Friday, August 17, 2007

The Story Of Uncle Sam - Part 6

The fast economic recovery, coupled with the rising commodity prices, quickly succumbed the whole world to great inflationary pressure.

With the Federal Reserve of U.S. taking the lead again, the global central bankers embarked on a rate increase measure to tame the overheated economies.

Whilst inflation flattened the consumers' purses, the massive upward rate adjustments planted dangerous mines in the mortgage market in the United States.

The increasing borrowing cost effectively cooled off the steamy bubbling house market - in a very painful way. The correction signal started to emerge at the beginning of 2006.

The superbull house market sent both lenders (financial institutions) and borrowers (house owners) to a frenzied chase for gains and personal satisfaction.

The house boom provided such a lucrative trade that aggressive mortgage financing started to mushroom, giving rise to booming subprime mortgage market which was generally very lax in lending in return for much higher gains at greater risks.

Big banks (HSBC, DBS, just to name two) and hedge funds found it so difficult to resist the lures of the highly profitable returns that they exposed excessively to the subprime mortgage loans. All would be fine if the house prices continued on an upward trend. But things did not work out that way - it was simply too bad that the house bubble was pricked and the house price started to fall. In short, it signalled a beginning to a nightmare for the United States.

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