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How did the financial crisis in the US started?First was the dotcom bubble burst that lead to a bear market forced the US Central Bank to reduce interest rates to a historical low of 1% to curb recession. That help eased inflation and infact have reinflated the economy. However, cheap money caused another problem, properties were snapped up by investors using this easily available cheap money. When price of properties flew off the roof, investors were able to afford even bigger properties with easy credit.
This is when investment banks started to come up with brilliant idea by bundling risky mortgages portfolios into smaller tradable bonds for other banks and investors. Products such as REITs (Real estate investment trust) are created and traded just like another equity in the stock market. Warren Buffet once described that the financial markets are getting very complicated with too many derivatives and it is hard to determine where the money flows.
The problem comes when those investors who are not credit worthy start to default their loan payments. House prices tumbled because of this. Investment Banks and brokerages that had borrowed money to boost the impact of those investments locally and overseas panicked to raise capital. Some, like Merrill Lynch, were forced to sell. Others, like Freddie and Fannie and Lehman Brothers, weren't so lucky.
The effects in Malaysia and Singapore:1. The subprime mortgage problem is not really evident yet in South East Asia. Countries like Malaysia and Singapore did not really offer cheap and easily available mortgages to investors. Indirectly, maybe...
2. Price of properties are still high, especially near city. Only a slight decrease in price of properties.
3. A slowdown in sales of properties.
4. It has a little effect on rising inflation. The increasing price of commodities has been the main factor for rising inflation. The fear of inflation and recession have caused
everyone to me more cautious in investments and spending. Shopping complexes selling high end products seemed to be quite quiet in the past few weekends.5. Caused fear and panic in the stock market. Investors were selling financial related stocks.
6. Investors who invest in ailing US companies are panicking. Some now wondering whether their investments are going to completely vanish.
Will banks in Malaysia and Singapore share the same fate like the ones in the west? Situation in still under control. There is still no alarm raised like in the US. But for sure with big banks from the BIG Brother are now having serious problems, the world economy is definitely going into recession. Recently price of commodities have started to deline, even the price of Gold has started to decline which investors normally see it a a safe haven.
Now this is where the problem comes, Slowing economy (recession) may caused few problems like unemployment, paycuts, company liquidation etc that would lead to borrowers not able to service their loans, be it mortgages, credit cards, business loans, car loans etc. which eventually cause the financial industry to fall. Unless the goverment take measures to foresee and overcome this fact, we may see and gone long recession in Malaysia and Singapore as what we are seeing now is just a catalyst for recession, the crisis has not even started yet...
N.I.N.E.
