“Subprime crisis”
First of all, let us look at the background to the subprime crisis, and the factors which fuelled it. As noted by Ghosh (2007), a major factor was the rise in property prices in the USA over the past ten years; low borrowing and lending rates helped to boost housing demand. Ghosh states that the crisis began in early 2004: “the Federal Reserve . . began a cycle of interest rate hikes that raised . . interest rates seventeen times and paused only when . . borrowing cost touched 5.25%” (Ghosh 2007). Lungu (2007) states that investors “bought into the credit market of major global lenders (which) . . created a substantial amount of liquidity in the global economy” (Lungu 2007); this, in turn meant that banks could extend more credit to customers. Prior to this, borrowers had been required to show a good credit rating and financial stability before banks would lend; reduced liquidity led to caution on the part of the banks. Now however, as Lungu states, the banks became “willing to extend credit to less than stellar borrowers, albeit at a premium” (Lungu 2007). To reduce risk, premium rates were set higher than the normal or prime rate: hence the term, subprime lending. Prins (2007), however, argues that although subprime was significant, the overall lending problem was more complex. She notes, for instance, that although the banks‟ offering high interest rates to “less credit-worthy people” was a “contributor to the housing market downturn” (Prins 2007), it was the banks themselves who instigated the situation. Requiring higher payments from those with the least financial stability was, in itself, an unsound economic move. As Lungu notes, it was the security of large investors which allowed subprime facilities to be offered in the first place, and once mortgage default became widespread, these investors were at risk themselves. He asks, “who . . is securing the investors‟ investment . . who i