Study the housing market bubble the US is currently experiencing. What Essay

Study the housing market bubble the US is currently experiencing. What happened because of the bubble and what is the current state of the housing market and ho - Essay Example However, financial derivatives itself are considered as detrimental if their use is made in more superficial way. Banks, in order to recoup the lost liquidity drained into the subprime mortgage loans have securitized them against the payments and real estate properties offered as securities in those mortgage loans. The process of securitization works in double way. Banks rely on the cash flows generated through the repayment of these subprime mortgage loans to pay off their obligations on those securitized instruments issued by the financial institutions. The problem arises when the subprime borrowers started to default on their obligations hence creating a mismatching in the liquidity positions of the financial institutions. Since most of the financials institutions have already securitized their mortgage portfolio therefore, in order to avoid being defaulted on their payments to the bond holders of those securitized loans, they divert their normal cash resources to the payments to be made to those bond holders. Since the normal and routine liquid resources of the financial institutions go to the repayments of those bonds therefore they find themselves short of liquidity hence a credit crunch in the economy emerges as a result of this. The credit crunch caused by this housing bubble borrowers also leads to the crowding out effect also as more and more funds are being diverted in paying off the liabilities of the financial institutions therefore the availability of the credit to the private sector shrinks thus halting the progress of the economy since most of the companies rely on bank credit at least for their short term working capital needs as well as making long term investments through a combination of borrowings either through banking channels or secondary markets. With the lowering interest rates, the demand for the homes increased which ultimately raised the prices