Long time no see...

Hi All,

it has been almost a week since my last post and i have used one reason or the other not to post and conveniently giving in to my lazy self. Finally i managed to get my hands to type this post though i am still pondering what am i going to post about today.

hmmm...oh i got it..i got it...the credit crisis..

you must have heard of it. it has been for the better part of the week and it has had far reaching ramifications though fortunately India hasn't been at the receiving end as much as other countries..this is how it all started...

Interests rates in the US have been cut on a quarterly basis for the past 3 yrs or so to stimulate growth. What low interests rates do is encourage people to borrow and spend, termed as consumer spending which has traditionally been the biggest driver of growth. Low rates also make it easier for enterprises to draw credit and start new businesses.

Buoyed by low interests rates and some favourable legislations on home ownerships, people started buying homes without considering whether they needed it or not(and more importantly whether they could afford it or not). This sudden surge in buying artificial rise of prices of houses and made other potential home buyers to sit up and take notice. A feeling of "now or never" pervaded in the minds of these people and forced them to extend loans( most of these loans were sub prime loans..i will get to this later) which they otherwise would have never taken. Consequently, many of them entered the property market at totally unrealistic prices hoping that the rising property prices will keep rising.

Sub prime loans are loans given to people with no or poor(!) credit history. This means that the banks,mortgage firms and other lending instituitions lent money to these people knowing fully well that these people are not solid on financial ground and probably will not repay back the money in full. I guess these guys were figuring out that even if the loan wasn't paid off, the property was in the bank's name and given the way at which property prices were sky rocketing it doesn't really matter whether the loan was paid or not.

Obviously these sub prime loans were not paid back to these lenders, as these people were never in the position to repay such huge installments in the first place. But the title deeds are still in the possesion of these lensers, so why worry u might ask.

At one point in time, the prices of houses crossed the threshold limit and finally some sense of sanity prevailed among the general public. People stopped buying and homes prices tumbled and it was "declared" that the housing bubble had burst. Unable to recover the loans and unable to sell the properties for which the loans were given, many companies have now gone under. With these companies going bankrupt, there has been something called a credit crunch. i.e. not many people out there either having money to lend or the lack of willingness to lend the money they have.

I can go on and on...but i think i am going to stop here and let u draw ur own inferences on how this has affected global economies...