We stand on the threshold of the biggest financial crisis. So much has happened in the past few weeks that I felt it was important to step back and try to get a handle of what happened. At that time, it all seemed so beautiful. More and more people living the American dream of home ownership. Those who already own the buildings were glad to see them reduce the value and are glad to connect to the justice to purchase cars and vacations. This story is played out in so many countries.
But the composition came together in the financial markets, which make for a bad prescript. Many people assume loans that will probably never be extinguished. Large financial institutions are crediting more and more money to doubtful borrowers as a path to fast incomes. They could “set” of hypothecs and sell them to another person. Rating agencies blessed them, and they were sold around the world.
It makes me think of Warren Buffett quote: “Only if the water comes out you will find who has been swimming naked.” The tide in this case is housing prices. In connection with the reduction in house prices, these packages of mortgages fall in price. Then the financial institutions holding such risky packages should devalue them on their books.
Now the pendulum of easy credit has move too far in the rightabout. Each player on the market has been more conservative, then down right stingy with lending. We need qualified buyers to build and buy homes, thereby maintaining prices. But lenders have become so strict that it is not happening, and prices continue to decline. Mortgage securities impairment, the strength of financial institutions is weakening, so that they come less and prices continue downward in a self-perpetuating vortex.
This unwillingness to provide what led us to the current crisis. Loans and credit red blood cells of the financial system of circulation. Think of them as the necessary oxygen and nutrients to sustain the body. With Fed Chairman Bernanke and Treasury Secretary Henry Paulson saw in mid-September was to reduce the credit to an unprecedented level. The recent take over of Fannie and Freddie and AIG, had to restore some meaning of order and keep credit flowing. But this was insufficiently, and the markets were at a crucial moment.
Although unpopular with most citizens, the final adoption of the $ 700 billion rescue plan will be vital to restore confidence in the financial system. Just as markets breathed a temporary relief problem went abroad.
Fortunately, the euro Nations and Britain unveiled a bailout plan, which was considered more comprehensive than the U.S. plan. Investors believe it could be even more effective, because it guarantees bank deposits and introduced directly into the patient capital of banks.
These measures are likely to avoid the very real risk of depression, but this seems unlikely at this point, we are entering an economic recession. It will be better, but it will take time for the economy and financial markets to heal.
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