06-04-2008, 04:09 PM
Evan Wrote:Its hardly a "crisis", a word that has been so overused and misused that it doesnt mean anything anymore. "Crisis" is a price shock to the tune of "no one can afford to eat anymore"
Sure does get people's attention on the news though, doesnt it?
We are definately getting hit in a couple different places at once, which doesnt feel good, but ultimately its the standard cycle of economics and should self level itself just like always. Well, unless the governement dicks with things even more, like eliminating investment risk.......
It totally is a crisis. The global pool of capital has dried up. Apparently, most folks don't even know how much money has been lost. The simplest way that I understand it is the following:
The world's total savings which is about 73 trillion dollars (google fixed income securities) needs a safe place to invest because with that kind of loot, a low rate of return still nets a metric ass ton of money. Here's the big fact: Global savings has doubled since 2000. It was around 35-36 trillion. There's a bunch of new money in the system from new wealth created by the American tech boom, China, India, mid-east oil nation , RJ's car/moto spending spree etc etc.
Nothing is safer than the American treasury so that's where investment would naturally flow. However, Greenspan kept the fed rate at 1% which drove investment away from T-Bills and bonds etc etc into the stock market. So the global pool of money needed to find something just as safe.
A few financial analyst came up with the idea of packaging American mortgages into securities called Mortgage backed securities . It's a fancy word for assembling a bunch of loans into one big huge loan with a low low rate of default at 2-3%. So it's really safe but yields a %5 return. Whats not to like?
So long story short, a cottage industry was built around folks giving out crazy home loans for people because they wanted to "build" more mortgage backed securities for the global pool of money to chase. So basically a bunch of global money was poured into American pockets which will never be seen from again.
The owners of these large pools of money now don't even know exaclty how much they've lost so they won't loan out anymore of their money so even legit, large corporations can't get capital investment.
I think that's basically it in case you guys were ever wondering why regular folks could get a NINA (No Income, No Asset) home loan for 500,000 dollars with no money down, that's why. The banks wanted the fees from selling off the loan and since they didn't own the loan, they didn't have any incentive to insure that the borrower was legit.
Two feet.