Finally, the fall of sub-prime market -1

As I discussed in previous blogs , due to the lowering of the interest rates and easing of loan formalities banks had disbursed immense loans to non-credit worthy folks. This extra special effort to increase the credit circle had enhanced their probability of taking a fall exponentially.

After 2004, fed started raising the interest rates again slowly. this was a measure to control inflation and to reduce the trade deficit. Trade deficit refers to the difference in the earning via exports and payments via imports. So if a country is exporting more than it imports then the trade deficit is negative and viceversa. Common sense tells us that it makes more sense to have a negative trade deficit as it allows a country to earn.

But if the interest rates are low, then it makes sense for people to borrow and buy goods. And if by chance the currency is strong ie. people can buy more for $1 then it makes even more sense to buy on credit. This in-turn puts pressure on economy.

With china refusing to float its currency and US interest rates at all time low in 2003-4, the consumption was at a ll time high and the national saving rate for US came down to 1%. We will speak more about the US saving rate later on but suffice it will to say that US citizens were spending more than they could afford. And to counter this situation, Fed was raising rates.
Whew.