Description of economic crisis and discussion of outcomes Essay

Description of economic crisis and discussion of outcomes - Essay Example The mortgages taken by banks were financially engineered to create securities and trading was allowed on the same. Eventually, corporations from all over the world took exposure in such credit assets. On the maturity of their tenure, most of the customers failed to repay their loans. This was bound to happen, because these sub-prime customers never had the financial capability to finance their obligations. The banks sold off the mortgages to make up the losses suffered due to the non repayment of the loans taken by the customers. However, contrary to the earlier business forecasts prices of real estates decreased considerably. This translated into banks obligations, it meant that the companies who had an exposure in those toxic assets suffered huge losses, being unable to recover their investments as most of the mortgages were being traded in the form of securitized investment vehicles and collaterised debt (Credit crisis: More sub-prime bad news, November 6, 2007) Subsequently, the baneful effect of these transactions spread all over the world. The domino effects hit most of the developed countries financially. Consequently, investors got panic stricken and started withdrawing their investments from equities and other risk bearing investments. It led to a crash in the major stock indices globally. The pronounced effects of the crisis became evident due to the tightening of credit flow in the economy. A lack of capital halted the production activities and dampened the buying attitude among consumers all over the world. The credit crisis had spiraled into an insolvable puzzle due to the imbalance caused in the basic demand supply equations. All this have gripped the minds of global citizens with fear and apprehension of a pandemonium in their lives. The government of almost all the countries is acting in unison to combat the fear of the citizens. The credit crisis has built fear