How the current financial crisis developed?
>> Cheap money led to low interest rates, which encouraged sub-prime mortgages and consumer debt.
>> Sub-prime loans were packaged with lower-risk “normal” mortgages into mortgage-backed securities.
>> Such securities became highly desirable in investment portfolios
>> But market uncertainty has led to a loss of confidence in the value of such securities.
>> A plunge in their value has cascaded through other financial instruments like derivatives.
>> Financial institutions which insure such securities – moniline insurers – have also been affected.
>> The potential ripple effect of monoline insurers defaulting is particularly great, since they insure all bonds, not just sub-primes.
>> The ensuing credit crunch affects businesses and households – the “real economy”
TST, Mar 19 2008’s review
