I missed something in this economic crisis....'splain to me, please

  • Posted by a hidden member.
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    Oct 06, 2008 9:51 AM GMT
    How did the whole world get sucked into this? We couldnt have built so many houses with so many bad mortgages that is sucked down the credit capital for the WHOLE WORLD, could we?
  • GQjock

    Posts: 11649

    Oct 06, 2008 10:19 AM GMT
    This credit crunch has less to do with housing than they are saying

    Do you know what a Credit Default Swap is?
    If not start reading up

    http://en.wikipedia.org/wiki/Credit_default_swap

    And Hedge Funds? Leveraged Hedge Funds?

    http://en.wikipedia.org/wiki/Hedge_fund

    These banks and wall street tycoons were playing with BILLIONS of BILLIONS of dollars that became one huge Ponzi scheme
    But it made a circuitry link between all the investment and insurance houses
    and they are all playing musical chairs right now
    Waiting to see who's going to be left holding the bag
    and until then they are not sending out anymore cash
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    Oct 06, 2008 10:30 AM GMT
    Partially because of the new financial instruments such as collateraised debt obligations (CDOs), which allowed banks and investment banks to "securitize" mortgages and sell them to investors (such as pension plans, other financial institutions). The rating agencies such Moody's gave these new instruments Triple A ratings which made them seem much less risky then what they were.

    For example, a CDO is purchased by a bank from another bank that is made up of 30% sub-prime mortgages, and 70% other debt instruments (e.g. corporate bonds). It pays 6% interest. The sub-prime mortgages stop being paid when the homeowners can no longer pay due to the initial favourable variable rate ending and going up to a higher rate (varies when this happens). So the supposedly "low" risk CDO is now high risk. The bank that holds the CDO is no longer getting 6% and the value of the CDO decreases significantly. The bank has to write off this investment on its' balance sheet.

    Because of the number of sub-prime mortgages that have gone bad a lot of these financial derivatives have also gone bad causing massive writedowns by banks. Because banks don't know what other banks exposure to these sub-prime mortgages are they have stopped lending to each other. If they do lend to each other it is at a much higher rate.

    This is why this crisis is so serious. Economies need credit, without it they stop functioning well. Many companies roll over their debt (replace old debt with new). When they can't get new loans because banks are afraid to loan money (hoarding cash in case they get into trouble, they need by regulation a certain amount of capital) they must cut costs.

    When individuals cannot get credit to purchase a new car or a new stove, then the sale of large manufactured goods plummet. Even Toyota is starting to feel the pinch of slumping sales. This in turn causes companies to lay off staff, etc..

    This crisis has a ways to go yet. Next on the horizon could be credit card debt.
  • GQjock

    Posts: 11649

    Oct 06, 2008 10:43 AM GMT
    and then after that .... all these monstrous Hedge Funds that have been stacked up on all these credit swap trades

    Hose of Cards people .... icon_eek.gif
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    Oct 06, 2008 11:00 AM GMT
    I get the credit aspect and banks not trusting banks because of their uncertain exposure....but the WHOLE WORLD.....that much capital was sunk into these things from all over the WHOLE WORLD......how many friggin' houses did we build!?!?!?! ....all those national banks in Europe are in a crunch cuz of these mortgages???

    Oh and BTW I read the real estate market tanked Ireland before the US....so they cant blame that on us.
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    Oct 06, 2008 12:29 PM GMT
    Caslon7000 saidI get the credit aspect and banks not trusting banks because of their uncertain exposure....but the WHOLE WORLD.....that much capital was sunk into these things from all over the WHOLE WORLD......how many friggin' houses did we build!?!?!?! ....all those national banks in Europe are in a crunch cuz of these mortgages???

    Oh and BTW I read the real estate market tanked Ireland before the US....so they cant blame that on us.


    Yes the whole world because as GQJock indicated the financial system is so interconnected a contagion will spread like wild fire. Ireland's housing bubble was even more pronounced then the USA's. There housing prices went up over 200% in 10 years. Canada's by comparison was a modest 70%. The UK housing prices also skyrocketed and are now starting to go down which is dragging their economy into recession.
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    Oct 06, 2008 12:46 PM GMT
    Good lord! ....

    "The real roots of the crisis lie in a flawed response to China. "

    http://www.washingtonpost.com/wp-dyn/content/article/2008/10/05/AR2008100501253.html?hpid=opinionsbox1
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    Oct 06, 2008 1:14 PM GMT
    Other rich Countries backed/bought paper for high risk ppl's mortgages; high risk to default. When a high number of ppl could not pay their mortages and credit card debit, the other Countires lost big bucks.

    Canada has a simple policy in place to restrict the lending of monies to those who cannot afford a high level of monthly mortgage payments - that way we avoid the situation the US/World finds itself in. This would have helped in avoiding the Federal Gov.'s social-funding/buy-out of the Corporations at the ppl's expense. A re-active approach, not pro-active; all based on greed.




  • Posted by a hidden member.
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    Oct 06, 2008 2:38 PM GMT
    Caslon7000 saidGood lord! ....

    "The real roots of the crisis lie in a flawed response to China. "

    http://www.washingtonpost.com/wp-dyn/content/article/2008/10/05/AR2008100501253.html?hpid=opinionsbox1


    Interesting viewpoint. Certainly keeping credit so cheap for so long was the initial starting point. Mortgage companies and banks then aggressively pursued loaning out money without being prudent about who they were lending to. They also came up with very risky mortgage instruments that were predicated on housing prices always increasing. The result was too many mortgages being at risk for default if the housing bubble burst. The new financial derivatives that were securitizing the sub-prime mortgages ensured that financial institutions the world over got entangled in it without knowing how exposed they were. It is scary to think that some of the CEOs of these large financial institutions did not even understand these new complex financial instruments.

    Stock markets today worldwide are plunging as stocks are priced down to reflect future lower earnings of corporations due to an expected recession. The Canadian stock market has dropped nearly 20% in a week!
  • CuriousJockAZ

    Posts: 19119

    Oct 06, 2008 3:29 PM GMT
    Ugh! This is getting ugly...no, make that FUGLY!! icon_eek.gif The whole world financial market is in a tailspin
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    Oct 06, 2008 5:28 PM GMT
    For your reading pleasure and education, this article is from the Bloomberg website. Fascinating insight into the role the rating agencies played.

    http://www.bloomberg.com/apps/news?pid=20601170&refer=special_report&sid=ax3vfya_Vtdo