ECON 3420 Discussion 7

ECON 3420 Discussion 7 - 5)Asweknow, business. ,

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5.) As we know, many small firms always borrow money from banks to continue their business. As banks would ask for collateral in granting loan and small firm does not have enough marketable assets, many small business owners frequently use their own assets which most of them are their housing to be the collateral. The problem is that most of housing owners use paying monthly installments with interest as their payment plan in buying house and therefore it means that the housing properties do not completely belong to the small firm owner and the owner need to repay every month. Therefore if there is a drastic fall in housing prices, it gives a relatively great impact to them and thus the economic activities. The fall in housing price cause their own apartment become negative equity properties, in other words, the value of the collateral for loans decrease. Then, it is believed that small firm owners cannot further borrow money from banks as no more valuable collateral can support the granting of the loans. Moreover, since no more funds can be borrowed from bank, the running of small firm will become difficult as the cash flow is limited. Moreover, fixed monthly repayment of the housing property further limits the firm liquidity. Frankly speaking, they even cannot accept any business from other firms as there are insufficient money to continue their productions. Finally, their business environment become worse and worse and then goes bankrupt reluctantly. As for the impact of financial side to the real side of economy, it is true that the
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This note was uploaded on 03/03/2012 for the course ECON 3420 taught by Professor Kwong during the Spring '11 term at CUHK.

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ECON 3420 Discussion 7 - 5)Asweknow, business. ,

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