Planet Finance Summary - Real Estate Market, Subprime Crisis Analysis

This report summarizes the key takeaways from the Planet Finance episode on the real estate market and the subprime crisis. The video highlights the role of financial globalization and its impact on the US economy. It discusses the historical context, including the Great Depression and the subsequen...Read More

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The given video highlights the role played by financial globalisation in the ascent of money.
However, more importantly it highlights the key issues associated with this are also
highlighted. The real estate boom and the sub-prime crisis may be associated with the Great
Depression of 1930 in US. At the time, the house ownership was quite low and during the
crisis, a host of mortgage owners could not pay the instalments. As a result, there was high
amount of unrest amongst the majority of people that were not home owners. The solution to
this problem was “The New Deal” where housing loans would be provided by various
financial institutions while the savings and deposits would be ensured by the government. At
the time there was racial discrimination in this idea which later was removed.
Another major boost to housing market was received during the Reagan administration when
the interests rates charged by mortgage providers were deregulated. This led to a booming
real estate market during the 1980’s. However, the supply of real estate especially condos
exceeded their demand which led to the savings and loan crisis. The total cost of this crisis at
the time is estimated to be about $ 150 billion. Meanwhile, US through IMF and World Bank
in the 1980’s had started pushing the property led reform model into various poor countries.
This worsened the financial situation for majority of these countries with the prime example
being Argentina where hyperinflation was observed during 1989.
Also, during the 1980’s and 1990’s there was ascent of China which entered into a
harmonious partnership with America. China for promoting its manufacturing exports to
countries like US wanted to keep its currency low for which it bought a huge amount of US
government bonds. US did not complain as it ensured that they did not have to pay a high
interest rate on the bonds. The net result of this was that there was flight of capital from
China to US as the consumption in US continued to grow. This capital flow eventually was
responsible for the high liquidity during the 2005-2006 which eventually led to the subprime
crisis. Going forward, the nations need to more cautious regarding the financial globalisation
owing to the negative implications.