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The Crisis of Credit Visualised

The 2008 financial crisis is about to celebrate its 3rd anniversary and we are nowhere clear from it.

News reports are appearing that US regulators are suing banks for billions for the crisis.

Wrote The Slate,

The lawsuits came through. Late in the day Friday, the Federal Housing Finance Agency sued Bank of America, Citigroup, JPMorgan Chase, and Barclays. The federal regulator also listed Nomura Holdings, HSBC Holdings and Credit Suisse Group as defendants, reports Bloomberg. The suit relates to losses on more than $41 billion in subprime mortgage securities that were sold to Fannie Mae and Freddie Mac.

Many of us may not understand how this crisis began and we are looking at signs that it could happen again, especially with rising property prices in Asia. Below are two set of videos I found that helps explain the crisis of credit.

There are lessons to learn here. Property prices, especially in Singapore, where it is always expected to rise and never fall, is facing a bubble.

I believe the bubble will burst once QE3 is approve. QE3, or quantitative easing by the US, will increase the quantity of USD in the market. This will result in drop in the value of USD and might come on par between the Singapore dollar or even lower.

If this happens, inflation will sky rocket as there will be too much money chasing limited supply of goods. MAS would have no choice but to raise interest rates to curb inflation.

If interest rates do not increase, there could be run on banks as more money is needed to buy for goods and it doesn’t make sense to keep the money in the bank as your saving value decrease day by day.

Interest rates going up means you have to pay more for your housing loans and if you can’t afford to make monthly payments, you default. Default means the banks own the house, not an ideal situation for the banks either. With more supply than demand, property prices will tank.

Why will defaults on loans increase? Very simple. With the depreciating dollar, Singapore exports will also be expensive. When it comes to exports, it is not just goods but services employed by US MNCs.

Retrenchment of white collar workers would be expected, in turn they can’t pay their loans and are forced to sell their property.

This is explained very well in the the two videos.

The intention isn’t to scare you but to help you make a better decision in whether you should buy that property today.


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