Eating is an agricultural act - Wendell Berry

Monday, August 20, 2007

sub-prime surprise

the monster which has been wrenching the economic markets over the last months. 'sub-prime'.

my simple 6 step explanation to the uninitiated.
1. people bought a lot of real estate in the US under variable interest rates.
2. the loans were made into financial instruments and sold many times down the chain until in reached the big banks.
3. when the interest rates moved northwards the EMIs followed.
4. the borrowers were in the high risk (i.e., low income) category, they foreclosed the loans/mortgages.
5. not only did the banks stop getting the monthly EMIs, the flood of housing in the market depressed the rates (more supply, less demand).
6. chaos reigns.

business line has this simple FAQ style explanation on this here.
here is more on wikipedia.

this fascinates me because it simplifies the understanding of economics and global financial institutions.
so much so, that i used this example to exemplify the pitfalls of a consumer economy in my sunday class.

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