The subprime meltdown - Essay Example

Automated systems allowed people to go online, apply for a housing loan and simply wait for the cheque to come in. Wall Street greedily provided the money for these loans as investors rushed to pick up shares in hedge funds that were supposed to give a high level of return with a high level of risk. The loans that were given out often required no down payments and could also have needed nothing more than interest payments for a year or more before the principal payments would be added to the bill.

Effectively, what was considered a niche product only to be given out after careful scrutiny, became a mainstream product for banks and lending institutes (Browning, 2007). The subprime housing loan market was thus seen as virgin territory where banks needed to make inroads before the competition. They expected to get great returns but their investment risks were greatly underestimated. In fact, in some cases the risks appear to have been ignored while the search for short term profits and sales figures come out as the only important needs of the banks.

The situation has taken the American economy to a place where experts are calling it the “worst financial crisis since the Great Depression (Essen, 2008, Pg. 1)”. In some ways, the problems in the current crisis can also be due to the very structure and nature of the American market and the American business environment. The buyers and sellers on Wall Street seem to respond to short term gains and short term results much better than looking at how stable the business practices of a company really are.

This makes analysts such as Clendenning (2008) to say that American banks and other lending institutions with a ‘casino mentality’ while they were taking unnecessary risks. Even if the banks understood the risks involved, the lure of the rewards was simply too great for them to ignore. The crisis itself