Some Knowledge

Some possibly useful information.

Causes of Economic Collapse

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What causes a whole economy to crash to the ground?  In my opinion it comes down to one thing:  Spending more than you can afford to pay.  The reason economies collapse is because people buy things on credit that they can not pay for.  There is nothing mysterious about this process.

Look for example at the Great Depression.  Everybody was investing in the stock market.  The market was booming in the 20’s.  People bought stock on a margin, meaning they put down a small amount on the price of the stock with a promise to pay more later.  When the price of paper fell, people had to sell and hope they did not lose everything.  As more stock was sold, the price went down.  It is a case of positive feedback.  The lower the price went the more people sold, driving the price lower.  They lost more money than they had because they bought on credit and had gambled on the market going up.

Now look at our present situation.  Banks sold people on buying houses they could not afford, believing that the price of real estate could only go up.  People signed contracts for mortgages they could hardly afford, thinking if they bought anything less expensive they would miss out on profit when the housing market went up.  Now people start losing their jobs for various reasons like outsourcing, the price of real estate declines, and people are left holding the bag with mortgage payments that are increasing because they signed up for a variable rate.  Now the bank is out the money they loaned on the house, the buyers are out the money they can not afford to pay, and nobody will buy the house at its market value because there are so many houses on the market because people have to sell because they can not afford their payments any more.

Both of these situations could have been avoided if people did not get loans to buy things they could not afford to pay for.  Because banks and stock brokers got greedy and sold people on things they could not afford, the whole economy tanks.  How you get out of these kinds of situations is anyone’s guess.  You ride out the storm and then rebuild after conditions change.  In the meantime the whole world is suffering because some rich jerks had to milk every penny out of the whole economic system.  The answer to this situation is not to give the greedy idiots more money to cover their losses, but to make this kind of market manipulation impossible in the first place.  Adjustable rate mortgages should have never been legal.  Buying stock on a margin is no longer an option.  Until people get it through their heads that there is not an infinite supply of money they can pull out of thin air the economy of the world will continue to suffer.

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Written by Bill

March 8, 2009 at 1:56 pm

Posted in economy

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