We are on the verge of the biggest financial crisis since the 1930s. So much has to happen in the last few weeks that I felt it was important to step back and try to create an on what has turned out handle. We experienced a housing bubble, and as with most bubbles in the course of history, they made too much of the good. The loan is the thing. At that time, everything seemed so wonderful. More and more people were living the American dream of home ownership. Those who alreadyOwn homes, were pleased that their value rise and happy tapping into the equity to buy cars, vacations, and see Bad rebuilds. This story takes place in so many countries.
But the ingredients came together in the financial markets that make for a bad recipe. Too many people were always loans that will probably never repaid. The big financial institutions have been lending more and more money to questionable borrowers as a way to quick profits. They could"Package" these mortgages and sell them to someone else. The rating agencies blessed them, and they were sold around the globe.
This reminds me of a Warren Buffet quote: "Only when the tide goes discover who is swimming naked." The flood in our case is the home prices. Fall as home, depreciation in value of these packages of mortgages. Then the financial institutions are holding this risky package in order to devalue them on their books.
Now, the pendulum ofEasy Credit swung too far in the opposite direction. Each player was on the market more conservative, greedy, bottom right, in fact, with loans. We need qualified buyers to step up and buy homes, thereby supporting the prices. But lenders have become so strict that it does not, and home prices will decline further. Mortgage-backed securities in value, the strength of the financial institution weakens, allowing them to lend less, and home prices further down in aself-sustaining vortex.
This discretion in the granting of credit is what brought us to the current crisis. Credit and lending are the red blood cells of the financial system circulatory system. Think of it as the implementation of necessary oxygen and nutrients to sustain the body. As Fed Chairman Bernanke and Treasury Secretary Paulson was in mid-September was a credit contraction of unprecedented proportions. The recent takeover of Fannie and Freddie and the rescue of AIG, should be to restore to a certainSense of order and keep credit flowing. But it was not enough, and the markets were at a turning point.
Although unpopular with most citizens, final approval of the 700 billion U.S. dollars bailout plan will be crucial to restoring confidence in the financial system. Just as the markets breathed a temporary sigh of relief was a new problem overseas.
Fortunately, put the euro-zone countries and Britain a rescue plan was perceived to be more comprehensive than in the U.S. plan. Investorsthought it might be even more effective, because it guarantees bank deposits and directly injected capital into ailing banks.
These measures are expected to avoid the very real risk of depression, but is probably at this point we enter an economic recession. Will everything be better, but it will take time for the economy and financial markets in order to heal.
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