA GDP was expected to contract at a 5.5% annual rate during Q4 2008. USA employers slashed 2.6 million jobs during 2008, this is the most since 1945. There have been significant job losses in the financial sector, with over 65,400 jobs lost in the USA as of September 2008. The unemployment rate climbed to 7.2% in December 2008, this is the highest level in 16 years.Declining house prices have reduced household wealth and impacted the home equity loans collaterally. The tightening of credit has caused a major decline in the sale of motor vehicles. Between October 2007 and October 2008, Ford sales dropped 33.8%, General Motors sales dropped 15.6%, and Toyota sales had declined 32.3%. There is an ongoing global automobile industry crisis, and it calls for some form of government intervention.Various actions have been taken since the crisis became apparent in August 2007. In September 2008, major instability in world financial markets increased awareness and attention to the crisis. Various agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis. At present, various government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantee, and direct spending. the Federal Reserve's response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy. Including lowered the target for the Federal funds rate and the discount rate, undertaken, along with other central banks, open market operations to ensure member banks remain liquid, used the Term Auction Facility(TAF) to provide short-term loans to banks.Economic stimulus had also be taken. On 13 February 2008, President Bush signed into law a $168 billion economic stimulus package, mainly taking the form of income tax rebate checks mailed directly to taxpayers. On 17 February 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009, an $800 billion stimulus package with a broad spectrum of spending and tax cuts.Regulators and legislators have contemplated taking action with respect to lending practices, bankruptcy protection, tax policies, affordable housing, credit counseling, education, and the licensing and qualifications of lenders. Regulations or guidelines can influence the transparency and reporting required of lenders and the types of loans they choose to issue. Congressional committees are also conducting hearings to help identify solutions and apply pressure to the various parties involved. The subprime mortgage crisis reveals more information about how to prevent and regulate Chinese financial risks. The first is to strengthen credit risk management, and improve risk prevention in securitization legal system. The second is to enhance the market-oriented supervision, meliorate legal system of financial institution bankruptcy. The third is to reinforce the awareness of regulatory costs, and improve financial supervision and coordination mechanisms. Finally, it is necessary to guard against international financial risks, and increase international cooperation in financial supervision. |
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