Everything has a down turn. The Economy surged in the 90's and after 2003 it seemed to take off again.
It doesn't take a genius to figure out what went wrong. The Federal government under both Clinton and Bush wanted to deregulate lending laws and create new provisions to help spurt the economy, like 'minority loan programs'. Plus we also had a run and gun Federal Reserve chairman by the name of Allen Greenspan, who was all for banks lending out money without credit checks, employment checks and even collateral. Banks lent out tons of dough and the US economy soared. Dow hit 14,000 and Lloyd Blankfein got his 56 million payout, and I remind you this surge took place despite rising prices, weak dollar, war and every other crap that would normally slow down an economy.
On top of that, the Investment Banks bought from the banks billions upon billions of mortgages only to securitize them; meaning they issued securities such as notes and bonds who's interest parables were backed by the interest receivables on the mortgages. When people started defaulting, they no longer could back their securities. Write offs on the mortgages ensued to the point where the banks not only were losing a lot of money, but credit/financial ratios such as debt to equity ratio got higher and higher. This effected the banks' debt convenants(restrictions placed on a company by creditors), causing their credit ratings to drop. When this happens, creditors want collateral, or want the loan/note's principal amount back. Companies then struggled to raise cash for the collateral(as in the case with AIG having to put up 15 billion in collateral), but couldn't because they were not able to borrow anymore due to their poor credit ratings and performance ratios, and they couldn't exactly finance through issuing stock because no one in the public was willing to buy stock of a sinking company.
It is pretty simple, but the sad thing is that the average American still has no clue. Epic inability too make sense of free information.
