On The Financial Meltdown

I copied the following post from a data management forum, but I thought it was very interesting and worth sharing:

Regrettably, we're all focused on the mortgage holder that's stuck or behind, or whatever.

That's NOT what this is about. They are the instruments that brought this into existence, and lenders, banks, etc, may have caused it, but that's not the point.

Here's a close to home example. Liz just bought that house for $290K. Mike bought a Cape about 9 years ago for $120. That's 2.5 times price increase in under 10 years. Liz's house has about $50K worth of improvements, so that, in theory brings it down to about $240. Just 2x Mike's house...

The mortgage on the house was $313K. There were ZERO payments for 12 months prior to the sale. The interest rate was 10.45%. So, just straight interest, there was $33K in lost interest. So, the "true" debt was about $350K. The mortgage holder got $265 after all expense of the sale were deducted. So, the mortgage holder lost $85K.

Likely, the mortgage holder took that mortgage and bundled with a bunch of others and sold them to a bank. That bank was to use the future interest to pay interest on deposits, etc.

Because the home owner defaulted, the bank's customers were not able to get paid... So the bank had to take the owed interest out of reserves.... Multiply that by some quantity, and then the bank goes under.... etc. Multiply that by whatever and you have the dimensions of the problem.

If the bank needs money, then it cannot lend. That means that farmers cannot get advance on crops, business cannot buy equipment on credit against further sales, and all that....

Vapor lock takes over....

"We" are all what this is about. The businesses that we use, services that we get, and all that depend very much on credit from large banks. Because of this mess, the whole flow of money could come close to stopping.

So, what we, regrettably need to keep focused on is that if this doesn't get fixed we all suffer.