What precipitated the financial crisis still engulfing the world was a severe shortage of cash by leading banks. This article will try to shed a little light on what has actually happened, as opposed to what we are told by the media.
The lending frenzy of the last few years culminated in the lending of large sums of money by banks and mortgage institutions to down-and-outers and no-hopers with no chance of ever repaying the money. Part of the reason they did this may be put down to political pressure from politicians who saw this as a chance to increase their own popularity with down-and-out voters.
Another reason may be that the original lenders made some initial profit from each deal and then sold the toxic debts as part of a "package" of debts that included some that were not so toxic. They sold them to all kinds of financial institutions, including overseas banks, hedge funds, and pension funds. The racket could therefore be carried on for much longer than if the original lenders had to deal themselves with the toxic nature of the loans, and face the consequences.
Because of this shuffling around of thousands and thousands of mortgage accounts, the fact that the overwhelming majority of them were falling further and further behind with the monthly payments was lost, as focus was kept on the perceived value of each package as it was traded from one financial institution to another.
By the time the extent and severity of the problem became apparent it was far too late. Finance houses and banks had carried on lending their fictitious money, based on the assumed value of these so-called assets, and had thus made the problem ten or twenty times worse. Don't forget Merrill Lynch had lent over 30 times its entire capital base in toxic loans. That doesn't count the loans that weren't toxic. That was undoubtedly because the more of these loan packages they bought, somehow the greater their capital base became and the more they were able to carry on lending. "Every loan creates a deposit", right?
It was therefore only a matter of time before the inverted pyramid collapsed. When it did, the problem was world-wide. But it was not just the USA that had lent to bad debtors. The same thing had been going on in the UK, and many other Western countries (though it's nice to be able to blame the "US sub-prime mortgage market" for the crisis). As we all now know, the entire international banking system has had to be bailed out with loans and buy-outs totaling at least a trillion dollars ($ 750 billion in the USA and $ 250 billion in the UK alone).
Has this bailout helped people recover their repossessed homes? Has it helped lift the threat of repossession from millions of families? Evidently not. In the UK, half a million families face the threat of being evicted from their homes, at the rate of 120 a day. With …