subject: The Debt Crisis And How We Got There [print this page] The Debt Crisis And How We Got There
We are in a state of crisis when it comes to debt we've accumulated. Many people are asking the question 'how did this all happen?' While you might think the answer is complex and difficult to understand, it's really not.Almost like a math formula, the debt crisis that we now face played itself out in the form of an equation in which the final answer added up to less than zero and tons of debt.Here's how it works:World wide companies and large corporations sit atop the global financial pyramid. As most of the gobal economy is run on a capitalist idea of financial gains and large profits, those companies want to show just how well they are doing and how much money they are making so that investors will put even more money into those companies. So, they have a huge incentive to show the highest margins of capital profit every few months.Unfortunately, there's only so much actual physical money that they can make. In order to increase profits beyond a realistic number, they begin to loan money out and start counting the money that is owed to them as money that they have already made.Then, when they go to large money lending banks that lend money to big businesses, they produce the balance sheet that says they have the money, so borrowing more and more is okay because they have money coming in to pay the bank back. The banks know how much they can profit from the interest on those large corporate loans, so they willingly lend out the money.But who are the businesses and corporations relying on to owe them these incredible amounts of money? Answer: the bottom of the financial pyramid - the overwhelming majority of middle class and lower middle class citizens who borrow money that they cannot possibly afford to pay back.It used to be that if you couldn't show how you would pay back a loan, there was no way you could get a credit union or bank to loan out the money. That changed when lenders not only lowered standards and but knowingly loaned out money to people even they knew could never pay it back. But, it looked good on paper and on the balance sheet to have so much money supposedly coming in.So they did it. Now, many of those middle and lower class citizens who borrowed more money in a year than they make in 10 years are left drowning in debt. Everybody from the bottom on up the financial pyramid owed money to the part of the pyramid that was immediately above them. When bottom couldn't support the top, the pyramid crumbled. The enormous amount of money that was lent out should not have been, and most of the money that was eagerly borrowed should not have been either.In order to rebuild that pyramid, we have to start back at the bottom. Don't borrow what you can't pay back.
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