The credit crisis is essentially the mass erosion of artificial, implied wealth.
An artificial economy has been created over the last 16 years, and the market is waking up. The notion for the last 16 years has been "buy a house, it gpes up in value, you make money (implied wealth - equity), and pay off the debt".
This dream-scenario started to turn into a nightmare, when properties started to foreclose and market face an oversupply.
RC45 makes a good point here, where the ARM's and irresponsible sub-prime lending can be described as the catalyst, but not the entire root cause. ARM's work whereby there is a honeymoon interest period, (3-4%) for the first 2 odd years, then reverts to high, high interest - 13% and above. The common strategy was to refinance with a different lender before the honeymoon period was over, and all is well. A substantial portion of these loans were cast in 2005-2006, and you are now seeing them become due and entering the high interest period. This has been, and will continue to unfold to be the breaking of the camels hump for those who have kept head above water on repayments during the 2-3% glory days.
Foreclosures, and subsequent over-supply, ensue. This creates the downward pressure on housing prices and the erosion of implied wealth. The implied wealth - of $1 trillion+ of US citizens savings being eroded over such a short period of time creates means less spending and investing, resulting in pressure on banks, a reluctance to lend, non-availability of college loans, car loans, business loans, etc, and subsequently grinds the economy to a halt.
I can't believe how misleading the positive meida spin-doctors are. The US
might go into a recession? Rubbish, it's already in one. How does a depression sound?
The financial party's over. Anyone still sporting a lampshade on their head, kindly remove it.
