Seems the banking part that got into trouble was the ARM loans on inflated housing, which went by a formula, and were all lumped together & resold into on of the few big banking institutions. The more local banks were doing business more or less as usual, and really wouldn't have too many problems these days. It's the big ones that took on too much risk to try to keep up with the other big ones, who were trying to keep up.....
It's actaully a pretty small % of 'problems' out of the whole bank loan industry, but it has put the squeeze on several of those big boys. So they are drying up credit to try to keep their head above water, and this trickles down to other institutions - and you & me.
But again, it mostly affects the big boys, as they were into offering 20-30 year loans, and instead of financing them with long term CD's or etc, they were financing them with 30 day notes to each other. Well, now, each other needs cash, so the 30 day notes went in the toilet, and the big boys can't find any way to finance all those long term loans that really don't look too good right now.
So, they are using up their cash reserves trying to figure out how to deal with all these poor value ARM loans that don't have anything to back them up.
The problem is by burning up their cash, they can't make any more loans - even good ones - because they don't have the cash left. So they are in a pickle - a few more bad loans than expected; no one with short term money to lend them; and no long term investments to pull in steady income.
Oops.
They set themselves up with very short term lucritive income, and now got no income to pull through a period of riskier loans outstanding.
The local banks will be affected, but are not in the middle of this losing game.
As you say, most of us don't trust the big banks or the govt & assume we will be screwed over by both, so we aren't buying as much.
Which, hurts the retailers and the manufaturers.
Which can't meet their short-term obligations then, so have to stretch out their payments or not meet payments or something.
Which, again tightens up available cash in the banking industry, and makes all the big boys short on funds.
Put another way, the real big banks leveraged themselves out to the bitter end, making riskier & riskier loans that paid off today but had a lot of clouds with them, and using too much short-term borrowing that looked good 'this week' but no balance with long-term incomes to weather any storms.
Storm hit, big banks have no cash. Poof.
Stock market works on confidence. Everybody buys when things look good, everyone sells when things look bad. With the electronic and off-hours buying & selling, it happens a lot faster now. You & I can be trading by computer. So, we lose confidence in the ecconomy, & everyone sells. We know it's going down tomorrow, so no point in buying - just wait, it will get lower....
So, the stock market goes in the toilet. No suprise. Business doesn't have to be bad - it's just those trading stocks are confident prices will go down - so they do.
Nothing the govt can do to change that - throw money at banks & businesses - who cares, the stocks will be lower tomorrow, so no point buying any today..... And so it comes true, stocks continue down. Doesn't matter if a business is doing well, or the ecconomy is good or bad - it's all in our head, we won't buy a stock until it comes down. So it's gotta fall.
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