This scenario portends dire consequences for an economy that till now relied on consumer spending for sustenance and growth. Astute analysts and financial strategists had started predicting since the first quarter of 2007 that US economy was on the verge of facing a severe credit crunch (Mishkin & Eakins, 2009). This doomed prophecy became a glaring reality by the end of the year 2007.
Earlier the US banks were more then willing to lend loans to corporate concerns because the banks were in a position to resell these loans to the more then willing investors in the credit market. However, since July 2007, the investors started exhibiting a marked aversion for investing in corporate buyout loans. Thus the US banks were left with massive corporate buyout loans that failed to attract the investors in the market. This shrinking of markets for the corporate buyout loans left the US banks with a precarious situation. Also the investors who had already invested in such loans found to their surprise that they were unable to dispose off these loans in the credit market for any amount that would have been reasonable or acceptable (Whalen, 2007). As per the Business Weeks September 3 issue, the banks in the US were left with a mindboggling backlog of deals worth $ 300 billion.
At the same time the promises to pay sold by the US companies to acquire short term loans by relying on offering mortgages as collateral also showed signs of stagnation. This dire situation was further complicated by the hedge funds run by financial institutions that mostly catered to wealthy investors and were most of the times devoid of any regulatory attachments and were secretive in their operations (Whalen, 2007). Theses huge hedge funds backed by reputed financial institutions ruled the roost in the US markets. Theses hedge funds had become habitual of relying on the practice of issuing the promises to pay since the last couple of years. The investors also showed a great predilection for such funds and preferably extended large loans to them. Such funds were predominantly invested in financing the mortgages purchases in the US that sold like hot cakes. . However, when it became evident to most of the investors that lent profusely to hedge funds, that most of the real estate owners in the US were not in a position to responsibly deal with their mortgage liabilities, the investors started shying away from the hedge funds on a mass scale. Consequently such funds were left with massive losses by the mid of 2007. All theses factors debilitatingly shook the investor's confidence in the US financial markets and economy and contributed liberally to the credit crunch that became more acute with the passage of time.
It is the housing and the real estate boom in the American economy that gave way to the concept of subprime mortgages in the American economy. Owing a house of one's own is an integral part of the American dream. From the investment point of view, the traditional investors always considered the