Credit crunch lesson?

Question

I know what it means to my family as far as our daily life goes but what caused it and what are the wider implications of it?

Answer 1

The lesson is the major banks should have taken my advice and contact me after I wrote many of them letters in 2006 telling them of financial 'D-day.'

I offered to help and warned them in writing of the credit market risks, but they stuck their heads in the sand and said:

"there are no bad loans in my portfolio"

"there are no bad loans in my portfolio"

"there are no bad loans in my portfolio"

I saw the risk begin in spring 2004 when the FED first started raising interest rates.

The FED screwed up the economy and housing market by raising rates 17 times in 2 years (2004-2006) to reduce "inflation risk."

http://www.msnbc.msn.com/id/13615923/

The result was a 425% increase in the Fed Funds Rate (FFR) to banks in 2 years. And no one thought that this could impact adjustable mortgage rates?

FFR 06-25-2003 1.00%

FFR 06-29-2006 5.25%

Difference: 4.25% or 425% increase.

http://www.newyorkfed.org/markets/statis...

The Fed's "inflation control" failed misery, and was 50% of the equation of the credit crisis.

There was no inflation. The only thing that was going up in price was oil which is NOT controlled by the FED, or anyone in the U.S. Gov despite limited thinking belief.

Oil is controlled by the free global market, and can be influenced by supply by OPEC. The U.S. Dollar also impacts oil prices as oil is traded in (USD) Dollars.

http://en.wikipedia.org/wiki/Petrodollar

http://www.forbes.com/afxnewslimited/fee...

The resulting higher fuel costs got passed on to consumers as virtually everything is imported  to the US, and or is then trucked around the country. Trucking uses fuel, hence higher food prices.

The huge global demand for natural resources by China and India emerging into a bigger economy also drove oil, and other commodities such as the grains (soy, corn, wheat, oats), fertilizer, copper, steel, etc., higher.

(2006 article)

http://www.worldwatch.org/node/3893

Then, our brilliant gov continued to demand to "save the environment," (like anything the US does on it's own is going to change the polluting ways for the rest of the world (ex most of the EU). So the gov insisted we should still use corn based ethanol in gasoline to save our environment. We'll, corn prices soared 300% in 2 years. And yes, that will drive fuel prices higher. If they just take the ear of corn out of our fuel, gas prices would fall!

http://query.nytimes.com/gst/fullpage.ht...

And the cost to grow that corn?

We'll, fertilizer prices soared 200% in 2007alone. Check out this long term chart!

http://news.mongabay.com/2008/0220-ferti...

What else caused the mess?

The other 50% was banks making loans against traditional lending standards. This can be traced back to the Clinton administration's HUD program. Former Clinton HUD director Henry Cisneros - (D),  wanted "poor" people to be able to afford housing.

The end result was the prev (Clinton) administration allowed banks to have more relaxed rules when it came to home lending.

"In 1995, President Bill Clinton's HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers."

http://www.washingtonpost.com/wp-dyn/con...

If poor people can't afford their rent, and live on minimum wage, state, and or federal aid, what makes one so sure they can pay a 30 year mortgage?This is gov thinking at it's best.

More on HUD's Past Blunders

http://www.city-journal.org/article01.ph...

For the other poster.

How exactly did Bush cause what?

Yea, "despair, crime, (and) suicide" were all causes of the credit/ mortgage crisis? Please.

Here is the key.

When you have people who have no clue on how the financial markets, or how our domestic and global economy work, and then have these people make financial decisions, you will always have problems.

Answer 2

The credit crunch lesson must be all about money and how risky it is to invest in it. Like the mortgage related investment plan and now known as the infamous US sub prime mortgage. Investors in the US,UK and all over the world lost in hundred of billion dollars. In the US this sub prime mortgage cause crisis in its financial system and the FEB has to step in to bail those banks out. Those who planned such investments made huge profits and those investors and banks lost heavily and have to be contented with the Credit Crunch. A wise investor is one who undertake their own risk management plans before making any investment involvement their hard earned money. It is also important to undertake a credit assessment on the planner of their investments products. Also it is not fair to blame the government entirely when their investment went wrong.

Answer 3

Easy answer for the layman is the banks lent big money to people (mainly to buy houses) who were bad risks, and could not afford to pay it back.

eg, Let`s say YOU lend big bucks to someone to buy a rather expensive car, cos they told  you they have a good job and a steady income, and will have no trouble paying it back.

............................

They lose their job, the car is repossessed, he still owes you big bucks!

The situation then is, he still owes some money to the car-seller, he also owes YOU money.  He now has no or little income.

You also now have no savings and he can`t pay you back  - you have been credit-crunched!

Basically, it was a house built of cards that has collapsed.

Answer 4

Came from the good old U S of A, thanks to George Dubya Bush. Then there was the issue of irresponsible lending and practices by financial organisations as well. Joblessness, despair, crime, suicide etc are all going to be implications.