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Sub Prime Crisis

A primer on the ‘Sub-prime’ crisis Anamika Mukherjee Deputy Director- Research & Journal, Institute of Cost and Works Accountants of India, ICWAI & Debabrata Datta1 Professor, Institute of Management Technology, Nagpur

Introduction Financial uncertainty was brewing in the US for the last few years but it was only the disclosure of HSBC of loss from its operations resulting from its exposure in US mortgage market in March 2007 that led to a series of cataclysmic events, now known as sub-prime crisis and Wall Street melt-down. The mayhem started as a primarily mortgage crisis, originating from huge exposures of over leveraged financial entities to the real estate sector. It quickly spread to all other segments of the US economy and also in no time this crisis engulfed the money and capital markets of various countries. In what follows we make an attempt to first delineate the origins of the upheaval in the US financial sector and then show how this crisis has been incubated in the scenario of global macroeconomic imbalances and robust growth of the last few years. Emergence of the crisis The seeds of the crisis were sown when USA adopted the policy of credit-led demand generation to maintain the tempo of growth without cyclical fluctuations. US Presidents often entreated the US consumers to increase their consumption so that the growth juggernaut of US economy could roll on. Alan Greenspan, previous Federal Reserve Governor advocated a policy of easy liquidity as a prescription to support consumption boom so that the US recession that followed
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Corresponding author. IMT city Office, 603, Khullar Apartments, Byramjee Town, Nagpur -440013, Email: ddatta@imtnag.ac.in, Tel. 098300 58991

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the bursting of dotcom bubble and 9/11 terrorist attack could be tackled. An important flank of this credit –led growth agenda was the policy of boosting housing loans. Two government sponsored enterprises (GSE), Fannie Mae (1938) and Freddie Mac (1970), created for the...