Global financial markets were rocked last month following rising defaults affecting mortgage-backed securities. What does this mean for the world's money supply and confidence in Western financial institutions? Are we on the verge of a major upheaval in the world economy?
by Darris McNeely
On Sept. 11, 2001, Islamic terrorists attacked America, and overnight everything changed. The signs and warnings of such an attack were there the day before (9/10), but were ignored, misunderstood and glossed over by those charged with protecting the security of the nation. Had they been properly analyzed and acted upon, the tragedy could have been averted.
But it wasn't, and much has changed for America and the West since that fateful day. Now come signs of a looming financial crisis that could completely change the global economy and have a dramatic impact on America's role as the world's dominant economic power.
Subprime lending crisis
Last month the world's financial markets experienced a crisis caused by falling confidence in what is called the subprime lending market. Banks, brokerage houses and mortgage lenders in America and Europe were stung by the rising defaults on risky loans made to homebuyers of limited means on reckless terms.
Buyers took out loans on the gamble that housing prices would continue to rise. Lenders extended credit to them on a gamble that the buyers would not default on the loans. These adjustable loans, often with low initial interest rates that can rise sharply, were made to many who were unable to really afford owning a home at the inflated prices in many areas. These mortgages were then resold to other financial institutions that offered the potential for high returns to investors willing to take a high risk.
That risk was spread among many to the point that no one could really identify where the risk was. The result was fear in the markets, and the money that banks needed to do daily business began to dry up.
Many people who took these loans and are unable to pay will suffer the loss of housing, money and their credit rating. Many thousands who work in mortgage lending will lose their jobs as companies reorganize this part of their business. The Federal Reserve took steps to lower interest rates and to loosen the money supply. At the time of this writing, the dive has leveled off and markets seem to be returning to normal.
