It’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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