I don’t think there is anyone who has not heard or felt the impact of current financial crisis. In some way or other it has impacted all of us. Some have lost job and some had a pay cut or bonus cut. But how many of us really understand as to what happened and what went wrong. Yes we have all read in the newspapers about the causes of the financial crisis. For most of us it would have been financial jargon that just went over the head. We in simple terms are trying to put entire chronology of events that triggered the crisis.

The current financial crisis has been labelled by many as the worst crisis since the Great depression of 1930’s with far reaching implications. It caused many of the big companies which otherwise looked invincible to break like a pack of cards, eroded consumer wealth to the tune of trillions of US dollar, saw contraction in GDP across the countries and broke the otherwise rock solid economies. So how did it all start. What were the first signs of the coming trouble.

Many economists believe that the first sign of the storm was the housing bubble in US in the financial year 2005-2006. This was followed soon by high default rates on subprime and adjustable rate mortgages (ARM). There was a boom in US

housing market in the period between 1997 and 2006 with the price increasing by more than 100%. Buying a home turned out to be an investment option for many. Also this period coincided with low interest rates. With excess of liquidity in the economy banks were coming out with all kind of schemes to attract borrowers. Borrowers were encouraged to take up loans in the belief that they will be able to refinance at better terms. This was all good as long as the interest rates were low. With the increase in interest rates and decline in housing prices in the period 2006-2007 refinancing became increasingly difficult. This resulted in defaults and foreclosures as the initial easy term expired, housing prices declined and ARM rates were set higher due to increase in interest rates.

Now let us understand the other part of the story easy credit. Considerable amount of foreign money flowed into the US from emerging economies of Asia and Middle East in the period preceding the crisis, making it possible for the Fed to keep the interest rates low in the US. Also with so much funds to be invested, investment banks came up with innovative financial products like mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which were linked to mortgage payments and housing prices. These new financial products allowed investors around the world to invest in the U.S. housing market. With the decline in housing prices investors who had invested in these mortgage linked products lost heavily. Also with falling home prices there was a significant increase in the amount of foreclosures as the value of home was less than the mortgage loan.

This is just a snapshot of what broadly happened. In the subsequent blogs we will understand each of these factors and gauge the magnitude of this crisis and how it has impacted the global economy.