QUOTE(Suijen @ Sep 29 2008, 10:20 PM) [snapback]3943286[/snapback]
All right, I'm have a pretty weak economics background but I'm hoping someone here will add to/correct what I think is happening.
First, an inflow of foreign capital to American banks means that banks have more capital, so they want to make more money by loaning that money out.
They decide to give a lot more "subprime mortgages", which are mortgages that are below market value. Basically, they give unusually cheap loans for homeowners who aren't qualified for regular loans. The banks did this because they have that influx of capital.
Then, homeowners start buying up houses like nothing because of all these easy loans. This demand drives up the cost of houses such that...for some reason, these homeowners can't pay up the interest rates for the houses they borrowed and thus default on their loans, saying they can't and won't pay up.
The banks thus lose so much money that they're bankrupt, and so the current crisis we have right now is a bailout package to these banks since they lost so much money from so many defaulting homeowners.
And the $700 billion dollar package is to make sure that the banks have the money for the people who put the money into the banks.
I'm no expert. But, this is how I see it ...
It started when the Feds moved the prime rate lower to stimulate the economy.
Then, the housing market heated up. People could afford to buy houses with cheap loans.
Next, the price of the houses went up because there was more buyers.
This made the people who bought houses earlier look like they have more equity in their homes.
Which in turn made them look like better risks. The Sub-prime mortages looked better and better as
an investment. The houses were worth more ... prices kept increasing.
Lenders saw it was easier to get back their money in case of defaults.
It looked like a safe bet. And so, began a campaign to lend more.
Unfortunately, the prime rate went up. The housing market cooled.
The borrowers couldn't pay the new monthly mortage payments (Adjustable Rate Mortages).
And began defaulting on the loans.
All of a sudden the lenders couldn't get the money back because the value of the houses diminished.
Crunch, ... some of the investors were big banks and financial institutions.
These investors were neck deep in their bets on the sub-prime mortages.
As the fall continued, these investors went bust. Failed.
Now, was it irresponsibility? Or, a mad rush for what looked like gold?
Who ends up hurt and who pays for it? US ...
you and me and all our children to come will end up paying for this mess.
One way or another, we will end up paying.