1) Excess liquidity in the US led to low interest rates and rising house prices, fueling lending to subprime borrowers like Mr. Smith who took out a large loan he could not repay. 2) American banks invested excess liquidity in markets globally including India, raising those markets. Dhanukaka invested in the rising Indian market. 3) When subprime borrowers like Mr. Smith defaulted, American banks sold off housing investments at a loss, withdrawing from markets and causing declines, costing Dhanukaka his investment.

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2. Mr. Smith in USA,
didn't paid his
Loan
DHANUKAKA in India
Lost His Investments
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3. Sub Prime
• Subprime lending (second chance lending) is a financial
term that was popularized by the media during the "credit
crunch" of 2007 and involves financial institutions providing
credit to borrowers deemed "subprime" . Subprime
borrowers have a heightened perceived risk of default, such
as those who have a history of loan default, those with a
recorded bankruptcy, or those with limited debt experience.
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4. Excess Liquidity
•There was
excess of
liquidity in
US Markets.
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5. This Excess Liquidity in USA
resulted in:
Fall of interest rates on loans + house
prices started rising rapidly
And this benefited the Americans in
two ways
1) They got huge liquidity at inflated
housing prices
2) At interest rates that were
practically lowest in the last 20yrs.
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6. Commercial Banks
• Many Commercial banks got a
meeting for this excess liquidity &
decided to utilize this money &
wants to earn more.
• So they started providing home
loans even to those persons who
were not capable to repay & was
Subprime borrowers.
• These banks were thinking that
even if they wont get back their
money they can recover the losses
by selling off those houses on
which the loans were given,
because the real estate market
was on peak.
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7. Mr. Smith in USA
• Mr. Smith was among
those people, he was a
man with three part-
time jobs who earned
about $45,000 a year &
was a Subprime
borrower, and yet a
bank loaned him
$540,000. The bank
never checked his
income.
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8. • Even after providing so many
home loans to their citizens
the American banks still
having the excess liquidity
problem so they decided to
invest in different stock
markets of the world, along
with Indian stock market. 8
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9. This Sudden Flow of
Money in Indian
Markets Resulted in
Rise of Market
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10. On the other side, in India After looking at Rise in
Indian Stock Market & to make money double,
DHANUKAKA invested his money in the Stock
Market
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11. And In America also, this excess liquidity were
resulting in a very high consumer spending
and obviously fuelling global growth.
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12. But……………
• Excess Liquidity, Resulting in
• High Spending, Resulting in
• High Demand, Resulting in
• Low Supply, Resulted in
• Inflation
• Liquidity Over + Down in Real Estate Prices
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13. At the Time of Repayment of Loan
• Mr. Smith, who was having an
annual income of $45,000
was unable to repay his home
loan of $540,000.
• So in order to recover the loss
bank decided to sold off his
house.
• But the real estate market
was also down & this resulted
in heavy losses to the bank,
as the no. of cases like Mr.
Smith was very large
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14. So in order to recover those
heavy losses, banks winded up
their investments in different
stock markets along with India.
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15. This Sudden Outflow of
Money Resulted in
Immediate Fall in the
Indian Stock Market
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16. In this way Mr. Smith didn’t paid his loan & due to
this, DHANUKAKA lost his investment
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