2007 Financial Meltdown Due to the Emergence of Problems in the Us Sub-Prime Housing Loan Market

The background to financial meltdown was the emergence of problems in the US sub-prime housing loans market in the first half of 2007, which amounted to approximately 15 percent of the stock of housing loans. The failure of the US investment bank Lehman Brothers sparked a severe loss of confidence not only in financial sectors, but also in businesses and households who responded by cutting spending. This in return have a sharp fall on demand for manufactured goods, global industrial production and contractions GDP in major economy (Edey, 2009). So the explanation stresses the factors that are common to all financial crises, among which voices from China and the US are especially elevating. Former US Treasury Secretary Paulson regarded China’s high saving rate as one of the factors resulting the crisis, while Chinese officials considered American overconsumption as a factor. This essay sets out to discuss the merits of two points respectively. The essay will firstly portray the background of the crisis, and then evaluate merits of Paulson’s assertion from China’s high foreign exchange reserve, namely saving, furthermore, with the capital flow from the China, it will examine trade deficit and overconsumption in the US, finally the essay will provide some response by government in respect to the complex financial situation.

When the global economy began to meltdown in 2000s, coincidentally, as the attack on September, 11th, 2001, the Federal Reserves initialed a long period of interest cut in order to attract consumption and investment (Bernard, 2007).This advances new homebuilders to enter the home mortgage market on lower credit ratings whereas with higher interest rates — the phenomenon now known as subprime credits. This trend of the enhancing liquidity provided with balance of payment surplus countries such as China endangers the credit spiral. With the development of credit sector, balance of payment deficit stimulates the demand of dollars, triggering the...