ABSTRACT
This chapter discusses the background of subprime crisis that led to the turbulences in the U. S. and other markets, and how they could bring the economy into a recession. This is unprecedented, and plays a key role in the global imbalances. Subsequently, the Fed adopted a more accommodative policy to forestall looming problems created by the bursting stock, high-tech, and telecommunications bubbles that came along with the recession in 2001. While huge amounts of money was being made by underwriting subprime loans, banks and mortgage companies all but abandoned their prime loan guidelines. When the US second-biggest home lender American Home Mortgage Investment Corp filed for bankruptcy in early August, the commercial chapter market felt the shockwaves. The economic losses arising from lower asset prices and falling income and spending exacerbate the financial sector's predicament. What was once called the subprime mortgage crisis has since transformed into an economy-wide credit chill, raising the probability of a recession.
