Sub-prime lending in the United States of America has been blamed for the Indian stock markets crash that cost the investors here almost Rs 180,000 crore and this figure does not account for losses in the rest of Asia and Europe, not to mentioned the US itself. This is something that has been created by the people who try and make extra money by lending to people and businesses who are considered very risky.

Intent is to profit and then scoot, although it is couched in very intelligent and verbose prose. And above all, it is all legitimate. It is also referred to under the moniker ‘B-Paper’ and ‘second chance’.

In short, they create a bubble that will inevitably burst, sooner or later, although they are willing to bet that the later will be in the very far and nebulous future when the people concerned have made their money and are resting in comfort, while common people across the world suffer tragic consequences of unsustainable financial losses.

Sub-prime lending refers to the habit of giving loans to people with suspect financial status by financial institutions like banks and other financial entities. These institutions are not run-of- the-mill organizations, some huge banking corporates indulge in this way of doing business—they account for a large percentage of total profits.

These loans are given at very high rates of interest, much higher than those dictated by governments and market forces. In short, the money is needed to finance deals that may involve financial legerdemain of the dishonest nature. In any case, risk of losses is great, but expectations of huge profits drives people to go in for it.

Currently, the feature that is driving markets down across the world is the sub-prime lending undertaken by US institutions in the realty market. Loans have been given to people at high interest rates who had otherwise failed to get loans through normal channels. Now, with the realty market crashing in the US with buyers running away from house purchases, defaults have increased and the valuations of land and houses has crashed through the floor.

Figures quoted by analysts indicate that the default on loans may be as high as 20% and up to 25% of the entire housing market in US. Needless, to say, many financial institutions have suffered and some have even closed down.

With the huge number of financial institutions involved, nobody has been able to accurately put a number on the losses yet. Fear is rampant as many expect that if one reputed institution starts tilting, the rest of the US financial edifice will be awash in red too. And that scares the rest of the world as there are hundreds of billions of US dollars invested by US firms across all countries and these huge amounts may have to be withdrawn back to the US.

India itself has seen in excess of $10 billion invested in equities in 2007 by foreign institutional investors, most from the US.

To ensure that a crash does not happen, or to control it to a certain extent, the US government may raise interest rates. That will inevitably starve the US financial world of cheap money and businessmen will not be able to finance growth and thereby drain the economy of all energy to expand further. It is a vicious circle that once unleashed, will affect the world adversely.