What are the causes of the current financial crisis?

Housing prices have fallen, as much as 30% in some places. so the marker value of many homes is less than the mortgages that banks hold on them. That means that when people want to sell their homes they must have the money to pay the difference so the new owner can have a clear title. Since most sellers do not have the money, they just let the mortgage holder foreclose, so the banks lose the difference.





The underlying problem is that the bubble in the housing market pushed prices too high to be sustained which is why the prices are falling.


|||" believe that profits will rise and the loans will eventually be repaid without much trouble............"





Hyman Minsky has proposed a simplified explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any capitalist economy. High fragility leads to a higher risk of a financial crisis. To facilitate his analysis, Minsky defines three types of financing firms choose according to their tolerance of risk. They are hedge finance, speculative finance, and Ponzi finance. Ponzi finance leads to the most fragility.





Financial fragility levels move together with the business cycle. After a recession, firms have lost much financing and choose only hedge, the safest. As the economy grows and expected profits rise, firms tend to believe that they can allow themselves to take on speculative financing. In this case, they know that profits will not cover all the interest all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment, and the economy grows further. Then lenders also start believing that they will get back all the money they lend. Therefore, they are ready to lend to firms without full guarantees of success. Lenders know that such firms will have problems repaying. Still, they believe these firms will refinance from elsewhere as their expected profits rise. This is Ponzi financing. In this way, the economy has taken on much risky credit. Now it is only a question of time before some big firm actually defaults. Lenders understand the actual risks in the economy and stop giving credit so easily. Refinancing becomes impossible for many, and more firms default. If no new money comes into the economy to allow the refinancing process, a real economic crisis begins. During the recession, firms start to hedge again, and the cycle is closed.


|||In a nutshell bad debt is the problem.





LOTS of money was loaned to people with modest incomes and poor financial skills so they could buy houses at inflated prices. Many of them haven't been able to make the repayments and the house prices have fallen back to more realistic levels. So the bank that loaned the money,





1. Doesn't get the repayments from the mortgagee.


2. Doesn't get the full loan back from the subsequent property sale (foreclosure).





The bank borrowed the money to loan the money and can't pay back the original (massive) loan they took out.


|||Deregulation by the Republicans.


When the market was deregulated in the 1920's it crashed and caused the Great Depression. Then the Democrats got in and put regulations on it so it stayed stable for over 70 years. Then the Republicans convinced everybody that it would be good to deregulate it again, so they did, and wow what a surprise, it tanked again. I wonder how bad this one will get. It might not lead to another Depression, lets hope not. But things are already headed in that direction. Thats what happens when people forget the lessons of history and vote Republican. Facts do not lie, it is crystal clear.|||Deregulation and the complete lack of oversight.|||Divorce


The Economy|||The Government|||Its an election year|||borrowing money from other countries to fund this war|||Bad loans.