In a very simple terms, please explain the reason for today's financial crisis.?
January 8th, 2009 wktdThis made people panic and remove their money to other places (under the bed).
Then another reporter decided HE needed a payrise and made a big deal about a stock price reduction of a big firm, so then trading went mad because HE said it would.
Simple solution - stop prats making reports and PREDICTIONS on things most people do not fully understand and which only happen because they have said it would.
You see, in the old days (30 years ago), banks worried about making bad loans. In those days, you couldn't get a home loan unless you had a hefty (10-20%) downpayment upfront, plus could prove to the bank that your income would cover the cost of your mortgage over the years. The reason? Individual Bank Lenders would be stuck with the losses if you defaulted on your loan. They didn't want that to happen.
But then along came deregulation, and government backing, and AIG insurance to bail banks out (so they thought) if they took bad risks and lost money. So what did banks have to lose by lending money to people who couldn't really afford the homes they were buying.
Now young couples and others could buy homes with ZERO down payment AND they could get an ARM (adjustable rate mortgage), which means for 5-7 years they only had to pay a low monthly payment, say $1,000/month--but at that 5-7 year point? Suddenly they had to start paying $3,000 per month or more. Unfortunately, these sub-prime buyers could now no longer afford to make these hefty new mortgage payments to their banks and they began to default on these payments, forcing themselves into bankruptcy and causing their homes to go into foreclosure. They couldn't just 'sell' their homes so easily, because there had been such a glut of easy buying that prices nationwide had been artificially driven up. Now there was a glut of houses on the market, causing the cost of many homes to fall in price below what the buyers had paid for them in the first place, IF they could sell their homes at all.
To put it simply: Wall Street was deregulated, which allowed them to take Huge Risks without accountability to any government overseers. They invested heavily in sub-prime mortgage-lending, an Unknown and High Risk Road to take--and they lost. AIG, which took on the unprecedented path of letting banks buy insurance from AIG which would protect them from any losses due to the banks' own RISK-TAKING allowed risk-taking to run rampant--with no gov't regulations to say, "Whoa! You're going overboard!" [before this, companies like AIG insured people for flood or hurricane damage--but never something as uncalculable as 'overextending one's company in High Risk ventures"}.
So banks went under and AIG said, "Sorry, we made a mistake. We can't pay you for your losses like we promised you we would when you bought your insurance policy from us."
Now banks are wary about lending, which means it's harder for people to get car loans, etc. So car sellers have to lay off employees. Detroit has to cut back on cars it builds because it has fewer buyers, so they have to lay off workers too. Unemployed workers don't spend as much on clothes or haircuts, they aren't going to remodel their homes after all, etc., so layoffs start rippling down through other industries, small and large....
...and with fewer companies and working citizens to pay local taxes, that means your local governments will have to start cutting back their funds to schools and possibly start laying off teachers; they will have to cut back on county services, etc.
...and on and on it goes.....
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