The direct and most obvious cause of the financial crisis is the collapse of the real estate market. There are three main factors created a bubble in real estate market.
Firstly, starting from 2001, to help the economy out of stagnation, the U.S. Federal Reserve (Fed) has continued to lower interest rates, leading to the bank to lower interest rates for mortgages real estate. In mid 2000, the Fed's interest rate is above 6% but then interest rates were cut continuously, until mid 2003, only 1%.
Secondly, in terms of home ownership, the government's general policy at that time was to encourage and create conditions for poor people to borrow money easily to buy a home. This is done largely through two companies are government-sponsored Fannie Mae and Freddie Mac. The two companies will help to pump capital into the real estate market by buying loans of commercial banks, turn them into vouchers secured by mortgage loans (mortgage-backed securities - MBS), and then sold to Wall Street investors, especially investment banking giants like Bear Stearns and Merrill Lynch.
Thirdly, because of the transformation of loans into investment instruments, the credit markets to serve the real estate market is no longer the sole playground of the commercial bank or other lending company specializing in real estate mortgage anymore. It has become a new playing field for investors, is able to mobilize capital from anywhere, including foreign capital flows.
Because the formation, trading, insurance and MBS, is extremely complex, it is out of control of the government generally. Because of lack of control, the greed and adventure have become popular characteristics of investors. In addition, because the majority can sell loans to other companies that turn them into MBS, the commercial banks have become more risk in lending, despite the possibility borrower's repayment capacity.
For three reasons, the real estate market became very busy, there are many low-income people who have good credit or not, rushing to buy the house. Regardless of ability to repay the subprime group, loan for this group skyrocketed. Because of easy loans, housing demand is very high up, pull up the property prices continuously. This also leads to investment problems that people expect house prices will continue growth. As a result, consumers are willing to buy houses at high prices, regardless of actual value and the ability to repay because they think they will sell if necessary to repay the bank. Therefore, a bubble has formed in the real estate market.
In addition, because of differences in risks of all kinds of MBS (mortgage-backed securities), so the insurance companies and risk assessment, such as AIG, also jumped in to sell insurance for investors MBS (mortgage-backed securities). This incident has created new series and added other components to jump into the game, because this type of insurance sold in the real booming estate market are very profitable.
Worry about changes in inflation, Federal Reserve began increasing interest rates, forcing the banks to push interest rates for mortgages higher more; leading to the real estate market slowdown began in early 2006. High interest rate cause the intensity of borrowing loans to buy houses decreased . House prices began to slide as supply exceeded demand. People begin to lose the ability to repay beucase the new interest rates were adjusted quite high. As a result, they decided to leave home for the bank expropriation.
The more people unable to pay the bank every month results the value of the MBS was declining. Thus, the devaluation of MBS means that their properties lose value due to capital shortage. Besides, the insurance company MBS, such as AIG, also fall into the hell when they guarantee more bad loans. In addition, the commercial bank or mortgage company retains most of its loans also look at capital flows and their credit is exhausted because of loss rate repayment capacity of borrowers increasingly
In summary, because there are many tangled relationships between borrowers and lending components for direct and indirect, the decline in the real estate market has a direct effect on the financial markets in general. Degree of spread and severity of the problem is due to the buyers and sellers of financial instruments has pulled too many investment components, inside and outside the country, in the game in the rules of the playing field is still missing or unclear.
The impact of crisis on Vietnam economic is probably negligible. The direct effect is limited because Vietnam did not participate much in the world financial market participants and trading derivative securities. Direct investment (FDI) in Vietnam is probably not affected much by the crisis in the U.S. currency because the main investors in Vietnam are Japan, South Korea, Taiwan, etc. The influences of the U.S. recession on Vietnamese economic may be in the export sector. The United States accounts for more than 20% of total export turnover of Vietnam. Most of our products are exported to the U.S are apparel, footwear and seafood, so in short-term those export portfolios are influenced most.
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