I know we have mentioned it previously, but a new thread is due as the situation worsens.
Poor politics, poor decisions, poor policy and poor management.
Apologies for the brevity but here is a brief outline of what happened. There are secondary factors I'm skirting around but I think this is a fair summary.
I know most will have a good idea of happenings, but this is just a catch-up, in my own words, for some that may not.
By 2005 there was an over supply of houses in the US. Too many were being built and the growth was not sustainable etc. An era of rapid house price increase was looking to come to an end. Rapid growth that was partially feulled by a lack of faith in the stock market and the desire to invest in tangible areas. 40% of US home sales were not for living in by the buyer but as investments or holiday homes.
As house prices rose, people increased their debt as credit drawn against their homes and consumer spending increased. People borrowed rather than saved at rates never previously witnessed.
When the house prices started to fall delinquencies increased. Many of these were sub prime mortgages (ie mortgages given to people that previously would not have qualified). There was a Clinton initiated drive to enable more minority and low income home ownership and sub-prime lending was encouraged. However, with the flow of credit available, lenders were irresponsible. Some numbers put these sub-prime mortgages at 6% of the market but nearly 50% of the foreclosures.
This in itself would have been a problem. Ie a large number of mortgages going into delinquency. However, this problem was compounded by 2 related factors both of which were products of poor management and regulation.
The thread that connects the two following factors is that banks can only legally lend 10x the capital it has on its balance sheet. Ie if a bank has $10 it can lend $100
What then happened was that banks found ways to hide these sub-prime loans from the balance sheet. They packaged them and sold them. These loans were still in the system but didn't count on their balance sheet and they were then free to make more loans. This was called "securitisation" and everyone (other banks, pension funds etc) bought them. Basically banks could make many more loans than they were allowed and sell the loans to others. When these loans went bad it impacted every sector that bought them and showed that high levels of bad loans had been made. Billions were lost in what turned out to be near worthless investments.
There were also other ways to hide bad loans as well as banks keeping some of them on their books. When people started defaulting it hit hard. If a bank lost $1000 then it lost $10 000 of loans it could make. Every dollar lost meant $10 that couldn't be loaned.
So banks had thousands of terrible loans that were costing them billions which in turn meant that they couldn't loan any money.
At the same time the housing market is still weakening and more foreclosures in other areas are on the horizon.
So many billions of dollars of wealth have disappeared and there is no money to borrow. A credit fuelled economy has ground to a halt.
Obviously many factors play a role. From bad oversight, bad planning and bad policies.
How does this impact the rest of the world? Well the US wasn't the only country riding a property bubble, the banking industry is quite incestuous and interconnected, the credit boom was heavily financed by large inflows of foreign funds and many non-American investors bought the packages of bad loans.
So, how is it effecting your lives?