In 2000, America faced a recession. Rather than letting the economy rebalance, the Federal Reserve slashed interest rates to artificially stimulate the economy.
Mortgage rates plummeted and home buying soared. Home renovations also became popular since people could qualify for cheap loans to upgrade their existing homes. Trading Spaces and similar shows became popular, and Home Depot posted record profits.
Demand pushed housing prices up until fewer people could afford mortgages on new McMansions.
In order to keep selling houses and mortgages, banks and lenders started approving subprime loans to riskier borrowers. Zero down payment, low introductory interest rates, interest only mortgage payments galore.
American lenders then turned around, diversified and sold the subprime loans to international investors repackaged with an artificially inflated safety rating, removing the risk from their own books.
When interest rates eventually rose, American homeowners began defaulting on their refinanced mortgages. The international investors who now held responsibility for the loans lost money on supposedly safe investments.
Now that confidence in the American economy is gone, international investors are selling American assets at a loss, driving down the value of US dollar. The Canadian dollar has remained unchanged so far.
Full story here
[...] the economy is tanking I’ve blogged before about the reasons behind the current financial crisis. To summarize, banks and other credit lenders were selling [...]
By: What the economy is tanking « Nicely Toasted on September 25, 2008
at 2:32 pm