Timeslice

The Global Economic Meltdown. Credit Crunch. God I love this terms.

With all the sh*t floating around in cyberspace, this is the ‘idiots guide to the Global Economic Meltdown’. An easy to read/follow explanation on why the economic disaster we are facing now happened in the first place.

[disclaimer: when explaining the reasons below, I did not take into consideration other factors involved, so as to make this post as easy-to-read as possible. For complex reasons as to why the credit-crunch is happening, go to other websites]

Status quo: US banks/major financial house going into bankruptcy. What happened?

1. It is caused by bad management of the above-mentioned companies
2. They wanted more profit (by earning from the interests received by their customers) - so they issued more loans to them
3. by giving loans: this is called the sub-prime loans
4. sub-prime loans are used to buy houses (or re-mortgage it)
5. However, many of the customers taking out these loans DO NOT QUALIFY to receive them (such as low income, low surety, questionable guarentors etc.)
6. the banks know this
7. the banks issued loans nonetheless
8. coz the more people owe the banks, the richer the bank becomes (technically speaking, this logic only works if the customers actually pay back the money. If they don’t, then the bank goes bankrupt)
9. House owners/developers see that there’s a lot more people who have the cash to buy houses
10. so the house owners/developers jack up the price (Demand goes up, then so does the price - econ101)
11. sudddenly, these new borrowers can’t meet the new high prices
12. and therefore can’t pay back the loans. (seeing that they didn’t qualify for the loans in the first place made it harder for them to pay back)
13. so many of the borrowers couldn’t pay back
14. so step no.8 kicks in- the borrowers don’t pay, and the banks goes busts
15. who’s fault is it? I’d say it’s the banks….

So why must the US taxpayers pay for the problems of mismanagement of “private” firms? I don’t know, do you?

p/s:Another good read is from the BBC’s Megazine: “why do we need economic growth in the first place?“