Reasons for Banking / housing collapse?

Question

I need to write an essay on the background issues leading to the collapse of the banking and housing market within the current economy. Does anyone know of any good websites or information to help?

thanks x

Answer 1

Yes, you need to read the Wall Street Journal articles from mid-August 2007.  The process started when German banks were unable to fund their deposit requirements and quickly exploded into a world wide bank run, which is what this is.  The writing about bubbles is somewhat true, but doesn't explain why the problem has continued.  A bubble, like the tech bubble, or older ones like the "Nifty Fifty," do not automatically impact the real world, outside the investors who lost money.

What has happened is that Europe and the United States have been experiencing a liquidity crisis, an inability of institutions and people to convert assets to money and a demand on the entire banking system of Europe and the United States to convert their assets to cash.  If a bank has a choice between making a loan and holding cash, they choose a loan if they can since a loan produces money, but if depositors are coming in demanding cash, they choose cash.  If you cannot get a mortgage at any price, because the banks are out of money to lend, then housing prices have to fall down to the point that people of better means are the only people able to get loans.

Answer 2

too many monkeys in the financial system

Answer 3

Bubbles always collapse. Housing was a bubble -- meaning a market in which speculative expectations bid prices way beyond the fundamental value of the assets. Eventually prices must fall closer to their underlying values. In the case of assets where a lot of leverage is employed to finance the transactions, the collapse will be far faster and more severe.

You saw the same phenomenon with technology stocks in the late 90s, and you are seeing it with oil this year.

Answer 4

It's because of the inflation.