Business, Legal & Accounting Glossary
Financial meltdown means a total collapse of the finance sector represented by investment banks, commercial banks, and non-banking financial institutes. The finance sector or financial market includes money market, equities market, bond market, real estate market, spot or cash market, commodities market, derivatives market, OTC (over the counter) market, and foreign exchange market. As each of these markets is inter-related with the other, a fluctuation in one of them will have a significant impact on the entire finance sector.
A vicious circle underlying the financial crisis has made the recession more severe. Thoughtless financial innovation, consumption expenditure of almost 70% of GDP, falls in real estate prices, and huge debts have contributed to the formation of this vicious circle.
With real estate prices dropping sharply, concerns like Lehman Brothers and Bear Stearns who had invested heavily in this sector are neither being able to repay their debts nor borrow money. This is referred to as ‘domino effect’ wherein, the borrowers fail to repay their lenders. The Federal Bank has stepped in with bridge loans to cover this gap between debts and receipts.
An irreparable damage in investor’s confidence on Freddie Mac and Fannie Mae, US government-sponsored mortgage agents, would substantially reduce investments in mortgage securities. AIG, one of the leading insurance companies, received a rescue package of $85 billion from American treasury.
Mortgage lending rates have increased by almost 5%, and consumer’s credit by nearly 4.95%. Industrial and commercial loans have been increased to 15.5 % for a term of twelve months.
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This glossary post was last updated: 27th March, 2020 | 76 Views.