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My turn.
I am hoping (wildly) that by the dissemination and advancement of my current compiled information regarding the crisis, I can help people better understand just what exactly's going on, and it logically follows that if one knows the problem, one can help fix it. One caveat, some of this will sound somewhat foreign (despite my attempts at simplification) without a general knowledge of economics, sociocultural politics, finance, and international business. I'm also still not very certain about it, as my compiled info in and unto itself isn't really complete...a lot of it is conjecture and work-in-progress, based on some uni lectures, news reports, and a Wiki article or two.
Oh and one other thing, I'm no expert on this stuff. Feel free to correct me or point out anomalies as you see fit.
A Wooden Fireworks Factory
Anyways...a lot of what caused this crisis can be traced to the extremely rapid economic growth of China and other East Asian countries. This meant that the world had a lot of cash liquidity (i.e. buildings and other assets that CAN be quickly converted to cash) floating around, coupled with domestic saving and large foreign exchange reserves. The banks that controlled this cash liquidity decided to spend it in sub-prime mortgages (I'm sure you've heard it a lot, but this basically translates into lending money to people who may not pay you back). And because it became so easy to come by credit, houses were valued at much more than they should've been worth, since it suddenly became that much easier to pay for it.
For the average citizen everywhere, all this meant that money was suddenly easier to come by. Nobody cared about how much exactly they had to pay back in the future, what mattered was the money they got right now by asking banks. Additionally, this meant that markets around the globe were getting "richer" faster than the government could keep up, and governments failed to erect monetary policies meant to curtail this kind of rampant growth.
Additionally, this meant a lot of people (banks/lending institutions/etc) investing in construction projects, especially in housing and buildings.
Firestarter
A lot of this started coming down when the banks began to ask for the loans to be repaid, as per their contracts, loans that people simply couldn't repay. The housing market, which saw the most growth from the bubble, also was hit the hardest, as the economy reached a point where there were too many houses and not enough buyers, meaning the they had to offer them at ever-cheaper rates to stay competitive. Worse, people who couldn't pay back their debts had their houses foreclosed (taken away, repossessed) as a result, which simply put even more houses onto the market and drove their costs down even further. You can imagine the same thing happening in different markets and industries.
Fallout
All this meant that banks suddenly found themselves with very little money and lots of debt to pay off. Quite a few of them were forced to close. In the UK, Northern Rock, a major UK banking institution, applied for help from the Bank of England (equivalent to the Federal Reserve/FDIC in practice) and was subsequently bailed out. (As an aside, this meant the first bank run in the UK since the Great Depression, where people lined up outside the doors to withdraw their money).
Those banks and institutions that DID survive without being sunk became much more concerned about lending money out, and rightfully so. They needed to save money to re-capitalise, and couldn't afford further losses. The sinking of major institutions like Northern Rock in the UK, WaMu in the US, and the Lehman Brothers, also meant that banks were reticent to loan to each other, since the loss of those institutions signaled that even large banks could go down.
Again, to the average Joe, this meant that credit (loans, mortgages, etc) became much harder to come by, as people wouldn't be willing to loan out anymore. The growth of small businesses, the drivers of any economy, were hampered by a severe lack of available credit, and as expected, the economy took a nosedive.
Who's to blame?
It's very easy to point fingers in today's world; after all, it's everyone's fault BUT mine. But who's to blame, really? The answer seems to be everyone, and no-one at the same time. Should we blame China for growing? A silly presumption if any; growth is the next natural step. China was a country that had the land, capital, and through foreign investment, the money necessary to start its growth. This could have been a good thing too.
The blame, then, seems to lie in what people decided to DO with the money earned from this. But how are the banks really to blame for all of this? Again, the people benefitting from the bad loans didn't care if they were unstable, they cared about the money coming into their coffers too much to worry about the future. The banks didn't, or maybe couldn't care about who they were lending to. From the point of a bank, if you didn't give money out like this, you lost customers to competing banks that DID, and they got stronger at your expense.
Government seems to be the next person in line for the blame, then. After all, the government is supposed to stop the banks from making these irrational decisions, as the government is the all-seeing eye, the commander who can see the entire battlefield while the bank is merely the footsoldier with a ground-level view. However, economics are ever-shifting and complex. A lot of it is predicted and not foreseen by its very nature. It's akin to putting a general in a hot-air balloon above a battle in New York and giving him orders to command troops in San Francisco based upon what he sees below; try as he might, he will never ever have a complete picture of everything, and must make judgements based on what he sees.
(As an aside, I'm relieved nobody ran around screaming about how this is all Bush's fault. Not that I commend Bush in every aspect of his career, but the thing is, he has little, if any, direct control over governmental fiscal policy, and transitively, the economy…it's the duty of the financial arm of the government, while Bush is the tip of the administrative arm. The more astute in history will have noted that the same thing happened during the Great Depression...Hoover shouldered most of the blame for the depression, and conversely, Clinton rode in on the coattails of the economy's success back in the 90's. Like today, none of them have had any real control over the economy.)
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Okay, I'm exhausted. Hopefully someone'll have learned something from this...
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