"THE HOUSING MARKET IN THE UNITED STATES AND BRITAIN AND SUB-PRIME MORTGAGES INC

LUDING THE ROLE OF SECURITASATION AND COLLATERALISED DEBT OBLIGATIONS "　HOW THEY C
ONTRIBUTED TO THE GLOBAL ECONOMIC CRISIS?　
By Joshua Chigwangwa
The effects of the cold war have seen a new dimension in global politics and the
unprecedented challenges in global co-operation and international trade leading
to the historic collapse of global financial powerhouses and financial systems.
(Wikipedia, 2009a) argues that the global economic crisis which began in 2007 h
as been linked to the rapid economic slump of major economies across the world.
It suggests the crisis emanated from the Housing markets in the USA and rapidly
spread to Great Britain and other parts of the World. The financial crisis of 20
07-2009 has been called by leading economists the worst financial crisis since t
he one related to the Great Depression of the 1930s. The collapse of the global
housing bubble, which peaked in the US in 2006, caused the values of securities
tied to housing prices to plummet thereafter damaging financial institutions aro
und the globe. Analysts argued and believed that the roots of the crisis could b
e traced directly to sub-prime lending by State entities, Fannie Mae and Freddie
Mac, the US biggest underwriters of home loans among low and moderate income ea
rners. Wikipedia also refers to Sub-prime lending as the credibility or quality
of particular borrowers, who have weakened credit histories and are at greater r
isk of loan default than prime borrowers.

Bernanke (2009) argues that in the past 10 to 15 years, the United States and so
me other industrialised countries have been recipients of a great deal of foreig
n injections. He states that net inflows had peaked in 2006 to 1,5% of GDP, an a
mount equal to about US $825 billion, which resulted in a housing boom fuelled b
y a rapid expansion of poorly managed mortgage lending schemes. Lenders expected
the house prices to continue to rise, thereby allowing borrowers to build up eq
uity in their homes, simultaneously availing credit for refinancing easily. Regu
lators did not do enough to prevent poor lending, in part because loans were mad
e by firms subject to little or no federal regulation. Banks and finance houses
were lending mortgages at 5 to 10 times the annual incomes of people. They used
aggressive terms and conditions without insisting on creditworthiness. Foreign i
nvestors who had invested in the real estate market in the US had to declare ban
kruptcy owing to massive losses. (Housing News, 2009)

Paul Krugman (2008) suggests, the housing bubble started when house prices start
ed rising indiscriminately, as homebuyers took on mortgages they could not affor
d, fuelled by low interest rates and a departure from traditional banking practi
ses which resulted in an upsurge in unsecured housing loans. Buyers were given l
oans requiring little or no down payment, and with no regard to creditworthiness
, or ability to repay should the economy reset. He further argues that lenders c
ame to believe that because of ever-rising home prices, borrowers in times of di
fficulty could either take out home equity loans to get more cash or just sell t
he home equity loan to pay off the mortgage. Robert J. Shiller (2008) also argue
s that the impact of the loose monetary policy was amplified by the large number
of adjustable-rates mortgages issued after 2000, particularly to subprime borro
wers. He suggests that these mortgages were more responsive than fixed-rate mort
gages, to cuts induced by the US Federal Reserve, triggering a boom. Borrowers h
ad high expectations of compensation from rapidly increasing house prices and we
re also thought to be able to permit them to refinance at even lower rates. 　

Paul Krugman (2008) further argues that Lenders were involved in speculative len
ding, as they did not hold on to loan portfolios, these were on-lent or sold on
to ignorant investors, as part of Securitization. Wikipedia defines Securitisati
on as financial innovations in which banks essentially sell mortgages to homebuy
ers and distribute risk to investors through mortgage backed securities (Wikiped
ia, 2009b). This meant that those issuing mortgages were no longer required to h
old them to maturity, by off-loading these to potential investors, allowing the
banks to replenish their funds and thus enabling them to issue more loans and ge
nerating transaction fees. It is argued that this may have fuelled the bubble as
it accelerated substantially prior to years leading to the crisis. Securitisati
on was pioneered by Fannie Mae, a State-sponsored lending agency and was traditi
onally confined to prime mortgages. Krugman suggests that financial innovation t
hat made securitisation of subprime mortgages possible was the collateralised de
bt obligation, or CDO. CDOs offered shares in the payment from a pool of AAA rat
ed mortgages, but saturated with dubious and unsecured mortgages. This fuelled l
arge scale financing of subprime lending from many institutional investors, such
as pension funds and local authorities, resulting in the overvaluation of housi
ng by more than 50% prior to the crunch. In reality, this meant that properties
purchased during the bubble, ended up with negative equity, triggering massive i
nvoluntary defaulting by borrowers and the collapse of the shadow banking system
.　

Paul Mason (2009) suggests that this burst caused a sudden rush of speculative c
apital into commodities and hedge funds.ie the shadow banking system. The subseq
uent bursting of the commodities bubble resulted in the acute starvation in vill
ages across the developing countries and political disorientation. Robert J. Shi
ller (2008) also argues that the rating agencies that pass judgement on securiti
zed mortgages persisted in giving AAA ratings to mortgage securities that ultima
tely were vulnerable because they too believed that there would be no bursting o
f the bubble. Shiller attributes the crisis to the failure of regulators to rein
in aggressive lending. He also argues that since the Depository Institutions De
regulatory and Monetary Control Act of 1980 effectively ended state usury laws,
thus making it possible for Lenders to reap super profits with subprime lending
by charging exorbitant interest rates to offset the costs of the inevitable defa
ults and foreclosures. 　

Thomas (2007) suggests that the UK was adversely affected and among major econom
ies hit hardest, following market corrections in the US housing crisis and its i
mpact on the global economy. A substantial number of UK companies had invested s
ubstantially in the US housing market and off-shore in Icelandic banks. The incr
ease in mortgage defaults at the subprime end of the US market meant institution
s that bought up large packages of these debts were forced to close or bail-out
exposed funds. The Times-Online (2008), reports that the endemic fraud in the UK
housing market also proliferated. This rampant practice led the Financial Servi
ces Authority to ban at least two mortgage brokers for submitting false applicat
ions to lenders. This followed over 200 complaints of mortgage fraud allegations
by Lenders to the Financial Services Authority. 　

Green S. (2008) the HSBC Group Chairman issued a statement that the UK economy w
as experiencing the worst economic downturn in well over half a century. He argu
es that it marked the first crisis era of globalised securitisation and also mar
ked the first just-in-time global economy as the impact of the financial crisis
fed rapidly straight into the performance of the real economy. He attributes the
cause of the crisis to the global financial imbalances that rose from the accel
erating global shift towards emerging markets which had created a macro-economic
triangle consisting of major consumer markets. Green argues that huge global sa
vings were invested in US dollars, which kept rates low and cheap. This cheap mo
ney fuelled consumer boom and rising house prices, characterised by increased bo
rrowing by banks and consumers, fuelling asset price bubbles in housing markets.
The complexity of financial instruments had peaked beyond the capacity of exper
ienced bankers leading to sloppy risk assessments. Finally, Green also suggests
that it was the result of excessive and unchecked gearing, which resulted in ove
r-gearing and hence dependence on wholesale funding. The eventual collapse resul
ted in banks crowded with assets they could neither sell nor fund, forcing huge
losses on housing markets. 　

Fulcher (2009) argued that the bankruptcy of rock solid US financial Institution
s such as Bear Stearns, Merrill Lynch and Lehman Brothers, Mortgage Finance corp
orations like Fannie Mae and Freddie Mac and Global Insurance giants such as AIG
, signalled the collapse of the global finance systems. The crisis spread rapidl
y causing global financial panic. Banks became reluctant to lend to each other,
sending liquidity shock waves through the whole economy. This hoarding of capita
l caused the financial system to freeze. In the UK, private sector financed capi
tal projects came to a halt, causing despondency and spiralling unemployment. Th
e Government was forced to rescue most of the projects as they are linked to the
successful hosting of the 2012 London Olympics.　The extent of the impact of this
crisis on the global economies meant that unprecedented and extraordinary respon
ses were involuntarily required to find lasting solutions to the challenges. The
US government was forced to bail out insurance giant AIG following the collapse
of Lehman Brothers. The UK experienced the shock waves following the collapse o
f Northern Rock, forcing the bail out from Treasury to avert the collapse of the
financial system. According to Sam Flemming (Daily mail 2009), the Bank of Engl
and pumped £200bn of fresh cash into financial markets and pegged rates at just 0,
5% to prop up the economy. (The scale of this crisis unearthed serious flaws in
the management and control of financial sectors in economies around the globe. T
he financial monitoring mechanisms failed to flush out the problem at its infanc
y stages, rendering them irrelevant and in need of major overhaul. The risk mana
gement and assessment mechanisms, including stress tests which needed reforming
to address the challenges emanating from adverse outcome. Adair Turner (Mail Onl
ine, 2009) Chairman of the UK Financial Services Authority suggested that banks
that are too big to fail may need stricter capital requirements than smaller riv
als and was also broadly in favour of the EU proposals to tighten financial supe
rvision across the continent.　

The overview of the global financial crisis has led Analysts, Experts and govern
ments introspecting on the broad concept of global capitalism, as a leading phil
osophy in driving International trade as well as global financial reforms. Fulch
er (2009) suggests that the capitalist world economy’s failures have led some to s
uggest that the capitalist system may be in danger of collapsing. He however, ar
gues that the history of capitalism is littered with episodes of financial crise
s and economic depressions. He suggests that the complex global environment will
always characterise capitalism and will continue to do so. He also suggests tha
t global reforms require an engagement with capitalism because of its global dom
inance. China’s entry to the capitalist world economy, with its huge reserves of c
heap labour and substitutes, has transformed global financial trade and embolden
ed the dominance of capitalism. Mason (2009) suggests that the challenges of fin
ding a better model always confront us during periods of recession and financial
crises. 　

Policy makers need to draw important lessons from this crisis and take bold meas
ures to reform the global financial systems, adopt effective intelligence models
and monitoring mechanisms. The need to reign in laws and sound operational glob
al co-operation to ensure compliance is as vital as dealing with a crisis ounce
it has kicked off. The ripple effects of a global financial crisis affect across
nations and require global interaction and solutions for it to be effective. Th
e initiatives taken by the G20 Nations to find lasting solutions to the crisis a
re commendable. (Guardian Online News 2009) US President Barrack Obama, in his s
peech on financial regulation, recommended a raft of measures aimed at address t
he challenges of the global financial crisis. He announced the setting up of the
Consumer Protection Agency to act as a consumer scrutiny and strengthening of f
inancial monitoring mechanisms. (G-20.org On-line News 2009) The G-20 communiqué f
urther details the G-20 Framework designed to manage the transition from crisis
response to stronger, more sustainable and balanced growth for global financial
systems with close co-operation with the IMF, World Bank and key agencies such a
s the Financial Services Board. The G-20 also viewed as critical, the need to ha
ve co-operation from both developing and developed countries in adopting common
approaches to tackling the crisis as well as positively reviewing capacity build
ing mechanisms to support the efforts of developing countries.　
Bibliography
Brummer A. (2009) The Crunch. How greed and incompetence sparked the credit cris
is: London, Random House Business Books.
Fulcher, J. (2009) Capitalism: A Very Short Introduction: Oxford: University Pre
ss.Krugman, P. (2008) The Return of depression Economics and the crisis of 2008:
London: Penguin Books.
Shiller, R.J. (2008) The Subprime Solution. How Today’s Global Financial Crisis Ha
ppened, and What to Do about it: Oxford, UK: Princeton University Press.
Mason, P. (2009) Meltdown: The end of the age of greed. London: Verso.　
External links and further reading　
Ben S. Bernanke (2009) Chairman’s speech at the Morehouse College, Atlanta, Georgi
a.14 April. Available at: http://www.federalreserve.gov/newsevents/speech/bernan
ke20090414a.htm. Accessed on 14/11/2009.
Financial Times (2007) Equity income hit by fallout from US housing crisis. Avai
lable at: http://www.ft.com/cms/s/2/c7baea48-57e2-11dc-8c65-0000779fd2ac.html Ac
cessed on 21/11/2009.
Housing News Live (2009) Housing News [Online] Housing Market Crush in US. Avail
able at: http://www.housingnewslive.com/housing-market crush-in-us.php. Accessed
on 2009/11/12.
HSBC Annual Review (2008) Group Chairman’s Statement. Available at: http://www.200
8.annualreview.hsbc.com/chairman_statement/index.html Accessed on 21/11/2009.
The Times Online (2008) UK housing market close to collapse. Available at: http:
//business.timesonline.co.uk/tol/business/industry_sectors/construction_and_prop
erty/article3406268.ece Accessed on 21/11/2009.
Wikipedia, the free encyclopaedia (2009a) Financial crisis of 2007-2009. Availab
le at: http://en.wikipedia.org/wiki/Financial_crisis_of_2007_&_2009. Accessed on
2009-11-14
Wikipedia, the free encyclopaedia (2009b) Financial crisis of 2007-2009. Availab
le at: http://en.wikipedia.org/wiki/Financial_crisis_of_2007_&_2009. Accessed on
2009/11/14.
Wikipedia, the free encyclopaedia (2009c) Financial crisis of 2007-2009. Availab
le at: http://en.wikipedia.org/wiki/Financial_crisis_of_2007_&_2009. Accessed on
2009/11/14. h
http://www.dailymail.co.uk/money/article-1194171/FSA-head-Adair-Turner-says-bigg
est-banks-face-tougher-regulation.html Accessed on 23/11/2009
http://www.guardian.co.uk/business/2009/sep/14/obama-speech-regulation-wall-stre
et Accessed on 23/11/2009
http://www.g20.org/Documents/2009_communique_standrews.pdf Accessed on 24/11/200
9.