The Debt Crisis - What's It All About?
The Debt Crisis - What's It All About?
Suddenly you've gone from evaluating your next major purchase to worrying about the price of bread, national retail institutions are collapsing daily but the price of petrol is going down. You wouldn't be blamed for wondering what happened during the last few years and what's still happening.How did we get here?American banks issued sub-prime mortgages for many years, these are often one hundred percent mortgages at extremely high interest rates that are sold to people with low credit scores and sometimes even no source of income. The banking industry justified this by thinking that the constantly rising house prices would allow consumers to re-mortgage their house at a profit whenever they fell behind with their payments.In the summer of 2004 the American housing market started to crash and consumers began defaulting on their sub-prime mortgages, banks were forced to write off billions of dollars of debt.Why is worldwide lending cut?The American banks put the money from sub-prime mortgages into investments which plummeted in value when the sub-prime mortgage crisis hit, worldwide banks also had money in those investments and were left making a huge loss. UK and US banks were the worst hit and are now left fighting to survive, they tightened their lending habits to help recuperate the loss of the bad investments. Mortgages and loans are the worst affected as they are the biggest individual financial risks for banks and lenders.Why are companies going under?Credit is harder to get, savings are at risk as the stock market crashes and market based savings (including ISAs and pensions) are affected. The lower rate of inflation also affects savings accounts that follow the rate of interest. People are becoming more conscious of their spending and companies that aren't competitive in their own markets are going under when consumers switch to cheaper brands. Consumers are broadening their definition of a 'luxury item' and markets that previously enjoyed super-profit are now suffering a huge depression, these include luxury furniture, automotive and high-end clothing.Who isn't going under?Companies who sell consumables and supplies continue to thrive as long as they stay competitive in their own markets, this includes industries such as petrol & chemical suppliers, supermarkets and office supplies retailers. Companies in competitive markets that have previously enjoyed over-inflated profit margins, such as high-end clothing, will need to adjust their expectations for consumer spending in order to survive.
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