What came first, the recession or the credit-crunch? There appears to be some confusion about this but the fact is that the credit-crunch is happening because of the recession. The recession has produced a big increase in redundancies, not least among people with low credit rating, especially in America, who bought sub-prime mortgages and are now defaulting on them, and this accounts for the huge number of repossessions.
What are these sub-prime mortgages?
They are mortgages aimed at people who have low incomes and/or low credit rating, many of them were led to believe that they were buying a mortgage at an affordable rate of interest but they weren't told that the rate would rise after a year to a level they couldn't afford.
Sub-prime mortgages are a product of the need for banks to pay dividends to their shareholders, pay interest to their depositors and on borrowings from the wholesale money markets. To do all this banks must find new ways of making money and that's why they've come up with Junk Bonds, Derivatives, Hedge Funds and now the risky sub-prime mortgages.
Sub-prime mortgages have been around since the 1960s and were very profitable until now and this is why banks and other lenders have bought them by the million, hence the enormous losses.
So what is the credit-crunch? Because of the recession banks are reluctant to lend to would-be house buyers (may lose their jobs), to businesses (may go bust) and even other banks which could turn out to be insolvent, and that's what has produced the credit-crunch.
Vic Vanni will be expanding on all these issues at our first meeting of the year.
Community Central Hall,
Maryhill Road, Glasgow. 8.30 pm
What are these sub-prime mortgages?
They are mortgages aimed at people who have low incomes and/or low credit rating, many of them were led to believe that they were buying a mortgage at an affordable rate of interest but they weren't told that the rate would rise after a year to a level they couldn't afford.
Sub-prime mortgages are a product of the need for banks to pay dividends to their shareholders, pay interest to their depositors and on borrowings from the wholesale money markets. To do all this banks must find new ways of making money and that's why they've come up with Junk Bonds, Derivatives, Hedge Funds and now the risky sub-prime mortgages.
Sub-prime mortgages have been around since the 1960s and were very profitable until now and this is why banks and other lenders have bought them by the million, hence the enormous losses.
So what is the credit-crunch? Because of the recession banks are reluctant to lend to would-be house buyers (may lose their jobs), to businesses (may go bust) and even other banks which could turn out to be insolvent, and that's what has produced the credit-crunch.
Vic Vanni will be expanding on all these issues at our first meeting of the year.
Community Central Hall,
Maryhill Road, Glasgow. 8.30 pm
No comments:
Post a Comment