I don't understand the financial crisis?

[funkyboogalooo]

OK so I hope im not being blatantly thick but i truly am having difficulty understanding how it has got so bad.
As far as I can see. Everything (almost) is on a downturn this I believe is pretty much a fact. The banks and financial institutions world over are in a mess. companies are making redundancies and SOME people consequently have less money and so it spirals. But heres my confusion.
It seemed to start with the banks and mortgage lending? Ok so if no-one moves house the builders and associatted would have less work. But why has it gone so bad so quick? Surely the likes of GM etc haven't just lost billions overnight, a local bakery chain has just gone tits up here laying off 200 people, people must still be eating bread. I work in the motor industry and am now seeing it affect my wages which in turn will mean I spend less.
Maybe i'm answering my own question but surely if people keep spending we would all be ok, or most of us anyway, that would then help the economy and help the others less fortunate get back to work.
Sorry if i've bored you senseless but was just wondering thats all.
Mike

[Basil Hume]

Try this:

http://www.bbc.co.uk/blogs/thereporters/robertpest...

A great summary of where we're headed and where we've been.

[Panayiotis]

There are entire books on such subjects, and if you a really interested you should probably read some of them. Also another good source of information is the economist, especially if you can get your hands on older issues (library or something). Failing that, you might be lucky and someone may spend half a day explaining to you what is happening. You are on the right track when it comes to the consumption side of things, but that is only a very small part of the whole problem.

[loafer123]

This should be in the P&P, but here goes...

In the last few years, many people believed the view expressed by Gordon Brown and others that boom and bust had been eliminated, and therefore everyone started thinking that borrowing was the best way to do anything...buy a bigger house, drive a bigger car.

Unfortunately leverage also has a magnification effect both up and down, and when the sentiment in the market turned due to people in the US not being able to afford their mortgages (Google "NegAm Resets" for more info), all of a sudden the people who had been buying the debt stopped doing so, and banks stopped lending.

The sudden reduction in the appetite for leverage led to forced sales of all sorts of things, and we entered a spiral downwards of value.

As people and companies feel poorer and have less appetite and access to debt, they spend less and the economy falters.

And so on.

HTH.

Edited by loafer123 on Wednesday 10th December 21:56

[Alfa_75_Steve]

funkyboogalooo said:

overnight, a local bakery chain has just gone tits up here laying off 200 people, people must still be eating bread.
Mike

But they're not eating fresh bakery bread, or have cut down on the cream cakes and the bottom has dropped out of the corned beef pasty market....

They offered me a job running their retail outlets last year, but I saw the management team had one or two failed businesses behind them, so politely declined.

[Piglet]

Alfa_75_Steve said:

funkyboogalooo said:

overnight, a local bakery chain has just gone tits up here laying off 200 people, people must still be eating bread.
Mike

But they're not eating fresh bakery bread, or have cut down on the cream cakes and the bottom has dropped out of the corned beef pasty market....

...and their bank has quite possibly withdrawn their overdraft that allowed them to operate....

[TWSTEEL]

Basil Hume said:

Try this:

http://www.bbc.co.uk/blogs/thereporters/robertpest...

A great summary of where we're headed and where we've been.

Bugger

Didn't R.E.M. record something about this?

[mondeoman]

Piglet said:

Alfa_75_Steve said:

funkyboogalooo said:

overnight, a local bakery chain has just gone tits up here laying off 200 people, people must still be eating bread.
Mike

But they're not eating fresh bakery bread, or have cut down on the cream cakes and the bottom has dropped out of the corned beef pasty market....

...and their bank has quite possibly withdrawn their overdraft that allowed them to operate....

SO how is a company that is permanently running an overdraft a viable business??
If its constantly in debt, it aint making money, so it isn't viable.

Short term cash-flow bumps are one thing, but permanent overdrafts??

[Ordinary Bloke]

Banks gave lent money to people they knew couldn't repay it.

Governments have allowed them to do this, and revelled in the 'economic miracle' it created.

People have borrowed without worrying about how they'd repay.

Now it's time to repay, and the whole thing comes crashing down...

[chr15b]

problem is people have been spending because they believed their house price would keep increasing to cover it

problem is it always has to be paid back...

americans default on mortgages, an american then iceland banks go pop

banks start to stop lending to keep their cash to attempt to keep themselves in good positions

peeps in banking industry out of work - they stop spending

add to this new houses stop being built, builders out of work - they stop spending

sales down, retailers struggle, sales peeps out of jobs - they stop spending

large ticket items (cars, houses, building work, etc) sales all down - people out of jobs - they stop spending

it's not pretty

[Martial Arts Man]

mondeoman said:

Piglet said:

Alfa_75_Steve said:

funkyboogalooo said:

overnight, a local bakery chain has just gone tits up here laying off 200 people, people must still be eating bread.
Mike

But they're not eating fresh bakery bread, or have cut down on the cream cakes and the bottom has dropped out of the corned beef pasty market....

...and their bank has quite possibly withdrawn their overdraft that allowed them to operate....

SO how is a company that is permanently running an overdraft a viable business??
If its constantly in debt, it aint making money, so it isn't viable.

Short term cash-flow bumps are one thing, but permanent overdrafts??

An overdraft is just a flexible loan at the end of the day, on the balance sheet like any other debt. A business' balance sheet could contain many x overdraft in assets for instance.

There are many many reasons why viable businesses have regular/permanent overdrafts.

Cashflow could become more of an issue to such companies though I suspect.

MAM

Edited by Martial Arts Man on Wednesday 10th December 23:29

[tinman0]

funkyboogalooo said:

OK so I hope im not being blatantly thick but i truly am having difficulty understanding how it has got so bad.

Bit of a perfect storm to be honest.

You have the rising price of oil (and gas because the EU linked the two), which led to an increasing rise in price for food (amongst other things). So the family budget has been pushed, which means less ability to buy consumer goods. Even though the price has come back down, the appetite to buy consumer goods isn't there.

You also have people who are more minded to pay off their existing debts than building new debts, which in turn reduces spending in the economy.

You then have people who are a sound credit risk not being able to buy goods, especially cars and mortgages, but not getting credit facilities.

Finally, you have the people who could buy a new car, deciding that they are going to keep their existing car for another year or two to see what happens with oil prices, especially in the US where it hit $5 a gallon. $5 a gallon may not seem a lot, but imagine petrol in the UK hitting £4 a litre and you get some idea of how hard it hits the wallet.

And stuff like that.

[Ordinary Bloke]

mondeoman said:

Piglet said:

Alfa_75_Steve said:

funkyboogalooo said:

overnight, a local bakery chain has just gone tits up here laying off 200 people, people must still be eating bread.
Mike

But they're not eating fresh bakery bread, or have cut down on the cream cakes and the bottom has dropped out of the corned beef pasty market....

...and their bank has quite possibly withdrawn their overdraft that allowed them to operate....

SO how is a company that is permanently running an overdraft a viable business??
If its constantly in debt, it aint making money, so it isn't viable.

Short term cash-flow bumps are one thing, but permanent overdrafts??

Put very simply, if you're growing a business you'll need some money.

A company decides to double output. It'll need some money to pay for raw materials, machines, wages.

In good times, the extra sales will allow them to repay the loan.

Without some borrowing, almost nothing would get off the ground. That's what banks are all about, assessing risks, providing suitable loans, rewarding savers and shareholders with interest, rewarding prudent bankers with bonuses (to buy supercars).

Seems like risk assessment, suitable and prudent got ignored...

Edited by Ordinary Bloke on Wednesday 10th December 23:39

[Ozzie Osmond]

The rules of business,

1. If you haven't got any/enough customers you haven't got a business.
2. If you've got a big factory you need a lot of customers just to cover the costs that are there before you even get out of bed in the morning.
3. If you're a bank you're laughing. Whatever official interest rates may be you always charge a margin. The customers may win or lose but you always win. Because even if you get it hopelessly wrong the state will bale you out.

How it works internatonally,

1. China sold us some cheap plastic toys so then it had the £/$ we had paid.
2. Our "spend, spend, spend" government needed to borrow some money so the Chinese lent our £/$ back to us.
3. We now buy more stuff from China with our £/$ they lent back to us.
4. China gets BOTH £/$ for the stuff we buy AND £/$ interest on the money they lent us.

Conclusion,

China owns more of the UK every day so they're getting richer and we're getting poorer.
The more £/$ our government spends/injects, the quicker China gets to own the UK.

What should we do?

1. Not panic. The system won't run without customers.
2. Stop borrowing more money. Just service the debt we've already got.
3. Not panic.

[trooperiziz]

TWSTEEL said:

Basil Hume said:

Try this:

http://www.bbc.co.uk/blogs/thereporters/robertpest...

A great summary of where we're headed and where we've been.

Bugger

Didn't R.E.M. record something about this?

Not sure what Andy Kaufman has to do with this?