South Africa: The Ins-and-Outs of the global Economic Crisis

The causes and effects of the US mortgage crisis on world markets is often lost in financial jargon and economic terminology, with many South Africans left wondering whether they are being directly affected by it.

Put plainly, the economic woes in the Unites States began a few years back when banks and other financial institutions - not acting within the confines of good lending practices - extended home loans to almost every person walking through their doors.

No proper credit checks were done on prospective lenders and financial institutions continued lending in the face of a diminishing housing market in which the value of assets began dropping sharply.

Econometrix economist Russell Lamberti explained to BuaNews that when, for example, a bank has $500 million in housing mortgages on its balance sheets, but the value of houses has dropped by 20 percent, the bank can no longer extend as much credit as it did.

“If you have $500 million on your balance sheets as a bank, but the assets have lost 20 percent in value, it needs to be reflected in the books,” he said.

How much a bank lends needs to be proportionate to the value of its assets, Mr Lamberti explained.

With banks over extending credit and debt-burdened Americans struggling to repay their mortgages, the US market plummeted, requiring all major world banks to inject billions of dollars into world markets.

“These banks now either have to recapitalise or recall all their loans,” Mr Lamberti said.

Read full article: South Africa: The Ins-and-Outs of the global Economic Crisis

Source: South Africa: The Ins-and-Outs of the global Economic Crisis