Sunday, February 5, 2012

Can someone explain to me, in lay-mans terms, whats going on with the financial crisis at the moment?

I know that banks and building societies are at risk, and that its all over the news, and everyone is referring to the "credit crunch", but somewhere along the line I got totally lost.

If you could explain it to me I'd be very grateful.Can someone explain to me, in lay-mans terms, whats going on with the financial crisis at the moment?There are two problems. Things are bad because they've both gone wrong at once.



1) Suppose I lent you 拢1,000. You agreed to pay me 8% interest. I then issued a bond for 拢1,000 paying 7% interest. I'd be making a profit on your loan and I'd have 拢1,000 to lend to someone else. I do it again, so I finish up a liability to pay 7% interest on millions of pounds of bonds, but I'm getting 8% interest on millions of pounds of loans - and making huge profits. But then you say you can't pay me back. Well I could cope with one or two defaults, but if a lot of people did it I'd suddenly go broke. That's exactly what the mortgage banks have been doing. Because they can make a big profit on the interest difference, they've been lending on ever dodgier mortgages and now people are defaulting in their thousands. They can't recoup the money by selling the properties because there are government rules on repossessions and the house market has fallen down a hole.



2) America has the mother of all budget deficits. Wars are expensive and they are not taxing their people enough to pay for them. Effectively the world's biggest economy is bankrupt. The Federal Reserve Bank has the job of dealing with the consequences and they've mopped up all the spare cash in the world's money markets - so there's no spare cash to bail out the banks.Can someone explain to me, in lay-mans terms, whats going on with the financial crisis at the moment?
Some stuff, like houses and petrol and similar have been getting more and more expensive over past years, but until now people paid for them still.

But recently, people have started to not be able to afford them, so they have cut back on their spending, in pretty much everything.

In housing, this means that price value goes down, and fewer people buy. This means companies who deal with housing start to lose money, and have to reduce wages and lay people off.

Similarly, people decide not to go on holiday, as they think they can't afford it. This means that holiday companies and airlines start to lose money, and are at risk of going bust.

The same think happens in lots of different fields, mainly those involved in the selling on non-essentials.

So now you have more people unemployed, which means more people cannot pay their mortgage and go bankrupt.

Banks tend to reclaim money lost from defaulted mortgages and loans by taking a person's house and selling it, but no one is buying houses at the moment, so the banks are losing money too.

Meanwhile, fuel prices are still increasing, because there is a higher demand for fuel globally, and so heating and similar becomes more pricey. That means everyone's bills are higher (37% higher this year), but they are still earning the same amount, so they have less money to spend on other things.

Soon no one is spending any money, so lots of businesses are losing money. Because businesses tend to make money by supplying/working with other businesses, more become affected, and soon everyone is potentially at risk of losing their job. Can someone explain to me, in lay-mans terms, whats going on with the financial crisis at the moment?After the IT industry in 2001 went bust , the federal reserve decided to lower interest rates.



This made getting money very easy.



Banks decided to use this cheap money to give housing loans to everyone.



Everybody then wanted to buy either one or 2 houses, since loan was easily available, pushing up home prices in the bargain.



Banks knew that there was inherent risk in the loans distributed.



They combined some prime ( people who can pay interest on time ) and sub prime ( people who might not be able to pay interest) loans into tradeable securities.



Since the housing rates had gone up very high, people wanted to sell them and make profits instead of paying a higher interest on the loan



When a lot of houses were in the market for sale, their prices crashed.



People stopped paying interest and banks were left holding securities which had no value since the loans backing them were inert.
Banks lent out money to people who could not afford to pay back the money they borrowed. (mortgages) and banks usually sell and buy mortgages between them. Now they gave so many people mortgages that could not be paid back so the banks got into billions of dollars/pounds of debt. This has led to repossession of homes of those people who simply couldn't afford a house in the first place. and this brings on the reason why house prices are falling. The CREDIT CRUNCH is a silly phrase given to explain that it is now almost impossible any bank now to give people a 100% mortgage to a consumer or even any amount as they need all the money they can keep to stay a float. People taking their savings out of banks is a blow as banks rely on those savings to lend to others in loans and mortgages.



Would you like me to go on?lolCan someone explain to me, in lay-mans terms, whats going on with the financial crisis at the moment?There are two main reasons



First of all speculators got into the housing market and drove up the price of housing so that they could make a profit, buy a house for 40,000, sell it for 60,000 in two years and make 20,000 profit. And if you get someone to rent the house they are paying for your mortgage on the property so its free money. Housing is about 50% more expensive than it should be because of speculators, and any fall in the price of housing is greeted with horror, but the only people who loose are speculators. Buy a house for 40,000 and sell for 20,000 and you loose money.

Someone who buys a house for a home will not loose because they sell for 20,000 and the house they move too will be cheaper.



Then banks wanted to sell mortgages and credit to more people to make more money, so they where selling credit to people without having any idea whether they could pay. How oftain have you recieved loan applications and credit card offers through your door? The main driving force for this was bonuses for the seller, and massive bonuses for the heads of the banks.



Of course eventually this credit became unsustainable, people where getting sold loans they could not afford, and when they could not repay the whole system fell apart.Can someone explain to me, in lay-mans terms, whats going on with the financial crisis at the moment?
banks / mortgage lenders, giving money to people who couldn't afford the repayments, being overly greedy and getting themselves in a fine mess now that the house of cards has come tumbling down. Irresponsible lending, and irresponsible borrowing. What you can't afford now you should save for not ask for credit continuously





it s a tad simplistic but thats the gist of it
1. People got mortgage loans which they could not pay back to the banks



2. As a result, the banks are now having trouble getting loans from other banks. Securities which they issue to raise money are very poorly valued, because of the mortgage problems



3. The big investment banks themselves have run out of money to lend anyone



The problem is that there is not enough cash in the system - to support all the borrowing going on. So the goverment wants to inject some cash into the system to keep it moving.Can someone explain to me, in lay-mans terms, whats going on with the financial crisis at the moment?
it is a correction of overactivity done in past. it is natural and gradually will pass away. there are many many instances of this type in past throughout the world. factors responsible can not be summarised in one line or paragraph. no theory and phenomenon can justify. theories fail and pass but the up and down is eternal. it is like wave which will pass before you.
the banks have no confidence in each other so they have stopped lending each other money. this is because they are unsure that they will ever get their money back. the net effect is that the banks have no money to lend to anyone else, so there are limited mortgages available and nobody can buy houses etc.



im sure that there are other factors involved but i dont understand the whole thing myself. i hope you get some decent answers here.



interesting question !
Teddy is correct.

Also all the irresponsible lending is what has caused house prices to rise to fast ( since it has been too easy to borrow money )

That is why house prices are falling back to a more realistic level
Hoga vahi jo manjoore khuda hoga.

Man proposes but God disposes.


I'd also like to know..
no sorry
it all going ape s-h-i-t.
We went off of the gold standard ages ago, and so our money is only built on trust. It is just paper, after all. And "assets" that are "liquid" are all that count. Stocks, bonds, Deeds of Trust. More paper.

What keeps it working is trust, the agreement we have amongst ourselves, that holds it all together. When Trust gets broken (I can't make my mortgage payments, for example) then there is no money flowing. Money has to flow to keep the system working. Sort of like plumbing. Low water pressure and it is no fun to take a shower.

Of course, a very high percentage of folks are making their payments, so apparently the banks didn't leave themselves much leeway. The no flow of money from a small percentage (like 3%) and the poor banks have no money now to lend to others? So the rules have to be wrong. Whatever operating basis they have, and I don't know what it is, probably something like if we have $10 we can loan out $1,000 sort of rule, is wrong and doomed from the start. So who is making these rules, our congress or the Federal Reserve or both? I don't know.



Our society, probably wrongly, is based on lending and the percentage the banks get when they lend. So this is a credit society. I don't know the answer of how to get off of the credit treadmill. But when credit stops, companies depending on credit slow or go bankrupt. Workers of course, get laid off. There is less money for spending when workers are laid off, so companies don't make as much money from durable goods, you know, tables, chairs, cars, baby buggies.



When people don't buy, then companies cut back on production until some retail store says I've sold all my highchairs, please send more.



Even good companies, who don't have to borrow to keep their business going get in trouble when other companies fail, because there are less jobs, and less people placing orders. So even a well healed company can be hit rather hard and have to let go of some workers. But at least those companies will still survive.
  • monroe muffler
  • watch weeds season 7
  • No comments:

    Post a Comment