From the podcast, I have come to learn and appreciate several things about the world Economy as it has been for the last few years. For instance, I have discovered that by April 2008, the world economy was not badly off. The global pool of money at that time was about 70 to 80 trillion, US dollars which was in form of fixed income securities. This kind of money is far much more than the money spent in the world each year. It is very crucial that the money is kept safe as it supports the world’s economic development.
I have also learned that the economic recession that the world is experiencing today started when the world investment managers decided to invest the money in the world economic pool, with the aim of increasing it. Even though they wanted to invest this money, they were not armed with appropriate investment strategies. They contemplated on putting the money in a low risk investment with minimal interest rates and came up with residential mortgages as the most appropriate form of investment. However, there emerged a chain of brokers between the world’s economic pool and the common man. As a result, the interest rates of the mortgages went up.
On the other hand, the pressure to sell more mortgages by the brokers was rising, making them less strict on the securities. They started asking for a ‘stated income verified asset’ as the form of security. This was followed by the ‘no income verified asset’, then came the ‘no income no asset’. This is where a mortgage would be sold to you without substantiating if you had any money or assets. These ways of securing their loans were very unsafe as they could lead to fraudulent transactions as well as defaults in cases of death. The banks did not mind defaulters to a great extent as they could own the houses which were more valuable than what they got from the loans. From the banks’ estimates, they were doing fine as the rate of foreclosure was projected to be at about three percent. Little did they know that a good number of their clients were giving them the wrong data. In reality, the rate of foreclosure was higher than estimated. Moreover, the banks gave loans recklessly. They loaned money to people without verifying their assets, unwary of the fact that some were even jobless. Several mortgages were sold to poor people who could not afford to pay back. In the process, majority of people lost their houses while others kept them but had difficulties in repaying them. Even though the mortgage relief plan substantially reduced the interest rates of some of those who were having difficulties in repaying their loans, others had accumulated very huge debts and have since stopped repaying, awaiting foreclosure. This irresponsible partnership between the banks and the clients greatly contributed to the global economic crises. This whole process had a negative impact on all the stakeholders involved.
In conclusion, it is clear that the factors mentioned above led to an enormous crisis which saw the world economic pool loose a huge sum of its money, amounting to about 3 trillion US dollars. As a matter of fact, were it not for the aid given by other governments, the entire world financial system could have collapsed. Consequently, investors have lost faith in investing their money in the World Economic pool and thus there is little money for lending. This is the main reason why it has become very hard to borrow money from banks, the more reason why we are trapped in an economic recession. Indeed, the global investment managers should learn to invest in reasonable, secure and low-interest rate dealings. They should learn from their past mistakes and avoid repeating the same in future. Governments should also regulate the number of brokers in the credit sector. Moreover, consumers should avoid getting into financial dealings blindly. Instead, they should seek professional help from financial consultants before embarking on any tentative financial undertaking.