INTI Orion.com

By NELLIE TAN

Bank bailouts? Credit crunch? Sub-prime mortgages? Collateralized debt obligations?

Unless you were living under a rock in the year of 2008, then it is very likely that some of those terms strike you as familiar. Yes, I’m referring to the biggest crisis to hit the shores of Wall Street since the Depression- the credit crunch. But as many now have come to realize, this isn’t just a Wall Street crisis or an American economy crisis- this is essentially a global crisis, one that is taking precedence at warp speed.

The deal here is that no one really understands the gravity of the situation. The financial crisis is very real and its effects can already be seen in the multiple retrenchments that have taken place, and are still taking place right here in Malaysia. Yet ask any Malaysian teenager or (working) adult what they think about the entire fiasco and they seem to recite a textbook answer that seems detached from what is really going on at hand. Either that or they scratch their heads and mutter the all-knowing “Don’t know lah.” The truth is, not many people understand the whole situation to even begin to comprehend its consequences.

The confusion here isn’t unfounded- the crisis stems back to the late 1990’s and has since unraveled as a series of turns of events, so much so that people often can’t make heads or tails of what, where and how it happened. So let’s take this from the top.

It actually started in 1998, when many people decided that real estate, which still hadn’t recovered from the early 1990’s slump, had become a really good bargain. At the same time, Wall Street was making it easier for people to get loans, especially since Alan Greenspan, the chairman of the Federal Reserve, reduced interest rates to a mere 1%- a form of damage control for the September 11 tech bubble bust. Lower interest rates made mortgage payments cheaper, and demand for homes began to rise, sending prices up. This was great for both the homeowners and investors; higher home values meant more money for everyone!

A lot of people made big bucks, from the stock brokers to the mortgage lenders to the investment banks and to other investors. But it wasn’t enough- the investors soon saw more green in their eyes and decided they wanted even higher returns. A few light bulbs were lit and the next thing you know, Wall Street came up with an answer: sub-prime mortgages.

Because these mortgages go to people with a less-than-perfect credit history, there was a big risk that they would default, or fail to pay their debts. So the sub-prime loans came with higher interest rates and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, more commonly known as collateralized debt obligations (or C.D.O.’s). Once bundled, different types of mortgages were sold to different groups of investors. Investors then made large profits through leverage, a strategy that gave them almost ten times the profit than what a normal deal would.

But as expected, some old habits die hard. Many debts turned sour and instead of money on their hands, many investment bankers found houses- houses that they had to sell at only a fraction of the original value. As more and more defaults piled up, it created more supply of houses than there was demand and prices plummeted. Investment banks and their investors, with their previous high-return C.D.O investments, now only had worthless houses in their possessions. Sales amounted to losses, firms started going bankrupt and Wall Street was shocked to its core. Paranoid firms started hoarding cash instead of lending them, people with a solid credit history couldn’t get loans and the credit market froze.

And there you have it, ladies and gentleman. The credit crunch.

What does this have to do with you, you ask? Everything.
Just last month, Bloomberg reported Malaysia’s economy to be at its slowest pace in 7 years. Malaysia’s economy isn’t the only one that’s slowly slipping into recession, but our neighbors all around are as well. The credit crisis has managed to create a worldwide slump because of the constant falls in the stock market, with giant companies and firms charting perpetual losses. Along with the global slump, demand for export is on the decline. This isn’t good news, especially for our region since Asian economies are twice as reliant on export as the rest of the world.

What with Thailand facing its first recession in 11 years and 1 million job losses, the South Korean economy heading for its first recession in a decade, India and Hong Kong facing their worst economic downturns since 2003, Japan recording all time lows in industrial exports and Singapore seeing its worst economic state in the last 33 years, this is probably a moment in history that will be remembered for a long time- for all the wrong reasons. Mind you, this is just in Asia.

Most of all, the effects don’t just reverberate on a global scale, they hit home- hard. Tough economic times almost always entail unemployment. Malaysian Digest states that 2008 alone recorded 20,000 job losses in Malaysia, where numbers are predicted to increase to as much as 200,000 this year. This is happening everywhere, almost reminiscent of the Great Depression. We all have had that parent, aunt, uncle, friend, family friend, or relative’s friend’s friend who was laid off from the recent crisis. Some of us have even heard about those who haven’t necessarily taken the news in good spirits. Only last year, we read about Ervin Atonio Lupoe, the hospital worker who killed himself, his wife and his five children after being fired.

At this point you’re probably thinking, “I’m still employed and I don’t know anyone who has been laid off. Why should I care?” Well think about the one thing that swipes and resides in the pockets of most people today- the credit card. With losses still abundant in the credit market, lenders like credit card companies are spooked. They’re playing it tough: Minimum payment amounts have jumped. Interest rates are doubling. Card transactions are being declined. Like all other creditors, card companies are cautious of bad debtors and stingy with lending.

Tight borrowing conditions are now the case with so many other types of credits; loans once easy to gain now encompass a series of checkpoints before they can be passed. Student loans, micro-loans, business start-up loans and car loans are and will be hard to come by. Some students will not be able to pay their way through college and some businesses will never see the light of day because lenders aren’t so generous with their money anymore.

This is as real as it gets, and if you think the crisis is slowly drawing to an end, it’s not. The only thing that is ending now is a comfortable lifestyle for many people, with most having to resort to the traditional way of wise economic management in these hard times: saving. While Wall Street and the rest of the world sorts out this mess on their own, whether it’s cutting interest rates by another mile or creating job opportunities with another stimulus package, all we can do is try to get by with some good doses of resilience and patience, and hopefully some wise decisions from the higher-ups in the political ranks of our country.

The credit storm will eventually abate and while many people forget about the calm after the storm, it is there. And it is usually the most tranquil.