Essay About Mortgage Lending And Relaxation Of Monetary Policy

State Of Us Economy
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Just as generals are often accused of fighting the last
war, the seeds of modern economic crises are sown by
well-intentioned efforts to prevent a repeat of past ones.
However, while the global �credit crunch’ may have its
origins in the relaxation of monetary policy following the
bursting of the dot com bubble and efforts to avert a US
recession post-9/11, its impact on the global economy
will be felt via the same transmission mechanisms that
have led to past contagion.
But, while a certain amount of scepticism is warranted
against those stating that �it’s different this time’, the
global economy’s evolution over the past decade — notably
the rise of China and India and the political and
economic maturation of many emerging markets — mean
that the identity of those most vulnerable, and the ways
in which they are exposed, has changed. This report,
which draws on BMI’s proprietary Sovereign, Country
Risk and Industry Ratings systems explains which states
and industries are most vulnerable, providing a vital
guide to corporate strategists, analysts and financiers
seeking to manage their vulnerabilities.
The Origins Of The Problem:
The Sub-Prime Crisis
Following several decades of research and multilateral
efforts to ensure good governance within emerging
markets (EM) to reduce economic volatility, it is no
small irony that the credit crisis originated in the US,
the heart of the global economy. Abundant liquidity
and a shareholder imperative on financial institutions
to boost returns at a time of low interest rates, triggered
a rise in mortgage lending to those with poor credit
histories (sub-prime).
The relaxation of lending criteria led to a rapid rise in
borrowing which was in turn facilitated by innovation
within the investment banking industry. Instead of
holding the debt to maturity, mortgage lenders sold it
on to other financial institutions, which mixed together
sub-prime and less risky debt in new products and resold
them — after receiving investment grade status from the
Credit Ratings agencies — to other institutions.
This securitisation of sub-prime debt was initially
viewed positively, as it spread the risk globally. However,
three core problems arose. First, the products were
often difficult to understand, leaving many who had
purchased investment grade debt unwittingly exposed
to a risky asset class. Second, as much of the debt was
held off balance sheets by banks, the level of exposure
of institutions was virtually impossible to calculate.
Third, the bursting of the US housing market bubble
left assumptions regarding default rates on sub-prime
loans looking overly-optimistic.
These