Greed & Fear have been and would be the two indisputable factors that would drive the markets. Factors that led to this global meltdown are linked to subprime lending losses in US (3 trillion dollars and counting according to some estimates).
You might ask, what is “subprime lending”?
Subprime lending is a financial term that was popularized by the media during the “credit crunch” of 2007 and involves financial institutions lending to borrowers who do not meet prime underwriting guidelines.
Subprime borrowers are more likely not to pay the money back, such as those who have a history of not paying loans back, those with a recorded bankruptcy, or those with limited debt experience.
Well this throws up another jargon, “Credit Crunch“, or popularly known as “credit crisis”. There are tons of reading material available on subprime mortgages, credit crisis, global meltdown, financial system collapse, banks going bankrupt, etc, etc. For people like you and me the following video provides an easy to understand explanation of the entire fiasco :
The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.
The above video precisely portrayed the root cause identified in the G20 Summit on Financial Markets and the World Economy.
Root Causes of the Current Crisis
3. During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
4. Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.
We may argue, how does this affect us in India?
Our financial system is not insulated, Global financial meltdown does impact us. All these factors are affecting the growth rate of our economy which was growing at a rate of 9%.
We saw huge surge in stock markets mainly due Foreign Institutional Investors (FII) inflow. Post credit crisis, FIIs are pulling the money out from emerging markets, including India. Our stock markets have already declined over 70% from its peak in last one year.
Our banking system is affected by the liquidity crisis, businesses are facing extreme problem in financing their projects, or even, raising funds for working capital requirements.
With revenues drying up, cost cutting is the need of the hour. Abandoning new projects, putting existing projects on back burner. Employee are being laid-off.
The global financial meltdown is percolating downwards and affecting individuals like us. The impact on each one of us is clear and present.