i dont watch a whole lot of news nor do i really have an interest in politics etc so im hearing about the credit crunch and seeing all the larger shops closing etc but why. sorry if i sound stupid but like i said i dont know anything about it!
Best Answer: It is VERY complicated and one could write a book explaining it. seriously.
For starters, here is a brief history on the housing bubble. (more precisely, an example thereof. )
In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied "AAA" rating. The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.
Generally it was the democrats who accused banks of redlining and told them to loosen up their lending standards to accommodate the sub-prime market. Banks never did this b/c there was too much risk. When the dems stepped in,
they gave incentives for lenders to issue these subprime loans. So the banks concurred with the Clinton Administration and lent money to bums who never should have been given the responsibility of handling an adjustable rate mortgage payment (conversely the banks should never had inflated the APR's the way they did). many only had SSI to show for income (a temporary flow of Social Security income).
When the obvious happened and the sub-prime borrowers stopped paying, the lenders were out of the money. This is when it began to snowball.
Banks borrow from other banks. And when one bank tightens up due to a lack of funds from their customers who are in default of the agreement, they don't lend to their fellow banks. From here, you can see the snowball begin rolling downhill. It's a chain reaction.
It all began with government intervention in the free market.
BTW. the Republicans completely failed to roll back the interventionist policies and mandates that started this whole thing. Both parties are just as guilty, but Clinton should never have tweaked the Community Reinvestment Act to accommodate known financial delinquents.