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I know we have a couple of threads running on the issue, and this is a repost, but given all thats happened over the last couple of weeks, i thought this would be a good one to revisit. download and watch to get a layman's version of what went wrong with the subprime mess...
What it boils down to now is:
- banks who owned these mortgages dont receive payments on them. they write down their balance sheets and take huge losses. at the same time they are not able to meet their debts they owe to other banks. there is huge amounts of lending between banks to meet cash requirements, or put to use 'excess' cash. some banks fail.
- banks also lend money to companies for them to cover short term cash needs. the optimal state of a business is to have all its cash tied up in investments so its not just sitting in a bank account losing its value due to inflation. thats where the commercial paper markets come in...short term lending to companies with good credit ratings.
- since the banks are getting squeezed, they stop lending to other banks, as well as companies via the commercial paper market. thats where this starts to get really nasty, and why the injection from the government is necessary, unfortunately. if the banks really do stop lending completely...companies can't pay their bills, and the economy goes in the toilet in a hurry. this is a domino effect, and a frightening prospect.
hope that made some sense. i probably oversimplified a bit, and feel free to add stuff i missed, but wanted to add my .02 of a dollar on this whole fiasco.
What it boils down to now is:
- banks who owned these mortgages dont receive payments on them. they write down their balance sheets and take huge losses. at the same time they are not able to meet their debts they owe to other banks. there is huge amounts of lending between banks to meet cash requirements, or put to use 'excess' cash. some banks fail.
- banks also lend money to companies for them to cover short term cash needs. the optimal state of a business is to have all its cash tied up in investments so its not just sitting in a bank account losing its value due to inflation. thats where the commercial paper markets come in...short term lending to companies with good credit ratings.
- since the banks are getting squeezed, they stop lending to other banks, as well as companies via the commercial paper market. thats where this starts to get really nasty, and why the injection from the government is necessary, unfortunately. if the banks really do stop lending completely...companies can't pay their bills, and the economy goes in the toilet in a hurry. this is a domino effect, and a frightening prospect.
hope that made some sense. i probably oversimplified a bit, and feel free to add stuff i missed, but wanted to add my .02 of a dollar on this whole fiasco.
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