Understanding the US Financial Crisis – From Sub Prime Loans to Derivatives and Toxic Waste

Houses in a RowIt’s ironic that the world’s largest economy can be brought to its knees. And it did this all by itself – driven by the inherent greed of its financial experts and bankers. The problem is that it’s bringing others down with it. That is what being the world’s largest superpower is all about. When you catch a cold others sneeze along with you.

The current economic crisis may have been triggered by the slumping housing market and the defaults of the sub prime loans. But that is not the whole story. The real devil behind it is the derivatives, or what is called toxic waste by some prominent long term, value investors. What exactly are these ‘toxic waste’ and how did they cause the collapse of US economy?

The story starts with the sub prime loans. Do you wonder why banks even give out these loans? Traditionally banks do not take a lot of risks and as anyone who’s has ever taken a loan from a bank knows, the bank will attempt to mitigate its risks by taking your house as collateral as well as checking your financial status out to make sure you are capable of paying the installments. If your financials are not sound, the bank will not give you a loan. But sub prime loans are just that – loans given to persons (in particular house buyers) whose financial backgrounds are not too credible and the chance of default are higher. Why would the banks take on such risks?
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On US Financial Crisis, USD700 Billion Last Ditch Rescue and Bailout, Derivatives and Toxic Waste

Fiat MoneyThe USA is in a financial crisis and nobody will deny it this time. Unlike back in 2007 when the government denies the recession and the crisis altogether, figuring that a couple of billion here and there would prop up the financial sector enough to survive the storm and none would be the wiser. Today the US government is debating pumping in a huge US$700 billion into the financial system as a final ditch bailout plan. That is a huge amount of money, and not the government’s money, but the people’s money. The US government is now desperate enough to cough up the retirement fund for the whole of US to plug the current leak – chief among the stars this round is none other than Freddie Mae and Freddie Mac. The idea of sinking all the citizens hard earned cash (and future) is terrifying to say the least.

The question is, would the US$700 billion plug the financial leak for good and allow the economy and public confidence to recover. Or will it be the final card that the US Fed has to play on the table. What is next? Or more importantly, will there be another Freddie Mac and Mae after (and if) this hole is plugged. For the US Fed may not have enough cash to bail out another round of sinking ships. The US economy is sinking, the question is just how fast and how far will it need to sink before resurfacing.
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