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US Subprime crisis

Kazuyoshi Abe in a China Daily commentary was straight to the point in identifying the negative effects of the subprime crisis on money and securities markets around the world. However, the full effect of the crisis is not yet clear and may take some time before it is known. The uncertainty will affect the markets and more volatility is expected. AT Bloomberg. Com, Daniel Taub reports a gloomy picture for the construction sector in 2008. Among the statistics included in the report, home sales will drop 12%, prices of homes will continue to drop at 4. 5 points, and one million mortgage loans are expected to default.

In 2007, about 300,000 mortgage loans defaulted. Bank and brokerage losses related to the subprime crisis are estimated at US$80 billion for the year 2008. The report also says that anxiety on the strength of financial institutions will remain until the problem is identified, calculated and dealt with accordingly. Because of the subprime problem and other factors the, the US economy is forecast to face a recession this year. Evans-Pritchard of the Telegraph (2008) reported that Morgan Stanley has already issued a full recession alert on the United States economy.

Housing starts are estimated at less than a million for 2008, one of the lowest levels since 1959. Having one of the largest annual trade deficits in the world, a US economic slowdown will adversely affect the world economy, including the East Asian nations. The Asian Development Bank (December 2007) issued its economic forecast for China, Taiwan, Hong Kong, South Korea and the member countries of the Association of Southeast Asian Nations. It predicted slower growth in the region for several reasons. One is the worsening global crunch on credit due to the subprime problem.

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The other two are higher oil and commodity prices and abrupt changes in the exchange rate. In the forecast, the ADB said East Asian countries have not been severely affected by the subprime problem. However signs of financial vulnerability continuous to threaten the region. Among the Southeast Asian Nations, the Philippines was least affected by the Asian financial crisis. It is the opinion of the Philippine Central Bank that monetary and fiscal measures set up before and after the Asian Financial crisis will help the Philippines weather external shocks resulting from the subprime crisis (Inquirer, November 2007).

The CB cited acceptable growth rates, improved levels of international reserves and the correct fiscal policies will help the Philippine economy face the financial volatility the world market. In the Latin American region, the same air of confidence exists. The Brazilian-American Chamber of Commerce (2007) reported that among the private companies surveyed many believed that Brazil will survive external financial shocks due to strong fundamentals. Among the factors cited were high levels of international reserve and a surplus in current accounts.

There were, however, reports that foreign banks have started to limit cross-border loans as a result of the subprime crisis. The survey stressed there was unanimity among the private companies that the Brazilian economy can withstand external shocks. The US Federal Reserve Bank has implemented measures to alleviate the effects of the crisis on its monetary system. The Economist (August, 2007) reported that the US Federal Reserve Bank temporarily stemmed panic by flooding the financial markets with short-term funds. One of the problems is gauging the effect of the crisis on the world economy.

The negative effects of the US subprime crisis are spread around the world but financial contagion is not yet likely. However, the effects of the continuing crisis, continuously felt around the world, will spread nervousness. Aversion to risks in the capital markets will likewise remain increasing the risk of contagion. Pockets of pessimism exist elsewhere, however. What we see today is only the “tip of the iceberg. ” Benson (2008) said years of lax credit appraisal policies have resulted in the accumulation of doubtful loans. He said that 50% of US mortgage loans were approved on the basis of declared incomes.

No subsequent asset or credit verification was conducted. Today, these same borrowers are having problems paying amortizations and interest rates are expected to increase further. He estimated that bad loans of this type amounts to over a trillion US dollars. The US Federal Reserve Bank continuous to contain nervousness in the financial market while volatility exists and is expected to remain this year. The situation is not expected to change until such time that the magnitude of the adverse effects of the subprime problem is known. Many counties in different regions carry a sense of confidence in their economies.

They believe that the impact of the crisis will be contained in the US and Europe. Primarily due to the institution of fiscal and monetary reforms based on the lessons of the Asian financial crisis (ESCAP 2007). Lim (2007) believes that the financial weaknesses in the ASEAN region that existed 10 years ago have been properly addressed by now. However, he warns that there is no guarantee a second Asian financial crisis will never again occur. In order to protect ASEAN, he proposed the establishment of an Asian currency that will insulate the region from fluctuations in international currency demand and supply levels.

Uncertainties on the magnitude of the damages wrought by the subprime problem prevent concrete assessment of how countries in the world can protect themselves from ensuing external shocks. Asian economies remain optimistic and the possibility of a second financial crisis is not mentioned in their forecasts. One thing is certain, however, that the US economy will experience a recession in 2008. If the subprime problem persists, the prolonged period of uncertainty and volatility will contribute to further slowdown the US economy.

As the largest importer of world production, an ailing US economy will adversely affect the exports of East Asian countries. These countries have expressed confidence in absorbing external shocks due to its good international reserve position resulting from positive international trade balances. A prolonged recession in the US, partly due to the subprime problem, will therefore erode the basis of the air of confidence of the East Asian economies. Until everything is clear and the volatility settles down, a second Asian crisis is still possible but unlikely as of the present time.

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