Credit Crissis

The fluidity bubble The unprecedented flow of cheap money feel for a home flooded the Wests economies. Trade surpluses were recycled in the early part of the decade. This stimulated the search for yield and, in turn, the mispricing of risk as investor s imagined the high returns they were offered were safer than they proved. Search for yield With arouse rates low and money sloshing around the system, investors sought start increasingly risky assets for a higher return. Demand squeezed prices so little premium was paid for extra risk. When sub-prime mortgage borrowers started defaulting, the trade rediscovered risk with devastating consequences. Sub-prime lending With interest rates low and liquidity in plentiful supply, lenders threw caution to the wind, lending billions for high margins to mountain who found they could not afford repayments when rates rose. Often seen as the cause of the crisis, but in fact the most distinct symptom of a 10-year debt binge. Leverage Cheap money caused the world to go on a leverage spree. Individuals borrowed to invest in home or buy goods; investors used cheap debt to invest in higher- amenable assets, or borrowed against existing investments; bank lending outstripped customer deposits and activities were kept off balance sheet.

The shortage of credit as the debt is unwound threatens to pass on the economy to a halt. Originate and distribute The craze for higher yielding investments allowed banks to parcel up loans through mortgage securitisation, packaging of unified debt and other means for sale to investors. This was meant to disperse risk, but when self-assertion collapsed banks were left with billions of pounds of loans they had not offloaded. No one knew where the debt was, causing that market seizure. Alan Greenspan One of Mr Greenspans predecessors, William McChesney Martin, said his job was to to take away the punch bowl just as the party gets termination. Alans legacy was less happy; the... If you want to get a full essay, order it on our website: Ordercustompaper.com

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