How come the US housing mortages affects stock markets around the world?

Question

Last week stock markets around the world crashed due to reduced spending on the US mortage loans.Can someone tell me how the economy of many countries aroun the world was affected by US housing loans?

Answer 1

This has nothing to do with "Bush regime". Please people...

US housing affect stock markets worldwide because we live in the world where US economy (being the largest in the world) has a profound impact on security prices worldwide. Furthermore, the majority of foreign financial institutions (think banks) have significant exposure to the US securities (be it bonds, stocks or as in example below CDOs).

As to the particulars of the question, I will give a very simple scenario/rationale for the impact:
Mortgage company in the US originates loans. Then, in order to make its assets more liquid, this mortgage company takes all of the loans it originated, "packages" them into a security (similar to a mutual fund, but for loans), and sells to large institutional investors worldwide (usually at a nice discount). When US mortgages are doing fine, the market is stable - as a certain number of defaults on the loans is already reflected in the discount investors pay for them. When US default rates accelerate, the investors into these "pooled" loans realize that their investment has lost some of its value (as it contains more bad loans than originally thought). They frantically start selling them, and, as with any other security, when there are a lot of sellers but not enough buyers, the prices drop. These securities (called CDOs) are held by banks, insurance companies, hedge funds, etc worldwide, thus impacting markets worldwide.

Answer 2

Because the lending institutions who make the loans raise the money for making the loans by offering securities based on the value of the loans on the open market. Anyone who purchases those securities is ultimately investing in those loans. When the loans go into default, the securities based on them are worth less money. When that happens, the people who hold them may try to sell them.

Answer 3

Every U.S. mortgage is some investor's investment. They are usually considered reliable income producers. However, sub-prime mortgages have turned the whole market upside down as defaults have risen. Investors - including many foreign institutions - have sought safety above all and dumped riskier investments such as stocks. Ultimately, because the international financial system is so borderless, the enormous US mortgage market greatly influences interest rates worldwide and the stability of stock & bond markets.

Answer 4

every country is linked to performance of other countries coz they all trade with each other. india exports a lot to USA and if demand goes down in US due to shortage of money supply, depreciation of dollar or any other reason, it is bound to affect india or any other country. also, most of the investments in india is by the phoren guys/institutions who have got their money stuck in usa markets as of now and therefore have less flexibility to juggle money here and there. all major markets were anyway hyped enough to a PE of 24-25 which is huge considering it is tough to maintain this kind of growth by companies and also a call on 24 times annual earning becomes too risky. so a correction has happened with valuations now at 16-17 times PE which indians are more comfortable with. like it happens when the markets are booming that people become aggressive and overvalue projects, similarly in a downfall, they become over-defensive and under value projects and this is the prime reason markets fall faster (which has happened now) and is a big time opportunity to invest in select stocks that have good future potential and reap multi-times gains in future. but be careful where to invest. not all companies are as rosy as they are shown to be. REMEMBER, ALL THAT GLITTERS IS NOT GOLD!

Answer 5

Because under the Bush Regime, the USA has become a debtor nation and our mortgages as well as other debts are sold overseas.

Answer 6

are we not in debt to many countries?? if we are not selling and buying ( one of the few things we as Americans build anymore ) then it makes perfect sense why it is effecting other countries as well as ours.