Market Meldown

[Aiemond]

Ok, here is the deal. This is what the cause of the problem was.

1) Many lending institutions and investment firms bought into the idea of the mortgage market being secure.

They treated it as extremely secure investment. Now, some of this was corruption and some of this was drinking the kool aid (just bad planning, not looking at the future). So, as the housing bubble increased, the profits of these firms ballooned. Everyone began buying the stock, and it was happy time for their investors and the firms themselves. Well, we all know what happened. The ARMs were too much for many of the families that bought them (this is where alot of the corruption occured. Misleading families about what ARMs meant. The families getting them should have read the contract though so it is partly thier fault). As forclosures occured, banks cannot lend as much and more people would not buy the expensive properties (more hosues on markets for cheaper prices). Thus, the market burst. Well, what did this mean for the investors that were in mortgages. Since the houses were being forclosed, the investment was not what they thought. The morgatges decreased in value severely. Since the firms had large investments in this, thier value went down, and as they reported BILLIONS in losses. As losses came in, those with stock in the company sold it like a hot potato.

 

2) Many of these firms are a backbone of the economy.

When a normal company goes bankrupt, it can cause problems in the market. But, these are not normal companies. These are investment firms and lending institutions. These are the institutions that drive our economy. As we know, lots of lending goes on in the financial world. Nothign could be done without this. When you start a new bussiness you usually don't have all the capital you need. Thus you try and go get a loan. When you buy a house, you don't usually have all the capital you need. So you go take out a loan. This is where these companies come in. Bear Stern was a lending bank. What this means is it lent out its money to banks. In this case, it was mainly for houses. It made its money through the interest. Without firms like this, it makes it more difficult to get loans not only for houses, but for bussinesses as well. What trhis means is slower growth, less expansion, and loss of jobs from companies that can't function anymore.

 

3) What's it mean when the Feds lower the interest rate?

This is a good question. How does the fed changing the interest rate actually affect me?

This answer is somewhat simple. Banks and lending banks can borrow money directly from the federal government through the federal reserve. The interest rate they pay for these loans is the Federal interest rate. Thus, you won't get loans that are exactly the fed rate.

 

4) So, how exactly do banks get money to loan out?

One is investments and profits. Profits are reinvested into expansion, etc, but can also be used for loans to make more profit. Good investments will also mean a larger return, which will result in more capital for the bank.

Two, and these are the banks that youm use everyday, money you deposit. How much? If you deposit $10 they can loan out $100. This is an approximation. So, thats one reason they want your money :P

 

4) What about my investments with these firms/what about my bank going under?

 

FDIC insured banks are insured for up to $100,000 dollars on checking, money market accounts. Joint accounts are i believe $150,000. Investments are protected for up to $500,000.

 

Questions? :p