What do you understand about the current U.S. economic crisis?
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Topic Details
This topic was started by Goliath 
on September 27th, 2008. 3 grupies have voted on one or more of the 3 answers.
Tags: america, crisis, economy, united states, us
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info dumps are usually better suited to comments than answers. is there a particular aspect of the economic situation you want us to voice opinions on?
No particular aspect. I more want to see where the topic goes. I understand VERY little about this situation. Economy is one of the subjects I'm not well versed in. I DO KNOW that I don't like how this policy is trying to be hastily pushed through.
let's see, how best to explain it....
forgive me if this is too simplistic for some or too complex for others, but this is probably as good an explanation for what is going on as i can give you: people who shouldn't have been given loans were given loans which caused the amount of cash money available to drop sharply.
here we go. the housing market was great, pretty much anyone could make money by buying a house, holding onto it for a few weeks, slapping on some paint and reselling it. if you wanted to, you could get a high-risk loan you wouldn't normally qualify for at subprime rates.
subprime lending allowed people who would not be able to afford a mortgage on a house to purchase one with an obscenely low introductory rate and a period during which that rate was fixed, after which it would adjust back up above the prime rate. (just assume that the prime rate is the rate all fixed mortgages use. if you need me to explain this, i will). what happened is that the people who had the loans (usually) paid the low introductory rate, but when the rate adjusted up to the higher value (generally MUCH higher) they found they could no longer afford to pay that rate. furthermore, a number of people had been living solely on credit instead of actually paying off their credit cards which is always a losing game.
when the mortgages began to default, the banks seized properties. this is a problem because the bank can only hold so much in assets at any given time. ideally the bank wants to have more liquid assets than fixed assets, but a number of banks began to find that their non-liquid assets (seized properties) were quickly mounting to overweigh their liquid assets.
okay, so all these banks have non-liquid assets and they owe money to other banks. but they can't pay the other banks back because they don't have any money. so banks start going under.
in itself this is generally not good, but other factors have pushed through to make it even harder on people. rising oil prices have driven up the costs of basically every consumer good out there. real wages (that is your wage measured in the amount of stuff you can buy with it) have been decreasing for years as well. this has lead to a drop in consumer confidence which in turn guides the stock markets. stock markets have been variable and generally bearish.
earlier this year, a number of the larger financial institutions have failed. before it was usually minor, local banks that had been suffering the most from the credit crunch, but the effect has managed to trickle up to big names in the business such as AIG, Lehman Brothers, Merrill Lynch and others. fortunately, for the moment, there are even larger contenders out there who have been able to absorb the weaker groups to combat the decline (JP Morgan Chase, Bank of America, Citigroup, etc.).
earlier this month, the government sponsored Fannie Mae and Freddie Mac were put into what's called a "conservatorship". basically the government took control of them (mostly due to worries about decreasing liquidity), gave them a boatload of money and said "get your act together with this cash and pay us back if you can." this was done in an effort to keep them from floundering and to give other banks a guarantee that, if they needed to borrow money for a mortgage, one of the two organizations would be able to back them.
the bailout plan that you've been hearing about is a plan for the US government to buy $700 billion worth of mortgages from banks to attempt to decrease the amount of non-liquid assets that the banks have and help get us through this.
now i've skipped a bit about mortgage reselling and some other stuff that has different effects on the entire process but that should give you a basic overview of what is going on.