Financial crisis world-wide
The last few weeks have been in economic and even ideological terms, highly dramatic. The collapse of the sub-prime mortgage market in the United States, a market that specializes in lending money for house purchases to high-risk clients, as a result of collapsing house prices sparked off problems that have swept around the world. The problem arose in the United States as interest rates rose from 1% to 5% and more. Low interest rates sucked all sorts of people into house purchases and encouraged a high volume of speculative building. Rising rates caused lower sales and rises in defaults. The market, and perhaps even the regulators, seems to have overlooked the fact that when interest rates are at 1%, they can only go up! This led to falling house prices and increased rate of default on repayments. High-risk institutions in the sub-prime market had sold some of the debt to other institutions (banks; investment banks) domestically and internationally and this interconnected debt is what has given rise to the problems. This debt was made up of packages of mortages and so it was difficult for the rating agencies to be sure of the risks. There are suggestions that the SEC was not as careful as it should be in investigating the developments. Banks and mortgage institutions are in trouble nearly everywhere as stock markets and even private depositors took fright. The irony of the situation is that the regulatory authorities in the United States, the US Federal Reserve and the SEC, presided over the financial services industry as it was creating this problem and now the Federal Reserve is presiding over the attempts to rescue the financial sector and hence save the US and world economy from a deep and highly disruptive recession. How did this worldwide situation come about? What are the regulatory issues and other implications?