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    Yah. Cute video

    The recession cant be blamed on anyone factor, it seems the coming together of lots of issues which on their own are not that bad caused our current malaise.

    It was triggered by the realisation that lending in the subprime mortgage markets in America had been subject to extreme moral hazard (ie the money had been lent to people who couldnt pay it back).

    Usually this would be okay(ish) and a mortgage broker would go bust. as it was this 'bad' debt was not only colossal it had also been commercialised, repackaged and then sold on to other banking & financial institutions around the world via investment banks. So lots of these institutions had possibly bad debt 'on their books'.

    The world economy realised this and freaked out. A global situation of endemic leveraging was exposed causing everyone to become concerned that, if they went to the bank tomorrow, would they still be able to take out their money? Anyone would has cash doesnt want to trade it away, especially for financial product which may have links back to the dodgy debt in America so noone really wants to lend any money. This gives us the credit crunch.

    All banks are based on a fractional reserve system, they have been since the invention of deposit accounting (500 yrs +). This means that they dont have all the customers money in the bank vault. They have only maybe 10% of it. The rest will be invested in other financial products (shares, bonds, other securities) in a bid to get a better return than what they are paying depositors.
    This means that ANY bank, If all the depositors went down tomorrow morning and said "Can I have my money please" would not have enough and would go bust. (This is known as a bank run, nearly took down Northern Rock)
    Because of these little bank runs caused by general panic over which banks had the 'bad debt' hidden away on their accounts the banks need cash rather than securities so if there is a bank run they can pay everyone and say "Dont worry, we are fine, your money is safe with us" so that EVERY depositor doesnt withdraw their money and make the bank go bust.

    Since they want cash so bad they stop lending loans and credit card limits to customers and businesses and start charging more interest on mortgages etc. This exacerbates the credit crunch and generally causes the flow of money round the world economy to get sticky, illiquid.

    No loans for new business and customers to spend and the whole economy, based on high spending and borrowing grinds to a halt as people stop spending, businesses sell less GDP falls and we are in a recession.


    Trigger: revelations over subprime mortgage markets in America
    Reason for international spread: Large globalised banks and other financial institutions traded this bad debt without knowing how bad(risky) it was
    Underlying causes: Excessive over-leveraged lending and general debt culture 'spending beyond our means' , bubble in housing markets in several countries. Herd behaviour drives house prices to ridiculous, over-valued levels.
 
 
 
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