 The

minimum short-term interest rate charged by commercial banks to their "best“, most creditworthy clients.  The most favorable interest rate charged by lenders on a loan to qualified customers.  Lending to borrowers with highly rated credit histories.  Prime loans are often called "A-paper" credits. 
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 The

Federal Reserve Board increases the prime rate during periods when the economy is growing too fast to discourage inflation, and lowers it when the economy is too sluggish to stimulate growth.   The prime rate is the economic indicator used by most credit card companies to determine the interest rate charged on their variable rate credit cards (as opposed to fixed rate credit cards).   If Prime lending rate rise by .25%, new credit card interest rate would increase to 8.00%.  If the prime rate was lowered by .25, then interest rate should fall back to 7.75%. 
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 "Sub

prime" is any loan that does not meet "prime" guidelines.  Subprime lending (also known as B-paper, near-prime, non-prime, or second chance lending) generally refers to lending at a higher expectation of risk than that of Apaper.  A subprime loan is offered at a rate higher than A-paper loans due to the increased risk.  A subprime loan may have less room for financial difficulties of the borrower, which can lead to late payments and defaults.
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A

legal document specifying a certain amount of money to purchase a home at a certain interest rate, using the property as collateral.

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During the late 1990s and early 2000, interest rates fell dramatically because of excess liquidity. Prices of homes rose sharply. They obtained liquidity at very high prices of homes but at the interest rates that were at their lowest in the last 20 years. This became a vicious cycle leading to a very sharp rise in consumer spending and leading to global growth. This, in turn, led to an increase in inflation.
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Inflationary pressures led to a gradual hike in interest rates.
As a result, the cycle of taking loans to spend on consumer items practically stopped and the demand for homes started slowing down. House prices went down and Americans are faced with unemployment, decrease in consumer spending, and dangers of economic slowdown. Many borrowers won’t be able to repay the loans and it forced most of the US banks to write off their loans as bad.
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Unit:Billion Dollars Merrill Lynch Citigroup UBS Morgan Stanley HSBC Credit Agricole Deutsche Bank Bank of America CIBC Wachovia AIG Barclays Royal Bank of Scotland Credit Suisse Bear Stearns JP Morgan Chase Countrywide Others Total $22.4 19.9 14.4 9.4 7.5 3.6 3.2 3.0 3.0 2.7 2.7 2.7 2.5 1.9 1.9 1.4 1.0 4.6 $107.8

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Many institutions offered home loans to borrowers with poor or no credit histories by requiring higher than normal repayment levels — creating what is now referred to as “sub-prime mortgages”

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On June 30, 2004, the Federal Reserve began a cycle of interest rate hikes that raised the interest rates seventeen times and paused only in June 2006.

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Several sub-prime mortgage holders defaulted on their loans and the first sign of a “crisis” emerged in March 2007 when shares in New Century Financial, one of the largest sub-prime lenders in the US and more than 100 subprime mortgage lenders filed for bankruptcy.
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The subprime lending was 9% in 1996 but in 2004 it is 21%. So many sub prime loans are in default. Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008.
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 Loan

modification, pumping money into market may slow down the crisis.  Pumping money into markets, reducing bank reserves may temporarily weaken the crisis. But this is a two fold operation:Pumping money will increase inflation which will results in increase in subprime lending. 4) Reducing bank reserves to small extent is better but as whole it would destabilize the whole financial system
3)
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