Subprime Series 1 of 5 - A brief overview

I've decided to blog on such things to educate my non finance/economics friends about the current financial/economic turmoil in the US which is extending its reach globally.

So 7 years ago, after the DOT.com crisis, 9/11 and the Enron accounting scandel (of the biggest company in US caught cheating $$) in US, the previous FED (US Central bank) head, Alan Greenspan decided to cut interest rates ( the 0. something yield you get in your Fix Deposits (FDs) ) from 5+% to 1% to boost the economy => cheaper rate of borrowing => have more money to consume/makan; more money to invest in business.

So typically, low interest rates have drastic difference to people who are buying BIG toys, like cars, boats and houses as these big toys require huge sum of $$ to finance. People usually wont have that amount of $$ with them, so they make loans from banks. So with lower i/r, they can borrow money more cheaply.

So on the US consumer side, everyones getting 1 of these: either for personal consumption or for invesment purpose ( property ) since i/r is so low.

GENERALLY on the banks' side, they are so busy making loans to people to earn the spread ( the higher i/r they charged on any loans vs FDs' i/r that they are paying to fix depositers ) The more loans they make, the more $$ they earn. Also, with the FED offering such a low i/r, these big boys can always borrow from their dai gor at a low cost to earn more $$ by making more loans!

USUALLY, banks would only lend to people with credit worth ( check your bank book, income statement, credit card bills; to check if you're a potential customer who can pay on time or just a lazy bugger spending on future $$ ) So, the PRIME market can be defined as people that are credit worthy. What about SUB-PRIME? Banks wouldnt usually lend to these people. However, given the relative easiness to obtain credit from FED and market optimisim, the US banks start to relax their rules and start making risky loans to these group of people as they run out of mainstream of customers from the prime market.

So, the world sub-prime came from risky lendings from banks. Im sure wiki offers other version of definition but I dun think will go too far away from my definition. Next week would be about the consequence on sub-prime lending. Stay tuned. =)