Sub-prime Crisis and Recession Fears - Money Matters

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phi1618
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Registered: 02/14/04
Posts: 4,102
Last seen: 13 years, 11 months

Re: Sub-prime Crisis and Recession Fears

[Re: LayYouIn]
#8097174 - 03/03/08 11:42 AM (16 years, 1 month ago)

The problem now is that losses are heavily concentrated on the banks and related financial institutions. Since the banks are loosing lots of money, their capital base is contracting. Since they're loosing capital, they need to reduce their exposure to risk, which means loaning less money. Since the economy as a whole is credit-driven - companies need to borrow money to expand their business, consumers borrow money to buy stuff (whether houses, cars, or shit on the credit card), etc. - a contraction in credit will lead to a contraction in the economy. As a result, $200 or $300 billion of losses on to the banks could lead to $1-2 trillion less money in the economy, which means everybody suffers.
This is on top of the direct losses of jobs in the construction and housing sector, and the fact that most people are much poorer than they used to be because of the lost equity in their homes, and will spend less as a result.
Unsound financial institutions and massive credit contraction are the real worries that might make this worse than other recent disasters.

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