Stock markets appear to be enjoying a resurgence and there is a view that the worldwide financial crisis caused by the subprime mortgage fiasco in the United States has peaked. But it is too early to think that the crisis is over. The total picture of the damage to financial institutions caused by the massive foreclosure has not been clear and the possibility cannot be ruled out that the real economy has yet to feel the effect of a credit contraction caused by the subprime shock.
Housing loan firms in the U.S., eager to find new markets, extended loans recklessly to low-income people who wanted to buy homes despite having poor credit ratings. Securities backed by these loans have been created and are held by other institutions. Subprime defaults have affected not only the original lenders but also the holders of the debt-backed securities. Outstanding loans are expected to total more than $1 trillion and one estimate shows that irrecoverable loans exceed $200 billion. The securitization of the loans has had the effect of spreading risks worldwide.
U.S., Japanese and European central banks injected a large amount of capital into fundraising markets. Afterward, the U.S. lowered interest rates while Europe and Japan forwent interest rate raises. These measures are designed to prevent market confusion, but they do not cure the root cause of the problem. Prospects for the future are unclear.