Credit Crunch

Credit Cruch. Tumbling house prices. Downturn. Recession. A global finiancial turmoil the likes of which the world has never seen.

Like the majority of people, Dave's initial thought was

"Whoohoo!! I'll finally be able to aford a house!!!"

Unfortunately, much to Dave's and many others like him great astonishment, there is a dark side to the Credit Crunch.

It all started with subprime loans and mortgages in America. A "subprime" loan basically translates as a loan from a person you doubt will ever really pay you back. A high risk individual. So why oh why would a bank ever want to agree to give such a loan?

Simple. You sell the loan on to someone else. They take the risk, you keep a small profit. Repeat that enough and you a whopping big profit. No real risk. But why would someone want to buy it off you?

Simple. They sell the loan on to someone else. They pass on the risk, they keep a small profit. Repeat that enough and they get a whopping big profit. No real risk. But why would someone want to buy it off them?...

Pyramid scheme anyone?

Of cause, the banks are not, despite popular opinion and all the evidence, stupid. They realise someone has to be holding the loan if/when it finally fails. But they have safety nets in place. The loans are usually secured on a house. Loan fails, bank gets the house, sells it and makes the money back. But what happens when house prices drop and are no longer worth enough to cover the loan? Big risk and a loss. Repeat THAT enough times and it's a whopping big loss.

Unfortunately, it gets worse. See things like money and shares are funny old things. They're the fundamental building blocks of the world as we know it, and yet they rely purely on Faith. Money doesn't actually exist. It's a figment of our collective imagination. Shares are worth only what people want to pay for them. So when a bank makes a big loss, it can't just shrug it off, put it down to experience and move on, because it hasn't just lost money, it's lost the Faith of it's followers. That makes the bank worth less, lossing them more money, and in turn more Faith. If they can't perform a miracle, they may face a slippery slop.

Unfortunately, it gets even worse. You can make money from money you don't have. For example, if you get a 0% creddit card and buy everything using the card, then before you pay it back, the money you have technically already spent is sitting in the bank earning you money. Banks like these kind of games, so they borrow lots of money from other banks to try to make profit with it. They also lend out lots of their own money to earn interest on that. Whatever kind of opertunity comes along they call on their fellow rivals to help them out. Try not to think about where this money actually comes from, it'll make your head hurt. Just remember it's all not real anyway. But what happens when because you've lost the Faith of your followers, you also lose the Faith of your rivals?

Your source of cash gets cut off, your miracle becomes that much harder, your followers become less Faithful and the slippery slop looks that much slippier. And when THAT anoucement reaches the media, those Faithful that still had some hope or just hadn't yet noticed pull out while they still can. Game over.

But still not the end of the story. Because the Bank that just died did so in a classic "If I go down I'm taking you with me" manner. Chances are he still owed alot of his rivals ALOT of money, and they're never going to see that again. Which means whopping big losses for all of them. Which means loss of Faith from all their followers and from each other. And hey presto, Credit Crunch.

The only way the banks can get some money back is to increase interest on borrowing and sack all unnecessary staff. This steals money from the non-financial world, and the job loses spread.

So despite finally having the arrival of the glorious house price drop, harder mortgages and a lack of employment mean Dave and the others still don't have a house.

Damn.