Global Financial Crisis

The key question confronting the economy now is the backwash effect of the American or Global Financial Crisis. The current financial turnmoil is rooted to the subprime crisis.

Two kinds of loans are given by the American banks to their people.Prime loans and Subprime loans. Prime loans are given to persons who have thecapability to pay back the loan in time. Subprime loans are those loans that are provided even if the person is not capable to pay back the entire amount. Duing the boom years of the housing sector people took the subprime loans to buy houses. The banks provide huge amount as subprime loans with the eye that, if they didnt pay back the amount, then they can confiscate the flats and sell it at a higher profit. The banks gave the credits with little or no downpayment and without creditr checks.

When the banks took over these flats a situation arose where there were no buyers for these flats. Therefore these became nin performing assets with the banks. Banks ans financial instituitons often repackaged these debts with other high risk debts and sold them to worls wide investors creating financial instruments alled CDOs oe collateralised debt obligations. The serious subprime mortgage crisis began in June 2007 when teo Bear Stearns Hedge funds collapsed.