I don't understand the current economic credit crisis how is it a problem?

I don't understand how some people failing to pay off their debts or mortgages can have such an impact. How exactly does it come about?|||When banks loan money the money they use to loan belongs to the depositors. The bank uses this money to generate income from the interest on the loans.





Example is that you deposit $1,000 in a savings account and the bak gives you 2% interest on your money.





I walk in and borrow $ 1,000 from the bank and they charge me 8% interst on the loan. The bank has made a profit of 6% using your money.





That was way simplified but now what is happening is the bank is not getting paid back from the $ 1000 loan to me but still has to back your $ 1000 savings.





To do that they are using up all the profits they made and money from investors into the bank. To cover this the banks have been borrowing money from other banks, who may be borrowing money from other banks.





Now you see just how complicated this gets.





Now add to that the fact that the car I bought with the $ 1000 the bank loaned me is only worth $500. So if the bank takes the car they are still out the other $ 500.





Now it gets real complicated. If your bank has too many bad loans out there and can not collect on them they can not make the payments to the banks they borrowed money from and those banks call the loans, meaning pay up.





Your bank can't pay because all the people like you with savings accounts heard the bank was in trouble and where at the door the next day to get all your money out, called a run on the bank.





So the problem is that the banks are running low on money the can loan.|||Lot of people bought into the low arm;s loans three years ago but their time is up and so is their interest rates on their homes|||It really doesn't have the impact they are making of it. The problem is that it is an election year in the US, and therefore there must be a "crisis" that the political people can "solve". How they plan on doing that varies between the candidates, but there it is.





If you look back over the history of credit for the masses in general, you will see a sine curve. People charging way over the amount they can pay back in a reasonable time, then just paying the minimum and therefore getting deeper in debt. Then they panic, and rather than owning up to the mistake and working with the creditors, they go to court, declare bankruptcy, never pay back their debts, and the banks are left holding all the bad debt. Then those same people blame the banks for giving them the credit in the first place, wait several years, get more credit cards, and replay the scenario again.





It all comes down to wanting more than you can pay for, and getting it on credit, then the sine wave occurring around the time of a major election.





Second problem - the US is big enough that money problems there affect more than just the US now. All the stock markets are interwoven, and so when one shakes, they all shake.





And you end up with what we have. My "money" is on things becoming much more stable after the election, especially if the Republicans win the presidency. When the Democrats when the presidency, all the money people run for the hills because they know they're going to lose their business to taxes to pay for free stuff for non-workers.|||PEOPLE ARE DEFAULTING ON THEIR PAYMENTS WHICH CREATES A DOMINO EFFECT ON THE BANKS AN BEING ABLE TO PAY OFF THEIR LOAN.|||People aren't paying off their debts and the lenders are suffering financially because of it. They need money to pay their employeees, pay their bills, and pay their other operating costs.|||The reasons for this crisis are varied and complex. [19] Understanding and managing the ripple effect through the world-wide economy poses a critical challenge for governments, businesses, and investors. Due to innovations in securitization, the risks related to the inability of homeowners to meet mortgage payments have been distributed broadly, with a series of consequential impacts. The crisis can be attributed to a number of factors, such as the inability of homeowners to make their mortgage payments; poor judgment by either the borrower or the lender; inappropriate mortgage incentives, and rising adjustable mortgage rates. Further, declining home prices have made re-financing more difficult. There are three primary risk categories involved: (1)Liquidity risk: A related risk involves the commercial paper market, a key source of funds (i.e., liquidity) for many companies. Companies and SPE called structured investment (2) Asset price risk: CDO valuation is complex and related "fair value" accounting for such "Level 3" assets is subject to wide interpretation. CDO is collaterlized Debt Obligations. For deals with market value tests, if the valuation falls below certain levels, the CDO may be required by its terms to sell collateral in a short period of time, often at a steep loss, much like a stock brokerage account margin call. If the risk is not legally contained within an SPE or otherwise, the entity owning the mortgage collateral may be forced to sell other types of assets, as well, to satisfy the terms of the deal. (3) Credit risk In exchange for purchasing the MBS, third-party investors receive a claim on the mortgage assets, which become collateral in the event of default. Further, the MBS investor has the right to cash flows related to the mortgage payments.Asset securitization began with the structured financing of mortgage pools in the 1970s. The securitized share of subprime mortgages (i.e., those passed to third-party investors) increased from 54% in 2001, to 75% in 2006. Alan Greenspan stated that the securitization of home loans for people with poor credit 鈥?not the loans themselves 鈥?were to blame for the current global credit crisis.


Summary: When homebuyers could pay their mortgages in such an overwelming amount, then lender and other third party investors cant pay their debt. Investors can sometimes sell their shares (that money that used to loan to homebuyers) so not only are companies not getting income from default mortgage payments but now they must now give back monies invested to make those, liquidity is trouble. They dont have money to buy goods, they do not money to hire or they need to lay off, and so on and so on.