The Economic Advisor

What is the Cause of the World Recession?

The origins of the recent recession can be found in the US and was due primarily to the collapse of the ‘sub-prime’ mortgage market. Banks leant borrowers money to buy homes even though they were deemed as a poor credit risk. When the introductory interest rates finished these borrowers struggled with their payments and consequently defaulted on their loans when the interest rates rose. The banks basically hooked in these people to make them believe they could cope with such a mortgage.

These same loans were then bundled into packages and sold on to other banks and as part of the wheeling and dealing of the financial system the effects of the defaults were apparent throughout the banking world. This was first noticed within the US but then overseas banks that had dealings with the US banks too became affected. As this spiralled out of control all banks were reluctant to lend to anyone in case they didn’t get their money back so the financial system began to grind to a halt.

At the similar time commodity prices began to rise rapidly too and were driven by the demand from the booming markets in China and India. The price of gas, food and other goods has soared in the recent year or so and the central banks have been very reluctant to cut interest rates because they are struggling with inflation. Also we must realise that banks are always trying to protect their profit margins thus pushing up the cost of borrowing.

The recession just does not affect home loans and mortgages. When banks are no longer lending and hoarding their money then there is no money in the whole financial system. This has a worrying knock-on effect as the lenders then pick and choose who then lend money too. So people who have a poor credit rating will struggle to find a bank to lend to them.

Companies suffer too and if they cannot get access to credit, there are unable to invest or employ new staff. If their customers or suppliers are unable to get credit, they may default on their payments, so companies start to fail and jobs are lost.

Andy has been writing articles for several years. Check out his latest website on cheap gym equipment which gives people help and advice to find the best deals for great brand gym equipment such as True fitness equipment.