Just like our fashion industry is affected by US trends, so also is our financial industry. Whether it is relevant or applicable is not material. If it affects US citizens then it should affect us since we are a major economy having all the ills of a developed economy.
In the medical field it is no longer fashionable to talk about malaria or TB or leprosy, but, instead, obesity and cosmetic surgery. So also in our financial system irrelevant issues are focussed upon and inconsequential matters occupy the centre-stage with the participants not knowing what they are talking about.
The sub-prime is the current fashion and even my milk-man, when queried the other day why he was late, answered that it was due to the sub-prime crisis.
The sub-prime (mortgage) crisis is an ongoing economic problem, manifesting itself through liquidity issues in the banking system owing to foreclosures which accelerated in the US in the last two years.
The background
The term sub-prime lending refers to the practice of making loans to borrowers who do not qualify for market interest rates due to various risk factors, such as income level, size of the down payment made, credit history, and employment status.
Sub-prime borrowing was a major contributor to an increase in home ownership rates and the demand for housing. The overall US homeownership rate increased from 64 per cent in 1994 (about where it was since 1980) to a peak in 2004 with an all-time high of nearly 70 per cent. This demand helped fuel housing price increases and consumer spending.
Between 1997 and 2006, American home prices increased by 124 per cent. Partly this is due to the encouragement for the consumption economy after the 9/11 disaster to boost activities based on consum ...