A
aftab.ulhaq
Guest
easily understand it ? We all talk about global recession but hardly few of us know the original cause, it would be great effort if somebody can break it down in a way that a normal person can easily get it.
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Can somebody explain financial crises in a way that a normal uneducated person can
Sure.
Well banks take your 1000 dollars in your account that you make from work and lend it out to people to buy homes. But not just you, everyone from big billion dollar businesses to your ceo at your company to your kids saving account.
So basically banks have to make money to stay in business this is how they are able to offer you interest payment on your money in the bank. So to put it real simply, say you put 300,000 in the bank. The bank then lends that money to your neighbor to buy his house and makes him pay 4% interest rate while paying you only like 1% on your savings. The bank only has to have like 5% of all debts on hand. So the bank owes you 300,000, so by law the bank must have 5% or 300,000x0.05= $15,000.
Now you might ask what happens if I asked the bank for my $300,000 right after they loaned out the money to that guy. Well the bank never gives you $300,000 in cash on the same day they can take weeks to get that money ready. I tried to pull out my 10,000 and it took 1 week. However banks borrow from each other as well too, so even if your bank didn't have your $300,000 they could borrow it from the other bank. If that bank had no money they could borrow it from the federal government.
Anyways what usually ends up happening is that if you get a $300,000 loan from JP Morgan they don't keep that, JP morgan wants their money now. They then sell the right to collect your mortgage payments to some special private investors who want to make lots of money but over a long period like a hedge fund manager. However, a hedge fund manager has no interest in dealing with customers, so the bank agrees to continue collecting cash from you and dealing with you even though they technically don't have a loan with you(remember they sold their loan for money now to the hedge fund manager).
So now that things are going well for you and the bank has its money. They say hey lets loan out this $300,000 again to say a man named bob instead of you, and the process goes on. Lets say Bob is one of the guys who takes out a loan on his house so he can buy another car or another house in upstate new york.
Lets say Bob gets fired and loses his job. Lets say Bob has to sell his house because the economy has turned downed. It did not happen suddenly, the news has been reporting if you watch shows like Glenn Beck that they were reporting people borrowing money to pay of other debt. Lets say that includes Bob. His new suv cost $100,000 and his other house $250,000 and he has been using his second mortgage and credit cards to pay for these assets. So if Bob got fired lets just say it wasn't Bob, business go bust all the time, even in a good economy, lets say it was his whole factory and many of them behaved like Bob in spending money they didn't have.
Well suddenly the bank manager starts to notice that people there profits are down, so they take counter active meausures. They are going to raise interest rates on credit cards and mortgages. Bob defaulted on his loan, and other people from that factory are defaulting, so lending just got a whole lot riskier especially because you have some people saying the economy is going down. If 100% of people pay you back the money you borrow you can have a low interest rate, but if only 50% are paying you back your money then you need a high interest rate to make up for the people who get fired and can't pay mortgage.
You might say well wait a minute, I thought that fancy hedge fund owened Bob's loan, well your right they do and the bank still got $300,000 from hedgers for it but the hedge fund managers will demand their money back and sue and win if the bank doesn't make the promised monthly payment. Remember, hedge fund managers don't deal with customers except the bank.
So the bank needs to find lets say the mortgage was 2000 a month, they need to find 2000 a month that Bob stopped paying otherwise they will collapse. Remember the bank lended out that money they got from the hedge fund (300,000) to other borrowers. So they can't pay out of that 2000 they promised to the hedge fund from the $300,000 they got from them.
Now if enough borrowers start to default even high interest rates won't help the bank. Eventually the bank will default on the money owed to the hedge fund. Now if the hedge fund has expecting that $2000 a month Bob was to pay, to pay its employees and it doesn't come they eventually start to fire employees. Until they run out of employees to fire. Because now its like there are thousands of Bobs, now what if there are millions. Its a vicious cycle, high interest rates means more people default but the bank needs to try to stay in business so it can't not raise the rates. Now lets say the bank got overwhelmed too many customers default they go out of business. Guess what that bank is going out of business. So that hedge fund which relied on payments from the bank is also going out of business. This mean
Well banks take your 1000 dollars in your account that you make from work and lend it out to people to buy homes. But not just you, everyone from big billion dollar businesses to your ceo at your company to your kids saving account.
So basically banks have to make money to stay in business this is how they are able to offer you interest payment on your money in the bank. So to put it real simply, say you put 300,000 in the bank. The bank then lends that money to your neighbor to buy his house and makes him pay 4% interest rate while paying you only like 1% on your savings. The bank only has to have like 5% of all debts on hand. So the bank owes you 300,000, so by law the bank must have 5% or 300,000x0.05= $15,000.
Now you might ask what happens if I asked the bank for my $300,000 right after they loaned out the money to that guy. Well the bank never gives you $300,000 in cash on the same day they can take weeks to get that money ready. I tried to pull out my 10,000 and it took 1 week. However banks borrow from each other as well too, so even if your bank didn't have your $300,000 they could borrow it from the other bank. If that bank had no money they could borrow it from the federal government.
Anyways what usually ends up happening is that if you get a $300,000 loan from JP Morgan they don't keep that, JP morgan wants their money now. They then sell the right to collect your mortgage payments to some special private investors who want to make lots of money but over a long period like a hedge fund manager. However, a hedge fund manager has no interest in dealing with customers, so the bank agrees to continue collecting cash from you and dealing with you even though they technically don't have a loan with you(remember they sold their loan for money now to the hedge fund manager).
So now that things are going well for you and the bank has its money. They say hey lets loan out this $300,000 again to say a man named bob instead of you, and the process goes on. Lets say Bob is one of the guys who takes out a loan on his house so he can buy another car or another house in upstate new york.
Lets say Bob gets fired and loses his job. Lets say Bob has to sell his house because the economy has turned downed. It did not happen suddenly, the news has been reporting if you watch shows like Glenn Beck that they were reporting people borrowing money to pay of other debt. Lets say that includes Bob. His new suv cost $100,000 and his other house $250,000 and he has been using his second mortgage and credit cards to pay for these assets. So if Bob got fired lets just say it wasn't Bob, business go bust all the time, even in a good economy, lets say it was his whole factory and many of them behaved like Bob in spending money they didn't have.
Well suddenly the bank manager starts to notice that people there profits are down, so they take counter active meausures. They are going to raise interest rates on credit cards and mortgages. Bob defaulted on his loan, and other people from that factory are defaulting, so lending just got a whole lot riskier especially because you have some people saying the economy is going down. If 100% of people pay you back the money you borrow you can have a low interest rate, but if only 50% are paying you back your money then you need a high interest rate to make up for the people who get fired and can't pay mortgage.
You might say well wait a minute, I thought that fancy hedge fund owened Bob's loan, well your right they do and the bank still got $300,000 from hedgers for it but the hedge fund managers will demand their money back and sue and win if the bank doesn't make the promised monthly payment. Remember, hedge fund managers don't deal with customers except the bank.
So the bank needs to find lets say the mortgage was 2000 a month, they need to find 2000 a month that Bob stopped paying otherwise they will collapse. Remember the bank lended out that money they got from the hedge fund (300,000) to other borrowers. So they can't pay out of that 2000 they promised to the hedge fund from the $300,000 they got from them.
Now if enough borrowers start to default even high interest rates won't help the bank. Eventually the bank will default on the money owed to the hedge fund. Now if the hedge fund has expecting that $2000 a month Bob was to pay, to pay its employees and it doesn't come they eventually start to fire employees. Until they run out of employees to fire. Because now its like there are thousands of Bobs, now what if there are millions. Its a vicious cycle, high interest rates means more people default but the bank needs to try to stay in business so it can't not raise the rates. Now lets say the bank got overwhelmed too many customers default they go out of business. Guess what that bank is going out of business. So that hedge fund which relied on payments from the bank is also going out of business. This mean
Bill McBill
New member
The barbs of capitalism have finally reached the top of the Hierarchy.
M
mister ed
Guest
think of your local bank -- it takes savings and pays interest on the money to the depositors -- it than takes this money and loans it out at a higher rate to folks for cars homes and other needs -- well everyone got greedy and any one who want to buy a house no matter if they could pay for it or not was given a loan!!! well when they started going bad on the loan the banks of course was losing money and they still had to return the depositors money -- so the crisis occur or in layman's terms the crap hit the fan!!!