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International Business today - Essay Example

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The world is todayundergoing a serious economic crisis which is characterized by the collapse of financial institutions especially in the U.S.A, increasing levels of unemployment, fall in stock prices, reduction in trade volume and scaling down of businesses…
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Download file to see previous pages Employers and even senior management staff have lost their jobs. There is less credit available in the market today and many businesses are suffering. The world is experiencing a serious economic recession (Petrov, 2008).
The origin of the crisis is complex. Several forces have interacted and resulted in this situation. While the exact causes of the economic crisis may be debatable, most economic experts such as Jeffrey Stoffer are of the opinion that the most significant cause is the collapse of housing bubble in the United States. What happened is that the prices of the houses were far above the expected returns on the houses at the time of purchase .The problem has spread from the United States of America to the rest of the world. This is an opinion that has come to be accepted by most players in the world economy (Pinyo, 2008).
In the United States, there was high investment in real estate. Many individuals in the United States bought homes. Banks encouraged individuals to buy homes. Some of these people could not afford homes so mortgages were offered even to those who were likely to default from payment. Those who already owned homes saw the value of their homes rise and rise. They tapped into the equity and purchased many consumer goods.
Mortgage system was uprooted from commercial banks and transplanted into investment houses. Shares of the investment banks sold to investor in the stock market. Investors, both domestic and international, made money off the interest paid by the original borrowers. Banks encouraged more and more people to buy homes and credit credentials were not properly scrutinized. Some banks even gave out loans to those who could not afford to acquire these assets. The individuals who bought homes used them as collateral to acquire further credit.
Since the houses were overpriced, stock prices became higher and higher. This increase in prices led to further investment as investor confidence grew. Financial models projected stability in the future and the real estate business was booming.
This however was not to last very long. The interest rates charged on the mortgages increased.
As the interested rates mortgages shifted upwards, most of the mortgagees could not afford to pay, they therefore defaulted. This was to mark the beginning of the serious problems to come. Banks were not able to foresee what was to come and did not change. Even though many individuals defaulted from payment, many banks continued to bundle mortgages which were eventually sold to investors.
The banks simply took back the homes and put them in the market to be resold to other individuals. Financial statements from banks indicated that they were doing well and stocks continued to sore. Housing prices jumped and increased rapidly and steadily.
With time some borrowers lost their jobs and an increasing number defaulted from payment. As a consequence housing prices went down and many the bank loans became bad. The banks therefore sought to get rid of the loans by dumping them on the market. Fortunately or unfortunately the stockholders found out about the bad loans ...Download file to see next pagesRead More
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