The lending practices of American banks

Banks are very cautious about lending money due to the losses they

incurred through sub-prime mortgage loans (Goodman par 24). The banks

incurred huge losses and some are yet to get back on their feet. This crisis

started when the real estate business started to thrive because of the increased

value of housing facilities. Banks decided to take advantage of the booming real

estate business and invest by giving sub-prime loans to citizens who could not

afford the prime mortgages. The banks lowered their lending rates so that low

income citizens could afford to apply for mortgages. They used the increasing

value of housing as a justification for taking this risk because if the house owners

were unable to pay their debts, the banks would repossess the housing facilities,

whose value would have greatly increased. Unfortunately, the housing value

started to decline and the low income citizens who had applied for the loans were

incapable of paying their debts to the banks. The banks therefore were forced to

reduce the value of the housing facilities. As a result, the banks incurred billions

of dollars in losses. Many banks were closed down, but the ones that survived

are still grappling with the impact of the crisis. The banks have therefore reduced

their lending as a precautionary measure to avoid the reoccurrence of such a

crisis.

All the credit facilities available to businesses from banks have dropped

considerably, and this has affected many companies. Failure by banks to give

loans has increased the impacts of the economic crisis and citizens are cutting

down on their spending because of the increasing fuel prices, job scarcity and

huge debts. The value of housing is also decreasing. Denying businesses access

to credit facilities can not improve the economy. As a matter of fact, it will lead to

its continued deterioration because the companies require the capital in order to

grow, expand and hire more employees. Companies that heavily depend on

loans from banks have no other alternative but to postpone or terminate their

development plans (Goodman par 5).

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