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Question:

Discuss and provide an example answering three questions regarding subprime mortgage. With an example explain possible causes of financial crisis. Explain how financial crisis affected businesses in your own country and other countries.
 
 

Answer:

Introduction:

The world changed after the month of September of the year 2008. This all began as the slump in the country of United States and has now become the global crisis. All the rich as well as the poor countries became its target. This subprime mortgage crisis along with the crumple of the global financial markets led to the recession for the world economy.

The country of Bangladesh is not so globalised but its exports depend upon the foreign trade. But its exports of the readymade garments, shrimps, and leather is heavily the demand of the western countries. Therefore, when the world experienced the recession, the unemployment rose, there was a decline in the income of the average consumers of the US and this led to a very negative impact of the export potentials.

This report aims at discussing the causes of the subprime mortgage crisis and its impact on the world and on the country of Australia.

 

Causes of the subprime mortgage crisis:

It was being said that the reason behind the subprime mortgage crisis was the financial literacy. The banks were the ones that were handing out the loans along with the rating agencies. These rating agencies were working so recklessly that they filed to figure out that there were a pile of the subprime liar loans that had a rating of triple A. the mortgage brokers such as the Countrywide Financial were the ones that encouraged the wanted to be home owners to exaggerate their earnings. The media encouraged the people to buy the homes by saying that the times were different and this held good even when they were hugely in debt and had no money whatsoever to repay that debt.

The banks and the lenders trusted the distribution channels that had belonged to the different roof and this took place through the mortgage brokers and the correspondents. They encouraged the people that were working for them to take as much loans as they could even if they were unable to repay the same. They did not consider the fact of the quality standards loans so as to ensure whether they would be able to be repaid or not. They just though that the loans were being sliced down and sold in bulk, so they give the same whose credit rating was negative.

The mortgage meltdown began when the United States housing bubble busted and it all began during the year 2001 and reached its peak in the year 2005. The housing bubble is the economic bubble that took occurred in the local and the global estate markets. It is defined as the rapid increase in the valuation of the real property until there were some unsustainable levels that reached in relation to the incomes and the other such indicators of affordability. These rapid increases were followed by the fall in the prices of the houses and resulted in the mortgage debt that was higher than the price of the property.

 

Effect of subprime mortgage crisis on Bangladesh:

The following is the table for the value of Export of Bangladesh by Major Commodities during 2004-2011:

Commod- ity 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11* a) Primary Goods

Raw Jute 80 148 149 165 148 196 268

Tea 16 12 7 15 12 6 2

Frozen Food 390 459 515 534 455 445 471

Agricultural Product 41 105 88 120 122 189 186

Other Primary Goods 26 49 75 153 133 53 53

Total Primary Goods 553 773 832 988 870 884 980 b) Manufacturing Goods

Jute goods 246 361 321 318 264 540 569

Leather 211 257 266 284 177 226 210

Naphtha, furnace oil 37 88 84 185 142 301 196

Readymade garments 3538 4084 4658 5167 5919 6013 5962

Knitwear 2148 3817 4554 5533 6429 6483 6605

Chemical Product 121 206 215 216 280 103 68

Shoe 68 95 136 170 187 204 222

Handicraft 4 4 8 5 6 4 3

Engineering products 42 111 237 220 189 311 222

Other mfg. products 663 730 867 1025 1096 1527 1170

Total mfg. goods 7050 9753 11346 13123 14695 15713 15227

Grand total 7603 10526 12178 14111 15565 16597 16207

Annual Change 16.10 21.63 15.69 15.87 10.31 6.63 40.30

 

After the collapse of the subprime mortgage crisis of the country of United States, many of the countries of the world got into deep depression. The country of Bangladesh whose economy was least dependent upon the economies of the other countries was less vulnerable to the risks since it was already taking the steps so as to shield itself from the adverse effects of the other economies.

About 90% of the exports of Bangladesh is dependent upon United States and other such developed countries. The adverse effect of the recession had a negative effect on the growth of the export of the country. The country did try not to get affected by the recession since it held its head high during the first 6 months by not allowing the figure of exports of being dropped. But soon the country too started showing the effects and this impacted the exports. Though United States witnessed a serious meltdown, the currency started falling but the Bangladeshi Taka still remained fairly stable when compared with the US $. As the result, the exports became less competitive but the imports became cheaper. The exports of many of the items were turned down but the price of the essential commodities and the raw materials also declined in the domestic market.

Conclusion:

The main cause of the subprime mortgage crisis were the fall in the prices of the houses in the United States. This got coupled with the poor lending practices by the credit rating agencies and the financial institutions. This further led to the restrained economic growth of the country and led many of the people to lose their jobs.

 

References:

business.cch.com, (2015). The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown. 

Eldis.org, (2015). Protifolon: Impact of global financial crisis on the economy of Bangladesh - Eldis. 

Olen, H. (2013). What caused the subprime mortgage crisis? Not our math skills. [Online] the Guardian. 

Robertson, C. (2015). What Caused the Mortgage Crisis.

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