Sub Prime Crisis in US: Emergence, Impact and Lessons
24 Pages Posted: 18 Nov 2008
Date Written: November 18, 2008
Abstract
The sub prime crisis in US is the result of excessive amounts of loans made to people who could not afford them and excessive amounts of money thrown into the mortgage arena by investors who were very eager for high return. The crisis represents the other side of a phase when a low rate of interest, rising home prices and mortgage securitization brought huge gains. A number of factors like legislations like Community Reinvestment Act, low rate of interest, mortgage brokers and lenders, rating agencies played their role in generating crisis. Three important dimensions of the sub prime saga relate to poor regulation of investment banks, relaxation in lending standards led by greed in a regime of unbridled competition and failure of the asset market to realize the dues from the defaulter. It once again brings home the fact that financial sector is distinctive in nature and can be exposed to unbridled and unregulated competition only at the cost of a complete peril.
Keywords: Mortgage, Housing bubble, Sub-prime Crisis, asset market failure
JEL Classification: E22, E32, E44, L58, G11, G12
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