Subprime Crisis

Subprime Crisis is an on going economic problem,primarily in USA.This crisis began with the bursting of US housing bubble and high subprime lending rates in late 2006.
In US,the banks give loans at a higher rate than prime rates, to the high risk borrowers with lower income and less credit history.this type of lending is called sub prime lending.This sub prime lending can be in the form of house loans, car loans or credit cards.sub prime enabled lower income borrowers to buy houses and spend more money.People started buying houses,cars and other luxury goods on loans.Due to this, the prices of houses in US increased by leaps and bounds.People started looking at real estate as a good investing option and invested money in it borrowed on loan.We all are aware of gready nature of man.
BUt in lkate 2006,this bubble burst.Their was a huge decline in real estate prices ,as much as, 50% in some regions.Moreover, the rate of unemployment also increase in US(thanks in India and China).People realised that they had spend more than they actually had.Now, this group of high risk borrowers found themselves unable to return loans.They declared themselves bankrupt.A large number of US household properties were subjected to some sort of foreclosure action.As much as $1.3 trillion were lend by banks as subprime mortgages.Now,since the prices of real estate declined,so banks had to suffer huge losses.As much as $300 billion loss was reported by various financial institutions till april,2008.
The widespread credit risk and its unclear effect on financial institutions caused lenders to reduce the lending activities and thus they raised the interest rates,which caused the shortage of liquid money in the system.This is called credit crunch.Corporations found it difficult to fund themselves.
There started a decrease in consumption by people in US.They were spending less; which led to the decrease in demand of goods.Emerging economies like India and China,who were exporting goods and providing services to people in US also suffered a setback,as demand decreased.There started financial crisis in Us,whole economy got a hit.Even other economies suffered a setback.
Finally,the US Federal bank and Us government had to intervine.US Federal bank decreased interest rates and funded funded member banks to ensure that they have access money to keep liquidity in the system. President Bush signed an economic stimulus package of$168 billion,mainly in form of income tax rebates,to help stimulate economic growth.All these measures are showing its effect and US economy is slowly recovering from sub prime crisis.