What caused the credit crisis

what caused the credit crisis


To use a metaphore: A lot of (bad) things came home to roost.

Simple explanations.

1. Banks acting like schmucks to credit card holders and house holders. The most famous being the infamous CDS;s *Credit Default Swap) -

2. The power of the dollar diminishing worldwide.

3. The war in Iraq costing trillions of dollars.

4. Good U.S. jobs moving overseas.

These all contribute to an overall distrust of the U.S. currency, both foreign and domestically.

A short answer on CDS:

Imagine *I* take* out a life insurance on myself; Ie My family gets $1MK if I die

Then- Imagine *you* say "OK- I'll pay $100 a month to get $100K if Kevin dies"

Now imagine thousands of people doing the same thing.

Everything is great until I die - then EVERYONE is owed a total of billions of dollars.

now imagine that "Kevin" is a U.S. company or a bunch of mortgages -- that is in

effect what a CDS is and that's why we're in this mess - NO ONE expected banks and houses and companies to fail like they did (except me :-)

The reason I thought it would happen? Easy - An easy thing called the P/E ratio and the housing bubble; The avg P/E ration of an American company is about 40 - which mean foe ever 40 buck people invest, a dollar comes out of the company -- that is simply stupid. That;s why I put about 90% into T-bills (I lost about 10% - not bad, but a lot better than 90%).

The housing bubble: I's crazy to buy a house for $500K that cost $13K to build twenty years ago.

As far as the future goes? who knows. I'm pessimistic. I think we need to re-evaluate the dollar before it becomes as close to the penny in value worldwide.

But these are just my simple thoughts-- Hope you were not affected too badly about what happened.

Source: answers.yahoo.com

Category: Credit

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