How did this Whole Credit Crunch start?
Why did the housing prices lower, and how did this credit crunch start. I’m 14 and i understand what is going on, it’s just i don’t understand how it all happened.
In extremely simple terms…..Firstly, for every €100 you save with a bank, the bank keeps €10, and lends the other €90 with interest, such as mortgages etc.
But too many people started to borrow, (as house prices grew the amount they wanted to borrow also did), but the banks did not have the money they needed to lend any more, so they decided to stop making loans, as people had too many loans already are were finding it difficult to pay them back.
The world lives on credit, (think car loans, student loans, mortgages, to investment in making products, services, holidays..the list is endless) so if you stop lending money out people stop spending, if you stop spending Companies don't make as much money, meaning they need to let staff go, leading to higher interest rates, and a dead economy.
In a way it needed to happen, [as people are living beyond their means, hopefully the US government will bail out the banks (like European central banks has been doing all along) and that will steady the economy again. Otherwise it really will be bad news for us all.
But the irony is you need to spend money to get out of a recession, so hopefully the credit crunch won't last too long, and people become more realistic about how much they should really borrow,and banks stop getting so greedy. The money Markets is all based on optimism.
When you think about it all the assets are still there, ie property, factories etc, its just that they are not viewed as valuable anymore. A bit like last years Christmas present!! The whole financial system is really a house of cards.
5 Responses to “How did this Whole Credit Crunch start?”
Before this all started I went to a store that sold dogs.
Comment made on March 9th, 2009 at 11:26 amThey actually had a sign that said
“0 down”
No interest for 6 months.
FOR A DOG
That’s why we are in this mess.
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It started with easy credit to a bunch of deadbeats.
Comment made on March 9th, 2009 at 11:57 amReferences :
In extremely simple terms…..Firstly, for every €100 you save with a bank, the bank keeps €10, and lends the other €90 with interest, such as mortgages etc.
But too many people started to borrow, (as house prices grew the amount they wanted to borrow also did), but the banks did not have the money they needed to lend any more, so they decided to stop making loans, as people had too many loans already are were finding it difficult to pay them back.
The world lives on credit, (think car loans, student loans, mortgages, to investment in making products, services, holidays..the list is endless) so if you stop lending money out people stop spending, if you stop spending companies don't make as much money, meaning they need to let staff go, leading to higher interest rates, and a dead economy.
In a way it needed to happen, [as people are living beyond their means, hopefully the US government will bail out the banks (like European central banks has been doing all along) and that will steady the economy again. Otherwise it really will be bad news for us all.
But the irony is you need to spend money to get out of a recession, so hopefully the credit crunch won't last too long, and people become more realistic about how much they should really borrow,and banks stop getting so greedy. The money markets is all based on optimism.
When you think about it all the assets are still there, ie property, factories etc, its just that they are not viewed as valuable anymore. A bit like last years Christmas present!! The whole financial system is really a house of cards.
Comment made on March 9th, 2009 at 12:12 pmReferences :
You are going to get a lot of different opinions on this, but very briefly-
-the late 90s to 2007 was an absolute flood of lending. Banks were like drunks buying for everyone at the bar. They would loan more than 100% of the value of a home. Banks would make those loans with very little documentation, and do it on homes where the valuations were already artificially inflated by mortgage brokers. People thought there houses were piggy banks, to be used for cash when they ran out of money
Comment made on March 9th, 2009 at 12:59 pm-Money was flooding into all sorts of “subprime” loans. “Subprime” basically means folks who can not or will not pay you back. They figured if you make enough money on these loans up front, then it wouldn’t matter if you got paid back or not. But the profit was always on paper, not in actual cash coming in. But since there was profit on paper, financial institutions rewarded themselves handsomely with huge salaries and bonuses. Subprime invaded appliances, used cars, new cars, and eventually homes. So you have loans that would not be re-paid with loan amounts for far more than the property was worth. Add to that builders overbuilding areas and putting up too many houses. And now some of your loans start to go bad. Raise the cost of fuel, grain, and goods and services that depend upon shipping so the consumer has less money to spread around. When homes get foreclosed it can take months for them to be sold at auction. In the meantime they sit empty, get vandalized, flood and water damage, and so on. So their values drop like a stone, and meanwhile the lender has more money tied up in them than they were ever worth. Spin this cycle thousands of times over and over again and all of a sudden the banks holding these notes are in trouble. Now all the banks get jittery and don’t want to lend money to each other, for fear that the other bank may fail, or to anyone else for fear that there own balance sheets are getting shaky and they need to camp out on their cash. Play this all the way out and you could see businesses of all sizes who depend upon lines of credit start to fail, which loses jobs, which loses homes, and now the home prices drop even further! Pretty soon there is no work and we are back to breadlines and 1929!
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Decades ago in California, Realtor’s began a scam to get people to buy homes as an “investment.” They got them to sell homes they had not paid for, and buy more expensive homes. TO mortgage their own homes, to buy others to rent as an investment. Then they began selling them on the idea of buying property for which they could not afford a downpayment. Saying, you buy it, the value goes up, five years from now you mortgage them, for what they are not worth, and pay off a balloon note that covers the downpayment.
Realtor’s picked this up across the country, as the sales of property climbed because the demand due to turnover was higher than necessary it _artificially_ inflated its value. People who paid down payments had to pay higher prices, and bigger down payments.
More and more banks gave out such loans. NAFTA sent millions of jobs to Mexico, China, and other countries. The Govt said, {people will just take more “service” jobs. Countries which do not manufacture PRODUCTS, have a bad economy. People lost jobs, could not pay for homes, with lower income jobs and the crash began. It spread across the country. Those desperately hoping to hang onto their homes, stopped buying other products they found they could live without. Those companies went out of business, more unemployment, the cycle goes on, and on.
The Govt was as bad, loaning money they did not have to companies that were on the verge of bankruptcy, like car makers, etc. raising taxes to get the money… All the result of bad decision after bad decision compounding the problems…. Increasing the debt of everyone, even those who had no part in the problem, and kept their spending under control.
We need only food, shelter, and minimal clothing to survive or even be happy. Happines comes from our Attitude, not materiel possessions. We do not need all the junk they try to sell us on TV. We do not need a new car because the neighbor buys one. Cars are not for an ego trip, like the companies try to sell them, they are just transportation. A used VW will get you there just as well as a new Caddy or BMW, etc…
Buy what you need to survive, and save the rest, the more who save, the more it helps improve the economy…. Open a savings account, even if people make very small AUTOMATIC deposits to begin. Deposit $5 or 1% of your paycheck, whatever you can.
After a few months you never miss it. Increase it to 2%, and gradually increase it. Only a small percentage of people have a savings account, those who do have a better credit record. Buy what you need from savings, then make the payments to your savings with interest, your account keeps on growing.
Buy only a small house one that keeps you warm and dry.
Comment made on March 9th, 2009 at 1:12 pmBuy nothing else on credit, and you protect your future.
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