Subprime is the cause of USA Economy slow down. It is the very popular news among everyone and it is become very serious then expected. It caused more damage to all the industries especially Banking, Insurance and Automobile sectors. Subprime crisis caused big loss to the banks and now it is affecting the other industries like Auto Mobile companies (GM, Ford, etc.). In this blog I will write about what exactly is the Subprime crisis and why USA banks created such a big mistake in their era. Some experts comparing this disaster with the 1930 Economy slow down in the USA.
What is Subprime lending?
Subprime Mortgage Loans (or housing loans or junk loans) are very risky. But since profits are high where the risk is high, a lot of lenders get into this business to try and make a quick money.These loans are given to people who have inability to repay the loan and they don’t have stable income. For example , a person who is working on IT company earns Rs.40000 per month and he doesn’t have any other income or assets. When the bank gives him loan of some lakhs, the EMI for the month would be Rs.20000-Rs.30000. If he lose the job, there is no possibility for him to pay the EMI, he will just surrender the house to bank and go away. This is the one simple example how Subprime problem starts.
Who opt for Subprime lending?
Individuals who have experienced severe financial problems are usually labeled as higher risk and therefore have greater difficulty obtaining credit, especially for large purchases such as automobiles or real estate. These individuals may have had job loss, previous debt or marital problems, or unexpected medical issues, usually these events were unforeseen and cause a major setback in finances. As a result, late payments, charge-offs, repossessions and even foreclosures may result.
Due to these previous credit problems, these individuals may also be precluded from obtaining any type of loan for an automobile. To meet this demand, lenders have seen that a tiered pricing arrangement, one which allows these individuals to pay a higher interest rate, may allow loans which otherwise may not occur.
What caused 2001 recession?
Subprime problem is more severe then what we saw in the 2001 recession. The real fact is that, 2001 what happened is Dot Com Bubble followed by the recession. Since the invention of internet, there is dozens of new companies coming up with the Dot Com dreams. There is lot of hype around Dot Com is that any company can make the billions of dollars. So, people started investing more on the Dot Com companies and the prices of the share value is increased dramatically. The price of the stock market is over valued. A small company without any profit valued as a billion dollar company. Even they don’t have clear idea on how will they make profit.
To keep running the company, they are spending investors money and promising that they will make profit in future. After some period of time, investors realized that company is not making any profit and stared selling the shares. When selling shares is more than buying shares, the value of the share will be coming down. It caused sudden fall on the stock market and the companies tumble to survive. Dozens of small companies vanished and only few big companies like Yahoo, Amazon, ebay, etc. has managed to survive on the burst.
Buy : Recession Challenge : This book explains very well about the challenges faced by the recession. If you want to know more about the financial crisis that has engulfed the global economy, read this book.
So, whoever working on Dot Com companies lost their jobs immediately, when there is increase in the unemployment will decrease the country’s GDP growth. If there is two quarters continuous fall in the GDP, it is called as recession. This is what happened in the USA’s 2001 recession. What we are seeing as Subprime is different from the 2001 burst.
Another global recession in 2012 is in the cards…
Subprime Crisis and Banking Industry
Subprime crisis has ended history of many banks in the USA. As of now 22 banks closed because of Subprime crisis. It is started with the Lehman Brothers, a 138 year old company filed bankrupt. It is followed by Washington Mutual Funds. Like this 20 other small and medium size banks fallen easily. American International Group (AIG) survived by giving the $80 billion bail out money by the USA government. Another major collapse with Citi Bank which has written off $60 billion as the bad debts. CitiBank also rescued by the USA government using bail out plan. It is estimated that USA needs atleast $800 billion required to handle the Subprime crisis. It is not yet over and now the Automobile companies are struggling. You can read that in the next section.
Survival of Automobile Biggies
Now the turn is Automobile industry and it is affected more than any other industry in the USA. The major three companies in the USA, General Motors(GM), Ford and Chrysler needs help from the government to survive. The discussion is going on and the decision will be taken by the next week. The fall of automobile companies will be more, so it is expected that government will come to the rescue. i will write the another post on details of how automobile companies went into trouble.
The Subprime Crisis Explained In Simple Terms Part 1 – These bloopers are hilarious
Summary
I hope you have enjoyed reading this article. I have referred many sites to get the knowledge of Subprime lending and once I have read a book named “Dot Com” which helped me to understand the 2001 recession in better way. It is because of the USA governments mistake, the entire world is jolting on economy crisis. It is expected that this down turn will continue for the next 1-2 years minimum. Every company is now looking for the cost cutting measures and plan to spend efficiently. This is going to be good lesson for USA Banks and they need to learn from Indian banks. Of course we are doing pretty much better than other countries. Thanks for reading this article.
Please post your comments below and i am looking for the any suggestions about the article. Please subscribe to RSS Feeds.
Book Recommendations:
If you want to learn about global economy, currency fluctuations, recession, etc. there are great amount of books in the market written by the leading experts. Ir is always advisable to follow the complete book to understand the entire knowledge on the problem. Here I am listing down some of the suggestions to buy the good books on these topics:
- Recession Challeng
- Currency Wars: The Making of the Next Global Crisis
- The Return of Depression Economics and the Crisis of 2008
- The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means
In the above list, last two books are written by Paul Krugman and George Soros. Paul Krugman is nobel prize winning economist who can predict the forthcoming crisis. If you are reading the Business Line newspaper, you will have the chance to read his column. George Soros is one of the popular investor in the world like who can predict the future of market. Reading their books would give you lot of knowledge on the global economy.
If you have any thoughts on the above books, please post it in the comments section. Also if you have feel any other good books on the same subject, share with us.
September 2, 2009 at 10:39 am
It was a wonderful article. It helps to understand the concept in a simple and thorough way.
September 2, 2009 at 4:31 pm
Hi Shobhit,
Thank you for the comments.
Thanks,
Krishna
September 15, 2009 at 12:26 am
Salute to RBI banking policies, Which has strengthened our economy and to fight against the sub prime crisis.
September 15, 2009 at 7:16 pm
Hope they always will have good policy. But nowadays RBI also saluting the private banks. Letting them to charge more fees to the customers. Apart from that finance minister who is preparing the budget only for rich people. It all heading towards the collapse of India’s growth.
September 26, 2009 at 1:47 am
this is all lie men
September 30, 2009 at 11:50 pm
This is a wonderful article. i tried to know abt subprime crisis from diffrent sites but i found that the language of this article is simplest to understand.
Thanx
October 1, 2009 at 4:46 am
Hello Amit,
Thank you for the comments. Please subscribe to our articles here:
http://www.thinkplaninvest.com/subscribe/
Thanks,
Krishna
November 5, 2009 at 11:04 pm
it is good concept for saving money
December 29, 2009 at 6:58 am
H iKrishnas,
I have not seen such a simpler version of sub-prime crisis and recession. I am a professional banker though I enjoyed this article the most since this can reach even the freshers who would be future professionals.
Thanks and keep posting.
Rgs,
Guhan
January 5, 2010 at 6:36 am
good article. i understood a lot from this site. thank u very much sir.
February 7, 2010 at 6:22 am
it is good article and give good knowledge abot subprime crisis
March 29, 2010 at 1:17 pm
Good article
Thanks
May 24, 2010 at 4:33 am
The summary on subprime crisis is very lucid and crisp.
thank you very much
July 6, 2010 at 12:00 am
good article
August 16, 2010 at 8:49 pm
amazing, i feel comfortable and easy to understand which is written about subcrisis. amazing, language is too much simpler.
August 17, 2010 at 11:12 am
Nice article.
It is very useful for me, thank u.
August 18, 2010 at 1:39 am
Hello Readers,
Thank you for the comments.
Read the related articles:
http://www.thinkplaninvest.com/2010/08/what-is-sovereign-debt-problem/
http://www.thinkplaninvest.com/2010/06/euro-to-zero/
http://www.thinkplaninvest.com/2010/05/what-is-double-dip-recession/
Thanks,
Krishna
September 22, 2010 at 11:11 pm
Thank you very much for presenting all this in such a nice manner.It is really very helpful.It is brief (so that one can easily read from busy schedule) and awfully comprehensive! Please continue writing on contemporary issues like this. All d best….
Sankha
September 22, 2010 at 11:32 pm
I must also appreciate RBI for their policies to tackle the recent recession as well as the East Asian Crisis. It is now very clear that hasty financial liberalization policies (like opening up of capital account) are doing severe damages rather than doing good. the mistakes of the Western countries have heavy toll on the developing ones. the monetary and fiscal policies should be taken according to the domestic conditions of the Economy rather than on some superficial anticipated benefits that has been proposed via liberalization.One should not succumb to pressures like US is putting upon China that China’s exchange rate policies are responsible for the deficit of US.The fact is that the huge and continuous current account deficit of US is being financed by the developing countries by buying the treasury of US.Instead of taking policies to combat their deficits they are making China responsible for their deficit. This is so ridiculous.
September 27, 2010 at 12:19 pm
thankyou for this article, the way you explained the things is great especially people like me who are not having commerce background please keep on writing,
November 10, 2010 at 4:30 am
Superb Article man
November 14, 2010 at 12:41 am
first i should congrats you people who started this blog.
November 14, 2010 at 12:44 am
thank you
November 17, 2010 at 2:19 am
with the sudden scrupulous environment that begin with the Lehman failure to meet its obligation,the word economy forecast look quite gloomy for the western word economy
where by US try to shift its pain to other countries by printing dollars
on the other hand euro zone looks quite horrible where by baling out of countries become quite normal and these problem become quite normal where ECB has to write-off the bad debt of countries like Portugal Ireland Greece and spain in line.
IT’s interesting to know that ECB hold the maximum debt of these countries and if look at the history of these countries to repay there debt
i am not optimistic to say that this time also they will also need huge bailout. actually i will not consider my self wrong i i would conclude that european union was formed with a motive to bailout these very countries as only German economy look well shaped.
the biggest mistake which US is doing is that it is continuously take the resource of quantitative easing which is enough to make world economy paralyzed by way of dollar-carry trade.
japan also face deflationary pressure since from 1990 and it’s bad to compare it with its global peers neither there is any hope left now either from political aspect or from economical aspect yes but for sure japnese big entrepreneurs could turn their fortunes by way of mergers and acquisitions.
china and india looks very positive the way they handled their economy and especially the reserve bank of india deal with this entire world chaos it is highly commendable and plausible and deserve applause.
November 26, 2010 at 12:14 am
Brilliant article… It makes you understand the concept of subprime crisis in a simple and clear way.. The language tone used is absolutely suited to any person who reads it…
Its provided me an easier insight and knowledge of this topic. Thank you!
December 8, 2010 at 6:07 am
Thanks for the article. Very simple and easy 2 understand. But I want in more details….
January 13, 2011 at 10:56 pm
Really a very good knowledge about sub prime crisis.Thanks for such a knowledgeable article……..
January 18, 2011 at 4:52 am
nice 1 !!!!!!!!!!!!
January 24, 2011 at 10:19 am
it is very easily understandable article, thank u
January 26, 2011 at 11:35 am
thank you.
you made it a lot easier for me to understand the recession.
great help!!!
January 28, 2011 at 1:08 pm
It was wonderful article which helps us to clear understanding of sub prime crisis.
January 29, 2011 at 10:52 am
very knowledgable.. very good learning
January 31, 2011 at 1:28 pm
thanks for sharing ur knowledge it was of great help
February 1, 2011 at 11:35 pm
Very nice article.small,simple and superb
February 17, 2011 at 11:13 am
great job guys who involved in posting this blog…..phenomenal work…..keep doing….gained a lot….thank you
February 22, 2011 at 3:22 am
really nice article…got a clear cut xplanation of subprime crisis
February 23, 2011 at 9:26 am
great artical dude.. please give details of how automobile companies went into trouble.
March 14, 2011 at 8:17 am
First of all I will congratulate the auther for writing such a wonderful article. The sub-prime crisis is nicely described here. The sub- prime crisis can shortly be understood as,the problem of human greed where human beings become to much ambitous and greedy. They put their stocks heavily in the share market and then when they see that stocks cannot be regained understand that their venture has been too ambitious.
In the process they lose precious money. If this continues then they earn too little and goes into the traps of debt. This becomes a vicious cycle and investment becomes a matter of grave concern.
March 25, 2011 at 10:09 pm
Excellent job Krishna. Keep it up man. Lucidity of your articles is their USP.
April 17, 2011 at 7:29 am
Thanks…it helped me alot to understand wat actually is subprime crises
May 18, 2011 at 12:34 pm
a very composite n comprehensive article…thanks to the author.
July 5, 2011 at 10:09 am
It was reaaly awesme….. first tym i clearly understnd wht the sub prime crises exactly is…………thanks a lot
July 5, 2011 at 10:09 am
It was reaaly awesme….. first tym i clearly understnd wht the sub prime crises exactly is…………thanks a lot
July 5, 2011 at 5:44 pm
Thank you for the comments
-krishna
July 27, 2011 at 6:03 am
hi krish..
thanks for giving the article in such a simple language.i got to know more abt this crisis..hope u would write even more abt this in the upcoming articles..pls try to give an article about DEBT CRISIS which is now prevailing in USA..
July 31, 2011 at 11:11 pm
really good article. it gives clear understanding about sub prime crisis in a very easy language…Thank You so much…!!
August 1, 2011 at 3:14 am
Hi sumi ruhi,
Read about the debt crisis in USA:
http://www.thinkplaninvest.com/2011/07/what-is-us-debt-ceiling-problem/
Thanks,
Krishna
August 1, 2011 at 10:34 am
this is very good article to know about sub prime crisis
Thanks.
August 9, 2011 at 9:02 am
hey!! the article waS really good..but i kind off need more help!! because im workin on this topic in school…what do i do?
August 26, 2011 at 11:43 am
Really good one summarized view
August 27, 2011 at 5:39 pm
Hello deepika mahesh,
What help you need?
Thanks,
Krishna
September 5, 2011 at 10:33 pm
Thanks krishnas this article is really helpful to understand subprime lending, recession reasons, and why usa and other countries face sub prime crisis. Thanks again for this informative post.