Causes and Effects on Global Economy Research Paper

Causes and Effects on Global Economy - Research Paper Example The spate of events undermined the confidence of the investors impacting the global financial markets. With the tightening of the credit norms, there was a slowdown in the economies worldwide. It is argued that the government and Federal banks could have avoided this situation had they acted on time. Critics put the blame on the regulatory practices of the government and credit rating agencies. The latter failed to assess the risk associated with the mortgage-based financial products. As a result of the high ratings given to these securities, they were passed on to the investors easily. A hike in the interest rate led to widespread delinquency on the home loans and early foreclosures. This increased the supply of houses thereby putting a downward pressure on their prices. The rise in the rates of delinquencies due to the steep housing installments eroded the value of the mortgage-based securities. Surplus liquidity and low rates of interest created conditions of easy credit and contributed to a housing boom. There was a considerable increase in the homeownership rates in the country most of which was comprised of the subprime mortgage. During this time credit was extended to the borrowers with a bad credit history. The installments on these loans were low initially but with the rest of the interest rates, the monthly installments of the borrowers also increased substantially. Meanwhile, the steep rise in the house price and credit created a building boom. The rise in the rate of foreclosure together with the surplus unsold houses caused a steep fall in the housing prices in the US. Another reason that contributed to the rise in the home loan delinquency was the quality of credit. Enticed by earning higher transaction fees the lenders failed to check the creditworthiness of the borrower and in the process extended credit to the high-risk segment.