The Financial Crisis
January 18, 2013 in Financial Crisis
We can scream and shout as much as we want. We can occupy Wall Street or burn banks. We cannot however yet come to understand how the world got into the financial crisis. We are constantly bombarded with reasons and scapegoats. From clergymen to the simple farmer there is not one who can give us a decent answer. To shed some light on this matter we must begin with the interdependence of the world with the United States of America. The USA is the greatest market in the world. Without its endless supply of dollars the world cannot function. The Chinese have done a great job by buying as many dollars as they can to keep the US economy running. The sloppy job done by US bankers disturbed this system and caused the world to come to a standstill.
The bankers thought the days could never go bad. They thought they could continue scheming and the whole economy could take it. For the simple mind let’s take two examples. First let us look at the instance where the people of the US had mortgaged their houses to the banks. When things started going a bit uneasy these people started falling on these payments. The big bad banks didn’t care and thought that they could scare people into paying by taking away their houses which were perfectly legal and fair. The housing market was on the rise and these foreclosed houses could be sold at heft prices. The problem started there. As the US economy was being outsourced to countries like Bangladesh, India and China, there were no jobs left for the people of the US. The wars the US was fighting were getting extremely costly and the defense expenditure itself was going overboard. The rest is all simple give and take. If people don’t earn, they don’t have money to pay the banks. If they don’t pay the banks their houses go to the banks. When a lot of people do this the multitude of houses in the market cause the prices to go down and hence pop the bubble. Up till now we have only discussed this in terms of the US. In fact this exact same thing happened all around the world. Short of a total collapse of the market we found property prices around the world coming to their lowest in decades. People were emptied out of their savings and assets. The banks had houses which were a dime a dozen. All in all these banks could not recover their losses. These banks came near to collapse. Another dimension to this problem is how people could invest so poorly and how could the people in the banks act as if they had nothing on the line.
The main investment banks in the US including banks like Goldman sachs and JP morgan were interlinked with smaller banks who were given money through these banks and hence formed the entire financial net. These banks have rules regarding the amount of assets a bank can loan out with respect to the deposits made by the people. Meaning that if you deposit 10 dollars in the bank. The bank could only loan out 5 dollars of that. These big bad banks though to make billions of dollars in profits by actually agreeing with these banks to end this ratio and hence lend indiscriminately. The rest is history. When you have a pot brewing where there are not enough injections within the economy and companies like moody’s giving false information to the investors within the public, the whole scene was set for disaster. It’s not rocket science but only with a little prudence and foresight this entire debacle could have been avoided. The rest is indeed history.
Trenton Fortes is a Financial Analyst and a writer. He writes on http://www.speedyloan.com, a website that talks about payday loan Opportunities around the world. You can check the website for more information.